Catching up with capital gains
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The 31 October deadline is fast approaching but the good news for investors is they can claim any losses on their shares to offset any capital gains they may make in future years.
Tax time is here and for share owners, it might be time to declare capital gains if you've sold some for a profit. But the good news is that you can claim any losses on your shares to offset any capital gains you may make in future years.
Capital gains tax (CGT) is the tax you pay on the gain in the value of shares if you sell them. It is not a separate tax, but forms part of your income tax.
Selling assets such as property, shares or managed fund investments is the most common way you make a capital gain or loss.
The good news is that you'll get a 50 per cent discount on a capital gain on the sale of an investment asset if you hold it for more than one year.
So, if, for example, you bought some shares for $1000, and sold them 15 months later for $2000, then you would pay capital gains tax (CGT) on $500 rather than $1000, which would be considered part of your taxable income.
If, on the other hand, you held those shares for less than 12 months, then the taxable amount would be $1000.
Any costs associated with buying and selling those shares would come off that capital gain. So if your brokerage costs totalled $60, then you'll only pay tax on capital gains of $440 for shares held for more than one year "and that will be taxable at your marginal tax rate," says financial adviser Bruce Brammall.
If you've incurred losses on your share portfolio, then you can carry forward those losses and claim them in years when you make a capital gain, adds Brammall.
"Losses can be carried forward indefinitely, but capital gains can't. So, if, for example, you incurred $100,000 of capital losses during the global financial crisis (GFC), then you could carry forward those losses to offset capital gains in future years," he says.
"But you can't use any capital losses to offset your taxable income. They can only be used to offset capital gains. So if your losses are larger than your capital gains in one particular financial year, then you won't pay any capital gains tax. Any net losses can be carried forward."
For CGT purposes, you will need to keep detailed records of any shares you've bought and you need to keep them for five years after you sell your asset, according to the Australian Taxation Office (ATO).
The records must indicate the date you bought and sold the asset as well as the price, and any amounts which form part of the cost base of that investment.
If you're lucky enough to own shares in a company taken over and you received shares in the takeover company at a handsome profit, you may be entitled to a scrip-for-scrip rollover for any capital gain you made.
This means you can defer the capital gain made on the disposal of your old shares until a later CGT event happens to your new shares.
Some older investors may be able to escape CGT. For example, you can generally disregard any capital gain associated with "any pre-CGT assets" as the ATO call them, that is, any assets you bought before 20 September 1985.
Deduct what you can
Where you pay ongoing management fees or retainers to investment advisers, you will be able to claim that expense as an allowable deduction, but note that you can't claim a deduction for a fee paid to an adviser for drawing up an initial investment plan.
If you borrowed money to buy shares, you would be able to claim a deduction for the interest incurred on the loan, provided it is reasonable to expect that dividends will be derived from your investment in the shares (that is, the interest expense is incurred to produce an income), according to the ATO.
Where you need to travel to service your investment portfolio, for example, to consult with a broker or to attend a stock exchange or company meeting, you can claim a deduction for the full amount of your expenses where the sole purpose of the travel relates to the share investment.
You may also be able to claim the cost of internet access in managing your portfolio. For example, if you use an internet broker to buy and sell shares, the cost of internet access will be deductible to the extent you use the internet for this purpose, as well as the brokerage costs.
But be realistic--because the ATO will only allow costs directly related to the sale of those assets. And the ATO may decide to audit your numbers.
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Nicki Bourlioufas is a Morningstar contributor.
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