capital gain tax, page-32

With respect to Capital Gains Tax (CGT) it is important that there is a delineation made clearly enough between whether on is a "share investor" (SI) or involved in a "share trading business" (ST), being classed as either one has its positives and negatives.

An SI has to pay CGT when a CGT event happens, which for an SI will be the selling of shares for a profit. For instance if you purchase 100 XYZ shares at $1 each and then sell them for $2 each, firstly well done, secondly you have made $100 profit from that sale and CGT is payable on that amount. Costs incurred in obtaining the profit such as brokerage costs are added to the capital base of the purchase amount and affect the profit derived, for instance if the above transaction incurred $20 brokerage then your profit is $80 only, and that is the amount that you must pay CGT on. If you bought and sold the shares, as an individual SI, on or within 12 months of purchasing them then you must pay the full CGT which is your marginal taxation rate derived from your taxable income at the end of the financial year (i.e. if you earnt $90000 outside of trading activities then your marginal tax rate is 42% (I think) then you must pay 42% tax on your profit of $80 which is CGT of $33.60, which leaves you with a profit of $46.40). However if you sell your shares in excess of 12 months after purchasing them, so if you bought them on January 1, you cannot sell them until January 2 the following year, then you will, as an individual SI attract the CGT discount of 50%, and thereby the same scenario as outlined above will play out as follows:

Purchase January 2008 - $100
Sold January 2, 2009 - $200
Profit = $100
Profit minus incurred capital costs = $80
Apply CGT discount (80 x 50%) = $40
Apply marginal tax rate of 42% to profit after CGT discount = $16.80
$16.80 is the CGT payable on the profit, and thereby you have made a total profit of $63.20

As a SI the capital costs incurred in obtaining the profit are not available as taxable deductions against normal income, however other costs can possibly be claimed as taxable deductions such as:

- Bank fees and charges incurred on accounts where dividends are deposited
- Interest on margin lending or loan facilities used to finance share purchases. For the most part these are tax deductable, however there are some instances where they may be deemed as capital expenses, you need to see your accountant to nut your individual position out.
- Depreciation on equipment used to conduct your share trading activities (i.e. computer, etc)
- Costs of journal, newspaper subscriptions, etc
- Internet fees (or proportion thereof)

The big thing for SI's is that any loss made on share trades is NOT a taxable deduction, it is a capital loss and therefore if you've undertaken your transactions as above and attracted the CGT discount, but in the same financial year you also bought and sold some shares making a $50 loss on the share transaction then the CGT for the year would be worked out as follows:

Purchase January 2008 - $100
Sold January 2, 2009 - $200
Profit = $100
Profit minus incurred capital costs ($20) = $80
Profit (which is your capital gain) - Loss (Capital loss of $50) = $30
Apply CGT discount (80 x 50%) = $15
Apply marginal tax rate of 42% to profit after CGT discount = $6.30
$6.30 is the CGT payable on the profit, and thereby you have made a total profit of $8.70


Now all of the above is for a Share Investor, who essentially is someone who does not trade shares for a living or as their principle source of income. A Share Trader (ST) is different.

Whether or not an individual is conducting a share trading business is determined by the ATO, not by you, and the ATO considers a large number of factors when considering this, inter alia, whether profit was the principle motivation for conducting the share trades (as oppposed to just obtaining the dividends), the number and volume of share trades, the amount of capital used in conducting the share trading activities, what research was conducted by the trader, an existing properly constructed business plan, record keeping practices, etc.

As stated above the biggest "plus" in being classified as a ST is that everything is tax deductible, there are no capital gains or losses incurred. All profits are treated as ordinary income and all losses as deductions (incl. brokerage costs, losses on trades, etc) and therefore if the above scenario is played out (using multiples of 1000's to give a realistic scenario), the following would occur:

Purchase January 2008 - $100K
Sold January 2, 2009 - $200K
Profit = $100K
Profit minus incurred deductions (brokerage is now a deduction, not a capital expense) = $80K
No CGT discount to apply
Profit (80K) - Loss ($50K) = $30K
Apply marginal tax rate of 15% (I think) to profit after deductions applied = $4500
$4500 is the tax payable on the profit (ordinary income) and therefore you have made $25500 after tax for that year..........yeaaaaaaaaaaaa

Now it is very important that you do not take what I have typed above as gospel, I am not an account, I am aware of the above through my own experience and studies, it is very important that you seek the assistance of your accountant in assessing your own personal situation. In so far as your accountant, if you are trading shares and conducting proactive investment then I would suggest spending a little more and getting a personal accountant and not utilising the year 12 students that sit in cubicles betwene July and September at shopping centres. Seek an accountant whom either actively advertises that they specialise in personal investment taxation assessment or shares, etc......

I haven't covered dividends here because I now have carpal tunnel syndrome......

Hope this helps....

Cheers