Capital Gains Tax on Shares

[TheBacon]

CGT on shares

Hi All,
I’m not certain how capital gains tax is applied, please help.

If a sale of some shares makes a profit, one needs to pay CGT on this profit. OK
Is the taxable amount added to your other taxable income? For example, if one made $10k profit on a trade and had an income of $50k, does your profit get added to that and at the end of the year you are taxed as if you’d earned $60k? Is this correct?

This is probably how it works with a simple sale and if you have a simple income stream. I’ve only ever had simple years where at most I had one transaction (share or property sale) that attracted CGT, and this seems to be how it was taxed.

Now, I’ve heard also that CGT is taxed at your highest marginal tax rate. This is different and may be a bonus for my wife and, let me explain…

We recently bought some shares in my wife’s name and they have done rather well. If we make, say, $10k profit on sale of these shares, at what rate does the tax get applied?

My wife currently stays home with the little noisy members of the family and earns $0 (apart from family tax benefit payments). So, how does CGT get applied in this situation?

• Does it get taxed as if she had earned $10k (i.e. she pays approx $600 tax), or
• Does it get taxed at her highest marginal rate (i.e. 0%)? Or
• Does her income become $10k for the year, so she gets taxed at the highest marginal tax rate for that amount (i.e. 15%)?

Yes – I am aware of the 50% reduction in CGT if an asset is held for more than 1 year.

So is it 1, 2, or 3?

Our actual profit is much more than $10k at this stage so the answer makes a big difference to whether we would sell now (if we were to sell), or make sure we held for 1 year….

Cheers

 

[Pushka]

CGT for any investment is applied in the same way - ie the profit (sale price less purchase price) is added to your taxable income (50% deduction if held for over 12 months in your name) and whatever tax bracket that falls in, determines the tax you pay. So if you earnt no income, but had a CG of $5000 then no tax to pay. But an accountant is needed to confirm all this.

Beware, that if you make a much larger profit than this, and you need to pay tax, then you might get caught up in the quarterly PAYG scheme. You could also sell half of the shares on June 30, and half on July 1 which would drastically cut back any tax liability.

 

[GreatPig]

Does it get taxed as if she had earned $10k (i.e. she pays approx $600 tax)

This one, by my understanding.

Regarding the potential entry to the PAYG system, if you think it's a one-off and she won't have the same sort of profit in the next financial year, you can do a variation back to the level you think it will be. Try not to estimate too low though, or the ATO may penalise you if the income turns out to be significantly more than your varied estimate.

GP

 

[TheBacon]

This one, by my understanding.

Regarding the potential entry to the PAYG system, if you think it's a one-off and she won't have the same sort of profit in the next financial year, you can do a variation back to the level you think it will be. Try not to estimate too low though, or the ATO may penalise you if the income turns out to be significantly more than your varied estimate.

GP

Mmmm - interesting but confusing...

I would assume we would have to lodge payment of the tax until we had completed tax returns for that financial year? So if we sold on July 1 we potentially have well over a year before we have to pay the tax...

Pay as you go? Probably doesnt apply here or am I missing something?

Cheers

 

[Pushka]

PAYG can be triggered when the Tax Office checks what you paid in tax last year that was additional to the tax taken out as salary (ie you had to pay more tax once your assessment had been lodged - from income earned from investments, trusts etc) Then it sends you a quarterly statement (the one that GP and I are referring to) that you can vary if your tax liability for the NEXT financial year will be less. Have you heard of the old 'provisional tax' scheme? It is like that, but with a different name.

PAYE is the tax that employers take out of your pay packet each pay period.

And yes, selling on July 1 defers your tax liability UNLESS you have already been caught up in the PAYG system, in which case they catch up with you and you have to start paying this every quarter!

 

[GreatPig]

In some cases you can also get annual PAYG, which means you'd only have to pay slightly earlier than when you do your tax return, but I think quarterly is more common. Most of the ones we've had have been quarterly.

Although I might also be getting confused here between personal PAYG and company BAS (I just fill out the darned things whenever I get them and they say they're due ).

GP

 

[Pushka]

Hey GP, both are quarterly. And then there is the monthly PAYE that employers have to do as well. When did I get to become an employee of the ATO grrrrr

 

[GreatPig]

both are quarterly

Okay, now that you've made me go and take a look...

I have two here, one of which is called an "Annual GST Return" for a company (essentially the same as a BAS as far as I can see), and the other an "Annual PAYG Instalment Notice" for an individual.

Cheers,
GP

 

[Pushka]

OK, GP you got lucky - ours are quarterly. And monthly for PAYE. I send the forms off at the required time each month, within a week I get another one to fill in. sigh.....

One month I sent the forms in early - it was for a BAS so included GST collected, so around $12,000 to be paid to the ATO. But it wasnt actually due for payment until the 28th, so the form was received by the ATO about 3 weeks before the payment was due. I usually set up internet banking when I have completed the forms, so they match up, and pay it by Bpay the day before the money is due. The bloody Tax Office then sent me a letter saying I owed the amount of $12000 IMMEDIATELY - just because they had received the forms but not the payment Their own forms said it wasnt due for another couple of weeks.

Needless to say I never send my forms back early now!

 

[GreatPig]

I pay nearly all bills on or after the due date. The tax ones are usually on or just before though - don't want to press my luck too much.

And I pay everything using BPay if the option is available. Unfortunately some can't be paid that way and either have to be paid by credit card over the phone (second choice) or by going back to the stone age and sending a cheque.

GP

 

[Pushka]

by going back to the stone age and sending a cheque.

What's a cheque...

Remember the old days when petrol stations were closed at lunchtime Saturday and you had to drive to the country if you ran out of petrol?

When Banks closed at 2.30pm on Friday and that was your last chance to get money until Monday morning

You had to pay your stockbroker $65 just to do things that you wanted to do and not use their advise

When you could only buy things using cash....

When the only way to contact someone was to find a pay phone or call them from a land line at home?

When a letter was the only way to send someone something in writing

When music was on the radio and not in your pocket?

Off topic, but I reckon GenY would just not cope

 

[GreatPig]

What's a cheque

One of those things you chisel out on a stone tablet and have delivered by donkey and dray.

GP

 

[TheBacon]

Thanks

Cheers guys for the feedback.

TB

 

[gooram]

Question:

Who applies the 50% discount if held over 12 months? You or the taxman?

I.e. Do I only declare 50% of the profit or do I declare the entire amount and let the tax dept work it out?

This may be obvious when fillling out a tax return, but I've never claimed CG before so I'm not sure.

Thanks.

 

[Pushka]

You need to claim it in your return, if you don't the ATO won't do anything about it.