capital gains tax (gct) is a tax levied on any capital gain (profit) made on an investment. laws...
TRANSCRIPT
• Capital Gains Tax (GCT) is a tax levied on any capital gain (profit) made on an investment.
• Laws relating to capital gains seem to continually change. Some of the general changes are:
• Shares purchased pre 1985 are not subject to CGT.
• Shares purchased pre September 1999 the Capital Gain can be calculated using the indexation model or the discount model.
Capital Gains Tax
• The INDEXATION MODEL takes into account inflation and the “real” gain in price of the shares to calculate the CGT. *
• Shares that are purchased after September 1999 and held for less than 12 months have the capital gain calculated on the entire gain.
Capital Gain = total return – total cost
• For shares purchased after September 1999 and held for more than 12 months the DISCOUNT RULE applies – you find 50% of the gain and pay tax on that (or just divide by 2)
Capital Gain = (total return – total cost) / 2
• Once the capital gain has been calculated, investors pay tax at their marginal rate (the tax bracket they are in)
Capital Gains Tax = capital gain x marginal tax rate
Example 16
• Fred purchased 3000 AMP shares at $6.75 each. Brokerage is 2% and a GST of 10% is applied to brokerage. 9 months later he sells them for $8.98. Fred’s marginal tax rate is 42%
a) Calculate the capital gain
b) Calculate the CGT owing
c) Calculate the after tax return
Consideration : 3000 x 6.75 = 20250
Brokerage : 2% x 20250 = 405
GST : 10% x 405 = 40.50
Total : (20250 + 405 + 40.50)
$20695.50
Step 1 – Buy and Sell the Shares
Consideration : 3000 x 8.98 = 26940
Brokerage : 2% x 26940 = 538.80
GST : 10% x 538.80 = 53.88
Total : (26940 – 538.80 – 53.88)
$26347.32
Step 2 – Sell the Shares
Capital Gain = Total Return – Total CostCapital Gain = 26347.32 – 20695.50 = $5651.82
Step 3 – Calculate the Capital Gain
Capital Gains Tax = Capital Gain x marginal tax rate
Capital Gains Tax = 5651.82 x 42% = $2373.76
Since the shares were held for under 12 months no discount rule applies and tax must be paid on the entire capital gain.
b)
c)After Tax Return = Total return – total cost – CGT
After Tax Return = 26347.32 – 20695.50 – 2373.76
After Tax Return = $3278.06
Capital Losses• Most investors at some point make
poor decisions regarding investments and make a loss.
• The decision needs to be made to hold on to them and hopefully they will rise in value or sell them.
• If you sell them for less than you bought them for it is called a CAPITAL LOSS.
• A capital loss can be used to offset any capital gains – this reduces the amount of CGT payable.
• Capital losses are offset against the full value of any discountable capital gains. (i.e. before the 50% rule is applied)
• If your capital losses exceed your capital gains in a year – then the net capital loss (the amount left over) will be carried into the next financial year.
• It is best to offset the loss against any gain that the 50% rule doesn’t apply to.
You buy some AAA shares for $4599 and then sell them 18 months later for $3000, and at the same time buy BBB shares for $3980 and sell them 18 months later for $6234. If your tax rate is 34% calculate the tax payable.
AAA Shares
Capital Gain (loss) = 3000 – 4599Loss = $1599 (no tax payable)
BBB Shares
Capital Gain = 6234 – 3980Gain = $2254
So you need to pay tax on BBB – BUT you can off-set your loss
2254-1599 = 655 is your tax liability
But as you have held them for more than 1 year – the discount rule applies.
655/2 = 327.50
Tax payable = 327.5 x 0.34 = $111.35