Capital Gains Tax Capital Gains Tax GCT is

Capital Gains Tax • 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.

• 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

Step 1 – Buy and Sell the Shares 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 2 – 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 3 – Calculate the Capital Gain = Total Return – Total Cost Capital Gain = 26347. 32 – 20695. 50 = $5651. 82 Since the shares were held for under 12 months no discount rule applies and tax must be paid on the entire capital gain. b) Capital Gains Tax = Capital Gain x marginal tax rate Capital Gains Tax = 5651. 82 x 42% = $2373. 76 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 BBB Shares Capital Gain (loss) = 3000 – 4599 Loss = $1599 (no tax payable) Capital Gain = 6234 – 3980 Gain = $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