This month’s column is the third in the series addressing the tax implications of investing in shares and explains the impact of capital gains tax on the sale of shares by investors that are not categorised as share traders. If you are a share trader or contemplating starting up a share trading business, please read Part B of the series published in the March edition.
Record keeping
Because investors may hold shares for many years it is essential that records are filed away and retained for five years after the year shares are sold. This is an ATO requirement. The records required in order to calculate the capital gain or loss on sale include the following:
- Buy and sell Confirmation Contract Notes for on market transactions
- Dividend Statements for dividends that have been reinvested under a Dividend Reinvestment Plan (DRP)
- Share Purchase Plan, Share Rights and Share Options documents relating to shares issued by the company directly to the shareholder
- Documents relating to restructuring such as mergers, spin-outs, share splits, share consolidations etc.
Calculating capital gains/losses
The capital gain/loss is the difference between the amount received from the sale of the shares after deducting brokerage and GST on the brokerage and the cost incurred in acquiring the shares after adding brokerage and GST.
When shares are sold that have been acquired under a DRP the relevant dividend statements will show the number of shares issued, the price per share and total value which may or may not differ slightly to the total amount of the dividend due to rounding up or down.
Determining the capital gain or loss on sale of rights and options or the impact of restructuring events on share cost bases is much more complex and you may need to contact your accountant or financial adviser before deciding to buy or sell these securities.
Strategies for minimizing the impact of capital gains tax
a) Holding Period
Aim to hold your shares for at least 12 months to take advantage of the 50% discount on the capital gain thereby halving the tax on the gain, unless of course the outlook for the stock is negative.
b) Realise capital losses before triggering capital gains
Capital losses are firstly offset against capital gains before applying the 50% discount to gains on shares you have held for more than 12 months.
c) Make concessional super contributions
Personal concessional (deductible) super contributions can be used to offset the tax impact of net capital gains. It is important to ensure you do not exceed the concessional contributions cap of $25,000 for 2021 unless you draw on the catch-up concessional shortfalls from the 2019 and 2020 tax years. Please note the 9.5% employer super guarantee contributions (SGC) are included in the concessional contributions $25,000 cap.
d) Income splitting with lower income family members.
If your taxable income in future years beyond 2021 is likely to be in excess of $45,000 where the marginal tax rate of 34.5% kicks in or higher rates of 39% above $120,000 or 47% above $180,000 inclusive of the 2% Medicare levy, you should give thought to future share purchases being made either in joint names or solely in the names of family members in a lower tax bracket.
If you have shares that are currently showing a loss but you wish to retain, you could realise a loss by transferring the loss making shares to your spouse/partner or child over 18 years of age on a lower taxable income at market value. The capital loss you make can be offset against capital gains in the year of the transfer or carried forward to offset against future capital gains.
e) Income splitting through a family trust
Another income splitting strategy is to establish a discretionary family trust if you intend to invest a significant amount of funds ($100,000 plus) into shares and/or other taxable income generating investments. This strategy is frequently employed by families with lower income earning spouses and children and grandchildren over 18 years who are dependent upon family financial support.
Both dividend income including franking credits and capital gains can be distributed to beneficiaries on lower income levels where it is taxed at their lower rates of 21% up to $45,000 or at a nil rate if below the tax threshold of approximately $22,000 taking into account low income tax rebates.
Beneficiaries do have an entitlement to the income distributed to them so it is a good idea to appropriate their distributions to paying their education expenses, motor vehicle, holidays and board and keep expenses etc.
f) Investing through a Self – Managed Super Fund (SMSF)
This strategy should only be entertained if you have the knowledge and experience to manage the investments in the fund and to carry out the important duties of a trustee. Furthermore it is generally advised that you should have a minimum of $300,000 to invest in the fund to justify the set-up and ongoing costs of operating the SMSF.
The tax advantages whilst in accumulation mode are that net earnings on the funds invested are taxed at 15% and discounted capital gains at 10%. When the fund is rolled over into pension mode earnings on the funds invested and the pensions drawn down from the fund are both tax free.
The disadvantage is that you cannot access the funds until you meet the conditions of release so this strategy is better suited to long term investors and those who have paid off the mortgage on their primary residence.
If you are considering investing through the above two structures you must seek advice from your accountant and financial adviser.
Disclaimer:
The content of this article is not intended to be used as professional advice and should not be used as such. Some aspects of this topic can be quite complex, so if you are a share investor or contemplating investing in shares you should consult a registered tax agent, a financial advisor or your broker.
Brian Spurrell FCPA CTA Director, Personalised Taxation & Accounting Services Pty Ltd. 0412 011 946
Email bspurrell@ptasaccountants.com.au,
Web www.ptasaccountants.com.au