How to apply capital gains tax discount

skc · 19 March 2013

A question for the forum on capital gains tax discount for shares held >1 year.

Suppose I sold 2 share holdings in a financial year. These are:

Stock AAA, held for 2 years, profit = $1000.

Stock BBB, held for 2 years, loss = $200.

What is my total capital gains after discount?

Is it...

$1000/2 - $200 = $300

Or

($1000 - $200)/2 = $400

That is, do I sum all CGT events for holding >1 year before applying the discount?

Thanks

EDIT: I only needed 2 holdings in the example...

burglar · 19 March 2013

skc said:
...That is, do I sum all CGT events for holding >1 year before applying the discount? ...

I discount each event and sum, I believe that is one correct way.
But there is a second more complex discounting system which I could never understand.
I couldn't see a circumstance under which it was significantly different!!

So_Cynical · 19 March 2013

skc said:
A question for the forum on capital gains tax discount for shares held >1 year.

Suppose I sold 2 share holdings in a financial year. These are:

Stock AAA, held for 2 years, profit = $1000.

Stock BBB, held for 2 years, loss = $200.

What is my total capital gains after discount?

Is it...

$1000/2 - $200 = $300

Or

($1000 - $200)/2 = $400

That is, do I sum all CGT events for holding >1 year before applying the discount?

Thanks

EDIT: I only needed 2 holdings in the example...

$1000/2 - $200 = $300 pretty sure that's how ive been doing it, the loss comes off after the 50% discount.

Klogg · 19 March 2013

If you go to page 12, step 18 in this doc:
http://www.ato.gov.au/content/downloads/IND00270252n41520611.pdf

I believe it answers it in a round about way.

Step 8 says to deduct any capital losses from any capital gains. THEN, you apply the CGT concession you get for holding > 12months.

That being said, the tax office do allow you to apply the losses in the best way you see fit:

DEDUCTING YOUR LOSSES
You will probably get the greatest benefit if you deduct
capital losses from capital gains in the following order:
1 capital gains for which neither the indexation method
nor the discount method applies (that is, if you
bought and sold your shares within 12 months)
2 capital gains calculated using the indexation method,
and then
3 capital gains to which the CGT discount can apply.

Therefore, if you have a portion of CGT that cannot have the concession apply, apply your capital losses against that first (as the document suggests).

Hope this helps

Klogg · 19 March 2013

burglar said:
I discount each event and sum, I believe that is one correct way.

Actually, this is against what the tax office advise, but unless you're talking big CGT concessions, they won't pick it up.

But there can be big differences in taxes if you discount each event then sum, rather than the other way around.

So_Cynical · 19 March 2013

Klogg said:
If you go to page 12, step 18 in this doc:
http://www.ato.gov.au/content/downloads/IND00270252n41520611.pdf

I believe it answers it in a round about way.

Step 8 says to deduct any capital losses from any capital gains. THEN, you apply the CGT concession you get for holding > 12months.

That being said, the tax office do allow you to apply the losses in the best way you see fit:

Therefore, if you have a portion of CGT that cannot have the concession apply, apply your capital losses against that first (as the document suggests).

Hope this helps

Step 8 says to deduct any capital losses from any capital gains. THEN, you apply the CGT concession you get for holding > 12months.

Well there you go..i love self assessment!

burglar · 20 March 2013

Klogg said:
Actually, this is against what the tax office advise, but unless you're talking big CGT concessions, they won't pick it up.

But there can be big differences in taxes if you discount each event then sum, rather than the other way around.

No!

skc · 20 March 2013

Klogg said:
If you go to page 12, step 18 in this doc:
http://www.ato.gov.au/content/downloads/IND00270252n41520611.pdf

I believe it answers it in a round about way.

Step 8 says to deduct any capital losses from any capital gains. THEN, you apply the CGT concession you get for holding > 12months.

That being said, the tax office do allow you to apply the losses in the best way you see fit:

Therefore, if you have a portion of CGT that cannot have the concession apply, apply your capital losses against that first (as the document suggests).

Hope this helps

Lol. Thanks for the link. Who wrote this $hit. The information is self-conflicting. Following the steps and the worked example you would arrived at $400 of capital gains. Following the advice from the box you arrive at $300 instead.

I am going to use the number that gives me the greatest benefit, as stipulated in the document.

burglar · 20 March 2013

skc said:
Lol. Thanks for the link. Who wrote this $hit. The information is self-conflicting. Following the steps and the worked example you would arrived at $400 of capital gains. Following the advice from the box you arrive at $300 instead.

I am going to use the number that gives me the greatest benefit, as stipulated in the document.

Agree with you.
I have in the past, rang the Tax Office to clarify.
I no longer have proof.

A note of caution: the tax man is the only person who can put you in gaol without a trial.

craft · 20 March 2013

skc said:
($1000 - $200)/2 = $400

It’s definitely this way.

Sum all CGT events.

Discountable, No discountable, Losses.

Discount allowable is the lesser of 50% of discountable Capital Gains and 50% of summed CGT events.

If you have Non-discountable gains larger then losses you will avoid losing any discount.

burglar · 20 March 2013

craft said:
It’s definitely this way.

Sum all CGT events.

Discountable, No discountable, Losses.

Discount allowable is the lesser of 50% of discountable Capital Gains and 50% of summed CGT events.

If you have Non-discountable gains larger then losses you will avoid losing any discount.

@craft and Klogg
You win!
I am now confused.

Klogg · 20 March 2013

skc said:
Lol. Thanks for the link. Who wrote this $hit. The information is self-conflicting.

No probs.

Yeah, some of the ATO documentation is terrible. If you want a really painful read, check out the document on Personal Services Income... Took me a while to get my head around that crap!

Klogg · 20 March 2013

burglar said:
@craft and Klogg
You win!
I am now confused.

I'll give you an example:

Imagine you have three CGT events:
(1) $600 Capital gain that is not eligible for the CGT discount (held < 12months)
(2) $1400 Capital gain that IS eligible for the CGT discount (held > 12months)
(3) $800 Capital loss

So, according to the ATO document, you can subtract (3) from (1), which allows you to do the following:

Capital gains taxable amount = (1) - (3) + amount from (2)
= 600 - 800 + amount from (2)
= -200 + amount from (2)

As there's still a loss here, you have to apply the loss BEFORE applying the CGT discount. Therefore:

Taxable amount = (-200 + 1400)/2
= 600

In simple terms, you have to apply the loss against any of your capital gains until they've all been included, and then you can apply your CGT concessions, should you have any CGT events that warrant it after having losses applied against them.

Hope this makes sense

burglar · 20 March 2013

Klogg said:
... Hope this makes sense

Given the gobbledeegook written by the ATO; I see that you are correct!
It means that Losses and Accumulated Losses are negatively discounted! Right?!

drsmith · 20 March 2013

Klogg said:
Hope this makes sense

It makes sense to me. Step 9 came after step 8 when I went to school.

craft · 20 March 2013

skc said:
Lol. Thanks for the link. Who wrote this $hit. The information is self-conflicting. Following the steps and the worked example you would arrived at $400 of capital gains. Following the advice from the box you arrive at $300 instead.

I am going to use the number that gives me the greatest benefit, as stipulated in the document.

I had a quick look and couldn’t see the contradiction.

The principle that losses are allocated first is clear.

You can apply losses however you like to get the best result. But you can’t take the discount first and then apply losses.

Get it wrong and get audited (even if it is small fry you could get picked up in a random audit) you will have to then pay the correct tax plus interest and I would bet for this sort of breach (they wouldn’t accept your reliance on their documentation, because you are simply misinterpreting it) a penalty as well - Not to mention the scrutiny all your other year tax returns would then come under.

This is all surely moot though for all profitable short term traders – you would have enough non-discountable gains each year to offset losses – right.

drsmith · 20 March 2013

craft said:
Get it wrong and get audited (even if it is small fry you could get picked up in a random audit) you will have to then pay the correct tax plus interest and I would bet for this sort of breach (they wouldn’t accept your reliance on their documentation, because you are simply misinterpreting it) a penalty as well - Not to mention the scrutiny all your other year tax returns would then come under.

Indeed.

Anyone wanting to test the alternative would want to ensure they were on very firm legal ground.

Ves · 20 March 2013

+1 to Craft and Klogg.

skc · 20 March 2013

craft said:
I had a quick look and couldn’t see the contradiction.

The principle that losses are allocated first is clear.

You can apply losses however you like to get the best result. But you can’t take the discount first and then apply losses.

Get it wrong and get audited (even if it is small fry you could get picked up in a random audit) you will have to then pay the correct tax plus interest and I would bet for this sort of breach (they wouldn’t accept your reliance on their documentation, because you are simply misinterpreting it) a penalty as well - Not to mention the scrutiny all your other year tax returns would then come under.

This is all surely moot though for all profitable short term traders – you would have enough non-discountable gains each year to offset losses – right.

After reading the document again I agree with you. In fact, example 16 at the back is the most relevant and there's no mis-interpretation that discount is applied after offseting the loss.

Short term gains for a trader are income rather than in the capital account... so there's usually not a lot of short term capital gains to offset the loss.

Ves · 20 March 2013

skc said:
Short term gains for a trader are income rather than in the capital account... so there's usually not a lot of short term capital gains to offset the loss.

My understanding is that an SMSF is an exception to the rule... you cannot have trading stock since 10 May 2011, it's all on capital account. Just a FYI for those still trying to apply trading losses to other SMSF income.

How to apply capital gains tax discount

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