Capital Returns

[Stan 101]

Hi all,

I was wondering how capital returns are treated by the ATO if the share has been held for less than 12 months.
Seeing as the share receiving the capital return has not been held for 12 months one would assume the 50% CGT discount would not apply to the returned capital though it is hardly the shareholders decision.

Anybody have a firm understanding?

Cheers,

 

[Hyperion]

A return of capital typically:
Reduces the "cost base" of the share (by the amount of the return of capital); and
Reduces the "reduced cost base" of the share (by the amount of the return of capital)

If this would result in the cost base being reduced to below 0, the the cost base is reduced to 0 and the remaining amount is treated at as a capital gain.

This capital gain is eligible for discount if the underlying share is held for over 12 months.

 

[roland]

actually I am worried that the "average tax accountant" (mine in particular) is not going to get it right with all the nuances of share trading. I can do like up to 5 trades a day, but also have holdings that last more than 2 years. I have tax deffered and also US shares.

Would most expect their accountants to get it right ?

It is way too complicated for me, and honestly, I really do not want to have to learn all the tax laws.

Would like to hear what others are doing to make sure that their accountants are getting it right.

 

[Stan 101]

Hyperion,

thanks for that. Makes sense and it does ring a bell in my darkest grey matter..

Roland, as for making things easier for the accountant, I use a pretty thorough spreadsheet and I hide the cells not required for the accountant when I print out for him.

I too might have several holdings of the same share and it seems to work well. Both accountants I have shown the spreadsheet to have been happy with it after I explain everything to them. It usually takes ten minutes for me to confirm the accountant understands what they are looking at.


Cheers,

 

[Hyperion]

Roland,

I think the average accountant would get most of it right. Close enough that the ATO wouldn't mind about the difference hopefully.

When you have a large number of trades, CGT can get quite messy. (E.g. selecting which parcels to sell, pre CGT shares, discount/non discount, tax deferred, return of capital, merger/demergers)

Realistically, you probably wouldn't want them to be 100% correct. Because if they were - your tax return would be extremely expensive.

Hyperion

 

[roland]

mmm, I am still not confident that it goes the way I think it should. I suspect that me selling a packet and applying it to one of many might be different to the way the Tax dept thinks it should be applied.

I have complicated my holdings with tax deferred dividends. An example would be BBP. I have 20 seperate packets, half of which have had dividends applied. I imagine now that if I start selling some holdings as the SP rises, my interpretation of which packets have had a dividend return and still holding as opposed to what I have sold and have had a capitol gain on is going to be quite different to the way the tax department would see it.

I have attempted to read the tax rulings on deferred tax but it just sounds way too complicated.

Bottom line question would be: do the tax rules available to a professional accountant be sufficient to get it right???

I not only have a spreadsheet of all transactions, but also have a database driven trading program that can list all transactions showing which packets are applied with each transaction.

 

[Hyperion]

you can choose which parcel to sell...

generally you would sell your "discountable" shares first. Within that you would sell the ones with the highest cost base (so lower capital gain).

Tax deferred distributions (from trusts) and return of capital (normally from companies) are usually treated the same. Basically just reduce your cost base by the amount of the distribution.

"Bottom line question would be: do the tax rules available to a professional accountant be sufficient to get it right???"
The tax laws are publicly available. Anyone can view all the tax laws and tax rulings.

I guess you get what you pay for. If someone is charging you $50 to do a tax return, I'd be doubtful of its accuracy. On the other hand, if you are being charged $5,000 for a tax return, you would expect them to be much better.

 

[WRiley]

I do a Buy and Hold and seldom sell. I have sold one counter up till today and incurred a loss on it. So I intend to read up the tax rulings myself and go with the examples give. I will fill-up my own tax declarations and do the submission myself.

I will have to be extra careful with the dividends received, though,... but I think it's manageable. I think many investors with a similar scenario as mine out there are doing the same like I intend to. Am I right ?