Selling shares? Beware of all the CGT rules!

With Trump’s tariffs causing big sell downs on share markets around the world, it is important to understand a few key things about how capital gains (and capital losses) from the sale of shares are treated for CGT purposes in Australia.

For a start, it is crucial to know what the cost – or specifically the “cost base” – of the shares are in order to calculate the assessable capital gain (or loss). This cost base will include relevant brokerage fees.

And for shares received under a dividend reinvestment scheme (DRIP), the cost base will be the value of the dividend which has been applied to buy shares in the company.

Importantly, where only some of the shares in a parcel of shares are sold it will be necessary to identify exactly which of those shares have been sold – in circumstances where you may have acquired the shares at different times for different costs.

In this regard, usually some form of “identifier” (ASX or company etc) is attached to the shares.

But where it is not, the ATO allows you to choose which parcel of shares have been sold – provided you keep records of this so that there is no doubling-up or reselling of the same parcel of the same shares again later on down the track.

And of course, this may allow you to choose which shares you sell in a tax-effective manner.

Of course, the CGT discount is available to reduce the amount of your assessable capital by 50% if you have owned the shares for 12 months – or 365 days to be precise. And in an interesting bit of nitpicking, the ATO takes the view that this does not include the day on which you bought the shares and the day on which you sold them!

Another important thing to understand is how exactly you calculate your “net” capital gain for the income year that is to be included in your assessable income.

And the key thing to note here is that any capital losses of the taxpayer from either the immediate year or prior years must first be applied to any capital gain/s of the taxpayer before applying the 50% CGT discount – and this will mean that there is a bigger net capital gain (if any) to be assessed (as opposed to if the discount was applied first).

However, where there is more than one capital gain from a particular source, the taxpayer can choose which capital gain it will apply the capital loss against first. And, usually, the best result in this case is to apply the capital loss to a gain that is not eligible for the CGT discount.

But where there are a number of capital gains and losses to be netted this process can get complicated – and our advice will be invaluable in this case.   

Finally, beware of engaging in “wash sales” in the current volatile market – and this broadly occurs where you sell the shares to, say, realise a capital loss and then buy them back soon after in order to obtain some tax advantage. This ATO treats wash sales as tax avoidance.

So, if you are selling shares, see us first so we can help you do so in the most tax-effective method relative to all your circumstances.