Profits from sales back into stocks

[bigt]

Hi, this is a complete newbie question, but if I can't ask it here then where can I?

I see a lot of posts where members state "I sold X, and bought Y with the profits" or "I sold X and put it into Y".

Now for the dumb question...are there any taxation rules which allow you to put all the money you received from a sale straight into another purchase?

i.e. you buy $1000 of shares in X, sell for $1500..can you buy $1500 of stock with this cash, or do you pay tax on the $500, and buy e.g. $1300?

I'm 99.9% you pay the tax, though a friend asked me this the other day, and I thought I would clarify.

Thanks guys,

 

[TheRage]

Big T this is not financial advice but you may find it helpful.

Firstly if you sell for a profit you most definately pay Capital Gains Tax. Everybody does there is no avoiding it. If you have held a share for greater than 1 yr the government will give you a 50% discount on the amount. They did this to encourage long term investing. You don't pay tax upfront. So in your example if you sold for 1000 with 500 profit you can fully invest the 1500. However come tax time you will be up for capital gains tax.

Scenario 1

You held the share for less than 12 months. Capital Gains tax is paid on your profit of $500. To calculate CGT multiple $500 * marginal tax rate. Lets assume you are on 30% tax rate. Your CGT at tax time is $150. Therefore your real return is only $350 not $500. If you don't have any tax offsets or deductions you may have to pay this back to the tax man via your tax return.

Scenario 2

You held shares for 12 months. Capital gains tax gives 50% discount on $500. Therefore Capital Gains Taxable amount is $250. Then multiple your marginal rate lets assume 30% again = $75. Therefore your real return is $425. Much better than $350. So you will only be required to pay back $75.

Anyway hope this answers your question
Cheers
Ryan

 

[bigt]

Thanks Ryan - that explains it perfectly, you can never escape the taxman.

 

[canglan]

Hi Ryan,

What if I make $500 profit in transaction one, and lose $300 in transaction two. How much $ is liable for CGT? $500 or $200?

Thanks!

 

[tt1900]

What if I make $500 profit in transaction one, and lose $300 in transaction two. How much $ is liable for CGT? $500 or $200?

$200, as the positive capital gain could be offset by the negative loss.

Di.

 

[TheRage]

$200, as the positive capital gain could be offset by the negative loss.

Di.

Di is quite correct. Capital losses can be offset against gains. Hence why capital gains and losses are tabulated at the end of the financial year rather than Pay as you go.

 

[Judd]

They did this to encourage long term investing.

For the official, as opposed to the mythical, reason on why halving of CGT was introduced, read hear if you can be bothered to research:

http://www.aph.gov.au/Library/pubs/bd/1999-2000/2000bd190.htm

 

[GreatPig]

are there any taxation rules which allow you to put all the money you received from a sale straight into another purchase?

You can do that, but when tax time rolls around, you'll still have to pay tax on the profit that you reinvested. Same if you join a company's dividend reinvestment plan.

You can do whatever you like during the year, but you need to track all the individual profits and losses made during that year and then pay tax on the difference (if profits are greater than losses) when you do your tax return.

It's quite common to receive income early in the financial year and then use all of it for something else until tax time. You just need to make sure you can get the appropriate amount of it back when you do need to pay the tax, and haven't gone and blown it all on a new speed boat . Also be aware that if you make enough untaxed profit during the year, you'll likely end up in the PAYG system for the next year and have to make quarterly tax payments.

GP