My husband and I are retired. We do however have some shares purchased in our former business name. Valued now about $9000. We have virtually no assets, no superannuation and we rent our unit. I started share trading with only $3000 as a way to help our finances but although I did very well originally, our portfolio of late is down considerably (whose isn’t?). This year I have had to pay a tax bill of $2,000. We had tax credits in our business.

Please can you explain how the tax office work out capital gain on shares. Any profits I took out I promptly put back into other shares. What do they do about losses?

How can I minimise tax when the small amount we have is invested in shares? I do understand that they can class you as a trader depending on how often you trade. Your help and advice would be much appreciated by these two oldies! Best regards I.L.T


Quite often investors mistakenly believe that if the proceeds from their share sales are used to buy other shares, then they do not have to pay tax. The thinking is: “I have no money in my hand because I reinvested it, so how could I pay tax?” Not having to pay tax would be awesome (save for the roads and hospitals) but unfortunately this line of thinking is not the case.


Top Australian Brokers


Now the following explanation of capital gains and shares is not exhaustive – to be so, we would need volumes. It’s the basics and you are strongly advised to consult with your qualified accountant for all your detailed tax planning.

According to the ATO, capital gains tax (CGT) is payable on the capital gain made on disposal of a CGT asset which was acquired on or after 20 September, 1985. A capital gain will generally arise where the proceeds from the CGT event are higher than the initial outlay. In other words, the capital gain is the difference between the cost base of your shares (or property or other CGT asset) and the proceeds from the sale.

By way of example:

* Buy 100 BHP shares for $8 each (disregarding brokerage) = $800 cost base
* Sell 100 BHP shares for $38 each (disregarding brokerage) = $3,800 proceeds from sale
* Difference: $3,800 – $800 = $3,000 gross capital gain

A capital loss occurs when your proceeds are less than the total outlay. Basically, the above example in reverse.

Capital losses can be used to offset any capital gains made during the income year. Or, if you do not offset all the capital losses against capital gains in the current year, then you can carry the left over loss forward to future years.

Importantly, capital losses cannot be used to offset tax on any other income. So if you lose $3,000 selling XYZ shares (and you are not classed as a trader), you cannot offset your capital loss against your wage or business income – only other capital gains.



Another common misunderstanding is the concept of triggering a capital gains tax event – that is, when have I done something that gives rise to CGT being considered? Most people understand that an asset is said to be acquired when you buy it. But the asset is also “acquired” when you inherit it, construct it or receive it as a gift.

Similarly, an asset is disposed of when a CGT event occurs – most obviously selling it. However the asset is also said to have been disposed of for tax purposes when you give it away, change ownership off market, or even when it is lost or destroyed. So bear in mind that if you buy XYZ shares for your children and then 10 years later, give the shares to the kids – you have triggered a capital gains tax event and if the shares have gone up in value, YOU will be liable for the tax.

A capital gain will usually be disregarded if the CGT asset was acquired before 20 September 1985. So for those holding “pre-85” shares or property, selling these assets can be an excellent way to release tax free capital.

Now to calculate your CGT for individuals (not companies or super funds), you can use any of the methods below. The method chosen will affect the way capital losses are dealt with.

Full capital gain method for calculating the amount of CGT payable for assets held less than 12 months:

1.  Calculate the cost base for each part of the asset: (cost of shares plus brokerage)
2. Calculate the assessable capital gains: Consideration received (proceeds of sale less brokerage) – Cost Base
3. Offset any capital losses.
4. Add capital gain to other assessable income to determine overall tax liability.

50% Discount method for calculating the amount of CGT payable for assets bought on or after 11:45 AEST 21 September 1999 and held for at least 12 months:

1. Calculate the cost base for each part of the asset: (cost of shares plus brokerage)
2. Calculate the assessable capital gains: Consideration received (proceeds of sale less brokerage) – Cost Base
3. Offset any capital losses (from the same financial year, then prior years)
4. Calculate 50% allowance (for assets held for more than 12 months): Assessable capital gains x 50%
5. Calculate nominal gain: Assessable capital gain – 50% allowance
6. Add your nominal capital gain to other assessable income to determine your overall tax liability.

So using our BHP example above where we had a $3,000 capital gain, we have done steps 1 and 2. There are no losses so that’s step 3. We’ve held the shares for 2 years so we get the 50% discount, which means step 4 = $1,500. Step 5 means our nominal gain is now ($3,000 – $1,500) = $1,500. If you earned $80,000 for the year including your income from wages, bank interest and dividends, then the ATO says add the capital gain and we will now tax you as if you earned $81,500 for the whole year.

In this case, your gain of $1,500 will effectively be taxed at 41.5% because that is the marginal rate including Medicare.

For shares bought pre 11:45 AEST 21 September 1999 and held for at least 12 months you can also use the indexation method but it’s too complex to discuss here, so again, check the details with your tax adviser. Even if you can apply the indexation method, the 50% method generally works out better – ie: less tax to pay.

Bear in mind that if you hold the shares for more than 12 months then CGT is really a pretty cheap form of taxation. The worst case is tax of around 23% (or 46.5% x 50%) of the gain. Most people earning even a basic wage pay a marginal tax rate of 30% + Medicare levy so in that context, it is not the end of the world.

The distinction between an investor and a trader is an important one. If you are classified as a trader (which includes shares owned in a company), you are not able to take advantage of the capital gains tax discount provisions. Instead, the full profit made on the sale of trading shares is taxable at your marginal rate. This is because the activities of a trader are considered a business and therefore assessable under section 6-5 of the Income Tax Assessment Act 1997. This has been reaffirmed in case law (London Australia Investments Co Ltd v FCT and FCT v Myer Emporium Ltd).

So CGT for shares owned by a company is simply assessed as (Proceeds – Cost Base) = Gain x 30% flat rate of tax. There is no access to the 50% discount.

Although this treatment may seem fairly harsh – there is an up side for some. Because shares held by traders are classified as stock – any unrealised losses can be claimed as tax deductions.

So to minimise tax on share transactions, you can try the following:

* minimise trading activity so as not to trigger a CGT event;
* hold the shares for more than 12 months before disposing of them (individuals and family trusts);
* sell the shares in a financial year when your income from other sources is low (individuals and family trusts);
* if you own shares inside your own company and are retired (where your personal tax rate is zero or very low), speak to an expert about getting the shares out of the company and into a lower tax rate environment going forward; and/or
* own the shares in a super fund so that CGT is limited to 10% in accumulation phase and 0% in pension phase.

The tax world is a jungle – but if you know what you are in for when you start down the investment road and use the best structure for your own circumstances, then you can much better plan for a tax effective exit.

Jeremy Gillman-Wells is an Authorised Representatives of AMP Financial Planning Pty Limited | ABN 89 051 208 327 | AFS Licence No 232706.

Disclaimer: This article is general in nature and is not intended as investment advice. Readers should always seek further advice before making any financial decisions.