NOTE: Pearler does not provide personal tax advice and the following is general advice only. Please consult your tax adviser for your individual situation.
You recently sold some shares – but what happens to your profits come tax time?
As a first-time investor, you know the risks of investing in a short term timeframe outweigh the financial rewards of holding it long term. But sometimes life throws you a curveball, and that's when selling shares makes sense . It could be a sudden change in personal circumstances or a new investment opportunity in the sharemarket.
But, you realised that there was a catch to all the profits you hoped to make: Capital Gains Tax (CGT)
We know the thought of paying tax on your hard-earned profits is daunting. You also don’t know where to start with all the jargon and complexities. Not getting it can mean losing chances to build wealth, paying too much in taxes, and feeling discouraged from investing.
Don’t worry - like all good stories, this one has a happy ending! In this article, we'll break down the basics of how Capital Gains Tax works on shares – in a way that's easy to get your head around. From CGT rate to exemptions and discounts, we'll make sure you're in the loop and ready to maximise your investment profits.
What is Capital Gains Tax (CGT)?
Here, we’ll talk about something not as thrilling but still important when it comes to investing. Capital Gains Tax is what you have to pay when you sell shares or other assets and gain a profit.
So let's say you bought some shares for $100 and sold them for $150. In this case, the $50 profit you made is a capital gain. In Australia, you'll have to pay tax on that profit since it adds up to your assessable income for that year.
When you sell your shares either for a profit or a loss, it triggers what’s called a “CGT event”. However, it’s not only the buying and selling of this specific asset that triggers such an event.
Have other assets to sell? Lost or destroyed an asset? Own some shares? Moved overseas? Received a payment from a company that is not a shareholder dividend? All these are CGT events. Shares can also trigger a CGT event when they're cancelled, surrendered, or redeemed.
In any of these scenarios, you need to know the cost base of your asset, which is the amount you spent to buy it. The cost base also includes any other incidental costs or government charges related to owning and holding the asset. This may include brokerage fees, stamp duty, or other similar duty.
CGT liability as an investor
Besides the initial cost, there are a few other things that will affect how much CGT you have to pay. These include the amount of time you hold the shares, your taxable income, and whether you've made a capital loss. Let me break each down for you:
- Holding period: Holding onto an asset for longer can help reduce how much you have to pay for tax on capital gains. If you sell an asset within 12 months of buying it, you'll usually pay a higher CGT rate than if you keep it for over a year. This is another area where long term investing beats short term trading.
- Annual income return: Taxable income affects the amount of CGT you owe. It's calculated using your marginal tax rate, plus 15% for individuals or 30% for companies.
- Capital loss: If you have a capital loss, you can use it to reduce capital gains, but not to offset income from other sources. So, track any capital losses you make. They may reduce the amount of CGT you need to pay on future capital gains.
- Holding as investor: If you're holding shares as an investor, make sure to include CGT in your annual tax return. Any income from dividends or other payments like that will also count as taxable income.
Discounts, concessions, and rollover
I know the idea of paying tax on your profits might sound a little scary, but it's actually a good thing. It means you're making money! And don't worry, there are ways to minimise the amount of CGT you have to pay.
- Use the CGT discount: Tax residents who have owned an asset for more than 12 months can halve their capital gain when selling. Individual taxpayers can get a 50% reduction, while complying super funds get 33.33%. And if you're a complying super fund, don't forget to include the 33.33% reduction too. If you're getting dividends, don't forget that you can deduct costs like interest payments on loans for the same tax year.
- Capital loss: You can deduct allowable capital losses from the capital gains you choose to reduce your CGT. When calculating your losses, remember to include your transaction costs of buying or selling shares.
Let's say you had $10,000 in capital gains for the year, but you also had $3,000 in capital losses. You can subtract the $3,000 loss from your $10,000 gain. This means you'll only be taxed on $7,000 in capital gains.
Keep in mind that you can only use capital losses to balance out capital gains in the same tax year. If you have a net capital loss from past years, deduct that first. If you still have some losses left after offsetting your gains, think of it as a discount for future tax years!
- Small business concession: If you're a small business owner under 55 years old, there are some great concessions you could be eligible for. You could get a tax break, be exempt from Capital Gains Tax (CGT), and rollover capital gains into other assets. To qualify for any of the small business CGT concessions, you need to meet a few basic conditions.
- Affordable housing: Did you know that investing in a property can get a break on your CGT? If you're an Aussie resident, you can get up to 10% off if you meet a few requirements.
Keep your records
As you go on your investment ride, it's smart to keep track of when you bought and sold your assets. That way, it'll be easier to work out how much you made and how much Capital Gains Tax you might owe. And if you're thinking of selling something, make sure to plan ahead and check what the tax implications are .
To help you keep up with all the computations and paperwork, check out this CGT calculator and record-keeping tool .
If you're just starting out in investing, figuring out how much capital gains are taxed might feel a bit overwhelming. But with a little bit of research and preparation, you can make sure you’re making the most of your sharemarket investments. That’s why we suggest you contact a financial adviser or tax expert if you need more guidance.
Happy investing!
