Capital Loss on Shares

Capital Losses of Shares.

A question to the forum. I have checked this one with my accountant however just want to be doubly sure and see what you guys say. It seems an easy one, however as they say “if it seems too good to be true then it probably is”. The question relates to multiple share purchases this year, selling the shares for capital losses to use in the future, and rebuying the same shares immediately again.

Background information
I am an Australian living and working abroad.
Geared on multiple investment properties in Perth.
Investment properties receive rental income (my only Australian income) and have the usual IP costs.
Expected Annual capital loss this year on IP’s is ~ $5,000 per year
Five (5) years of accumulated capital losses of ~ $30,000.
No plan to sell properties in the near future.

Scenario
I bought 1,000 shares in XYZ at $10 on 1st. Aug 2008. Brokerage fees = $35. Cost = $10,035.
I bought 1,000 shares in XYZ at $ 9 on 1st. Sept 2008. Brokerage fees = $35. Cost = $9,035.
I bought 1,000 shares in XYZ at $ 8 on 1st. Oct 2008. Brokerage fees = $35. Cost = $8,035.
I bought 1,000 shares in XYZ at $ 7 on 1st. Nov 2008. Brokerage fees = $35. Cost = $7,035.

I bought the shares as a long term buy and hold however I am considering selling them all (or some of them) and taking the capital loss and adding it to my capital loss from my IP’s to use against gains in the future. Future income may be in the form of wages when I return to Perth and if/when I sell my IP’s.
Current share price = $6 thus current portfolio value = $24,000. Brokerage fee = $35 if I sell now.

If I sell all XYZ shares the net capital loss would be:
Cost Base – Income Gain = Capital Loss
($10,035 + $9,025 + $8,035 +$7,035) – ($24,000 -$35) = $34,140 - $23,965 = $10,175

I add these capital losses generated from my share sales to those expected from my IP’s this year to get a total annual Capital Loss of $15,175.

I then use the $24,000 from my share sale and buy XYZ shares again straightaway at $6.

The question is …….. yes I have made a loss of $10,175 from my shares however I have bought back in at the same price so no real loss but in the future when I have income or sell the IP’s I can use this $10,175 loss as part of my overall accumulated losses to reduce my tax on the IP sale price or wage income. Thus I could theoretically save up to 48% of this $10,175, ie. $4,782 or lesser amount depending on what tax bracket I am in.

I believe there is no problem taking the Capital Loss and adding it to my previously accumulated Capital Losses, however can I legally buy in to exactly the same share, XYZ, as I have just sold out of simply to take a loss that will save me tax in the future ?

I know it is not nice to realize a loss in my share holdings, however with taking the capital losses now it will reduce my tax in the future, plus I still believe that I want to be invested in the market. Basically taking my losses now will reduce the pain of this depressed market by giving me a tax benefit in the future..

Any comments or advice would be greatly appreciated.


Joe

 

Why are you realising a loss just to reset your cost base lower ?

Do you have any capital gains to set off ? Otherwise you will just pay higher CGT in the future AND capital losses are applied BEFORE any discount !!

Would this be a wash sale TR 2008/1 ?

Are you a non-resident for tax purposes - in which case gains/losses from Aussie shares may be ignored AND you may be deemed to have acquired them for market value at the date you become a resident again ? If you sell whilst a non-resident then the share losses will not be used against any gains if you sell the property.

So many questions unanswered .... so much time could be spent in an Advisors office with the meter running !

Cheers,

Rob

 

Capital Loss on shares.

Rob,

I am trying to 'realise' my losses now, add them to my capital losses from previous years from my IP's (and the next few years of expected losses) so that when I sell my IP's in 10 years time when I am back in Australia earning a wage my capital gains on my property sales will be reduced by the capital losses incured due to the IP's plus the capital losses due the the share sale.

I am not sure but residency doesn't really come in to the equation, I believe but could be wrong, as I do an Australian tax return already for Australian rental income and losses and have done so for many years. To the Oz tax office I am a none resident and my only income is rental income and Oz bank account interest income.

Joe.

 

Hi Joe,

If you are a non-resident for tax purposes, then I believe you ignore gains and losses on shares (unless the company principally holds land in Australia).

Therefore the tax position should not affect your investment decision.

Such shares sill held on your return to Australia will be deemed to be acquired for market value.

I do not believe that tax should be a compelling factor in your choice of shares, but you should be careful about gearing for shares since interest will not usually be tax deductible.

Cheers,

Rob

 

Rob,

I am an Australian resident 'for tax purposes' since I have rental income in Australia and the properties are Australian. Since I am currently living and working abroad I do not think it makes a difference as the CGT assets (houses & shares) are in Australia.

I had another chat with my accountant and got a little confused. He said that Capital Losses accumulated through higher running costs compared to rental income can only be used against future capital gains created from the sale of the IP. I cannot use these accumulated losses against any wage/employment income I may earn when I return to Australia. Thus in short:

Accumulated Rental/Interest losses from IP can only be used against IP sale Capital Gains.

If so what happens if I sell shares and make a Capital Loss through this sale what Capital Gain can I offset these losses against ? Share sale gains ? IP sale capital gain or not ?

Any ideas ?

 

Hi Joe,

Revenue shortfall on your rental properties are NOT a capital loss.

Such net rental losses can be offset against other income.

As a resident, you will be declaring your overseas salary and wages income (with a credit for tax already paid) as well as your Australian dividend income from which you can set off your net rental losses.

Any excess revenue losses will be carried forwards to future income years.

Note that being a resident, you will enjoy a tax-free threshold and pesronal tax offsets like the low income offset if you can just get yourself a very modest positive tax liability.

Merely generating a capital loss on shares means that you are stuck with that capital loss until you generate a capital gain such as a sale of shares or property.

Cheers,

Rob

 

Hi Joe,

Just as a side note can you tell me how you manage your properties overseas? Obviously you have a rental agent but what about the paperwork? That is, the rental statements and tax returns?

Thanks

Liverpool St

 

I'm no expert but it sounds like what you are proposing could be at risk of being classed as a "wash" sale by the ATO.

Effectively what you are doing is disposing of an asset at a loss for the purpose of obtaining a tax benefit, then repurchasing the identical asset, continuing to enjoy the benefit of owning that asset. I would be very careful, if this is your intention.

You can offset the capital loss on shares against the capital gain you make on the property, but of course to do this you actually have to sell the property in the same financial year as you sell the shares.

You could also offset the capital loss made on the shares against other capital gains made in the sharemarket. But again, those gains have to be realised (i.e. you have to take your profits as well as your losses).

According to my understanding you cannot offset the capital loss on shares against the income that your IP generates. If it generates negative income then that is carried forward to the next year and you get the tax benefit only when the IP income becomes positive.

 

Thanks for all your posts however, ...... I am in fact more confused than before due to the slightly conflicting posts. I will continue to read the 170 pages of the ATO Capital Gains documentation.

Thanks.

 

I thought you could carry over a capital loss into future financial years (to offset future realised capital gains)? Can anyone confirm?

Regards,

Jason

 

Capital losses can only be applied against capital gains.

If no capital gains this year, then carry forward the capital losses to a future year of capital gains.

Net rental losses on an investment property are not capital losses, so they can be set off against any other assessable income this year.

Cheers,

Rob

 

One of the exceptions to this rule is if the property is owned by a discretionaryt trust. The revenue/income losses can be offset against a Capital gain. Pity capital losses can't be offset against revenue in a trust however.

Cheers - Gordon

 

So have I got this right now ? ... please correct me if I am wrong.

Buy IP. Sell IP at profit in future =======> Capital Gain, discount method (50%), taxed at marginal rate. Any share dividend, wages, income etc. has no affect on this, apart from being used to determine the marginal tax rate.

Buy IP. Rental income < interest/costs =====> Income Losses. If no positive income for the year (ie. 'unemployed' & no share dividends) income losses can be accrued/accumulated over a number of years. Accumulated income losses subtracted from wages/income when one has a job/positive income in the future (eg. dividends) to reduce tax.

Buy Shares. Sell shares at profit in future =====> Capital Gain, discount method (if held for more than a year), taxed at marginal rate. Any other Capital Gain (ie. IP selling at profit) will be combined. Dividends from these shares are 'income', and added to other income (eg.wages) and taxed at standard rates accordingly. If no other income, ie. only dividends then taxed at standard tax rates.

Buy shares. Sell shares at a LOSS =====> Capital Loss. Used against Capital gains for that year (gains from 'asset' sale eg. IP, shares). If no Capital Gains for that year can these capital losses be carried forward ?

Joe.

 

Nothing special about trusts in this case.

Your assessable income includes your net capital gains s.102-5 ITAA97.

Cheers,

Rob

 

You got it !

Cheers,

Rob

 

Thanks Rob, learning new things all the time.

Cheers - Gordon

 

Gunner Guy

Any chance you can get non resident status for taxation purposes in Australia?

You are in Malaysia, where there is no Capital Gains Tax at all -- so well worth the effort!