With the rise of online, low cost share platforms, investing in the share market has become commonplace in many Australian households. However, regardless of whether you use one of these platforms or an ordinary broker, it is important to have a basic understanding of how you will be taxed when investing.
Firstly, let’s discuss some common phrases you may hear when it comes to investing.
Capital Gains Tax (CGT) – when you sell a capital asset, such as shares, you generally make a capital gain or capital loss. In other words, the difference between what it cost you to acquire the asset and what you receive when you dispose of it. While it referred to as a separate tax, once a gain is calculated it is actually part of your income tax.
Cost Base – the price you paid to purchase the shares, including brokerage. It is also important that there can be events that adjust your cost base while you hold the shares. Record keeping is key to establishing your cost base.
CGT Event – there are many types of CGT events (too many to go through today) however the most common of these occurs when you sell a capital asset, such as shares.
Each time you sell a group or ‘parcel’ of shares, you must determine if you have made a capital gain or loss. You first look at what you purchased the shares for, account for any cost base adjustments and then what you have sold them for.
If you have made a gain, you then apply any prior losses, exemptions or discounts and the remainder of the gain gets added to your taxable income.
It is important to note, that if you make a loss, it can only be used to reduce other capital gains and does not reduce your other taxable income (such as salary, interest, rental income.) It can however be carried forward to future years if you have not made a separate capital gain.
The timing of CGT events can also have significant tax implications, so it is always recommended to talk to your advisor before you decide to sell a CGT asset.
Capital Gains Tax is quite a technical and complicated area of Australia’s tax system, and it can have implications for a wide variety of transactions, not just the share market – even selling your home is a CGT event!
If we were to give two key pieces of advice they would be;
1: Records, records, records! Imagine trying to work out a cost base for some shares you brought 20 years ago and then all the adjustments that have happened since you first purchased them. It can be a time consuming and costly task, so the more detailed records you can keep, the better.
2: Speak to your advisor, before you take action. While we cannot give you investment advice or tell you if XYZ Ltd is a ‘great buy’, we can calculate the tax implications of what you are wanting to do, to enable you to make a more informed decision.