Paying taxes is a fact of life. We never worry about paying capital gains tax shares because it means we made a profit on the investment. We have prepared a simple primer on most common questions on this issue. These are our thoughts only and is not a substitute for professional advice.
Depending on individual circumstances, tax structuring can have a large impact on post tax returns. It is important to be aware of the most tax efficient means of holding investments, either directly, through a trust, company, or investing through superannuation. You should consult your tax advisor to get the foundation right which will save a lot of headaches down the track.
What is Capital Gains Tax (CGT)?
Capital gains tax is a tax on sale of the proceeds from sale above the original cost. If an asset is sold below its original cost, it is called capital loss. A CGT event happens where tax is payable when the gain is realized with asset sold. Then taxes will be payable on the difference between the sale price and original cost less any deductible expenses. This is paid when the individual lodges the tax return.
One year’s capital losses can be used to offset next year’s gains and usually there is no time limit for the loss carryforward period.
Australians are taxed on their income world wide as long as the individual declare themselves as an Australian resident for tax purposes. This means that the standard level of taxes applies for investments made offshore for example in US or UK stocks.
From this perspective, there can be considered double taxation of the dividends from overseas companies. The only claim domestic investors can make is the amount withheld by the overseas government or broker.
There is no double taxation on capital gains which means any gain from appreciation of the share price is only taxed once when the gain is realized.
Capital Gains Calculator
Sale Proceeds – Original Price – Costs = Net Capital Gain
How much is Capital Gains Tax?
The tax is applied to the individual’s marginal income. This means the net gain number from the above calculator is added to an individual’s income for the year.
50% CGT Discount
Individuals also receive the benefit of 50% CGT discount if the asset is held for more than 12 months. This means that any potential taxes is halved for long term investors where only half the original amount is added to income.
Capital Gains Tax on Investment Property and Primary Residence
The taxes applies to real as well as financial assets. If for example the asset is real estate it can be complicated.
If capital expenditure was made during the holding period to improve the asset, the cost of the expenditure can be added to the cost base of the asset and the cost base is adjusted by amount claimed as depreciation.
For most of the population, the family home is its largest investment and the most tax efficient investment. The sale of individual homes which the individual lives in and that meet requirements set out by the ATO are not subject to capital gains tax.
Even as the family moves out, if the asset is sold within 6 years, no capital gains will be payable. However the interest on mortgage is no tax deductible when it is occupied by the owner unlike investment properties. The trend of offset income tax with interest expense even with a negative carry property is called negative gearing.
Taxes on Futures Contracts Trading
In some instances where futures contracts are used for speculation purposes, the gain and loss are considered taxable income not capital gains.
Company Capital Gains Tax
For some investors, it could be more tax efficient to hold assets in a company or trust. Most trusts can be structured as a tax pass pass through entity which means the gains and losses as well as income and losses are passed through directly to the investors.
Limited liability companies (Pty Ltd) on other hand is a self contained tax entity. Taxes on assets held in a company is paid by the company it self.
Australia company tax rate of 30% (27.5% for small business) means that the maximum tax rate is much lower than the highest marginal tax rate. The main disadvantage of holding assets in a company is companies do not have the benefit of 50% capital gain discount for assets held more than 12 month.
The small businesses enjoy an additional benefit of a lower tax rate (if all the income and taxes are paid in Australia, the fully franked dividend would still enjoy a 30% franking credit).
Tax on Super Fund Investments
Tax in superannuation can be complicated. Superannuation can be either concessional or non concessional. In simplest sense, if a contribution is made before income tax is paid on the income then it will be taxed at 15%. If contribution to super is using money which has already paid tax on then contribution will not be taxed.
Superannuation Capital Gain Tax Rate
Investment gains and income are taxed at a flat rate of 15%.
Taxes on dividends are treated at the flat rate noted above. Any dividends paid by companies that pays taxes in Australia means the income is franked with imputation credits and is not double taxed at the shareholder level when the cash flow.
If the dividend is fully franked, they would be entitled for a refund of the franking credit. The level of refund would be dependent on the level of franking credits attached to the dividend.
Therefore from a holistic perspective for investors to think their investment portfolio in and outside super as one single portfolio, there are tax advantages to have the super fund in holding positions that has a decent franked dividend yield.