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Recouped initial investment

Discussion in 'Accounting, Tax & Legal' started by Arrtty, 20th Apr, 2017.

  1. Arrtty

    Arrtty New Member

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    Hi guys,
    I've recently invested about 6k to some shares that have done particularly well to the point of almost 200% if I sell some of the shares to recoup my initial 6k what are the tax ramifications?
     
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  2. Rakhi Withanage

    Rakhi Withanage Member

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    Hi Arrrtty,

    It depends on a number of variables. If you have held the shares for 12 months or more you will be eligible to a 50% Capital gains Tax discount. For instance, if I bought 1000 shares for $5,000, (ignoring brokerage costs) and sold the shares in two years’ time for $8,000 my capital gain would be the difference between the cost base purchase price plus costs, and the sale price less costs.
    E.g.
    Cost base = $5,000
    Sale Price = $8,000
    Capital Gain of $3,000
    50% discount applied $1,500

    So in this scenario the $1,500 would be added to your taxable income at the end of the year. For example if your taxable income was $80,000 it would push it up to $81,500.

    If you have owned the shares less than 1 year the gain would be the full $3,000

    If you had investment losses from previous years these can be used to offset gains in future years.
     
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  3. Arrtty

    Arrtty New Member

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    Hi Rakhi,
    Thanks but question was in regards to part profits which works out as follows:
    I purchase 100000 of XYZ shares at 0.05 for $5000 and sell 50000 at $6000 so my profit would be [$6000 - (50000*0.05)] $4500 & CGT would be applied to that. Please correct me if i'm wrong.
     
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  4. AnthonyKing

    AnthonyKing Active Member

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  5. Rakhi Withanage

    Rakhi Withanage Member

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    Hi Arrty,

    Yes, you're on the right track, in the scenario you outlined the CGT would apply to the gain of $3,500 [$6,000- (50,000*0.05)]
     
    Last edited: 24th Apr, 2017
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  6. AnthonyKing

    AnthonyKing Active Member

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    Hello Arrrttty
    My view is slightly different to Rahki's
    IMO CGT depends on two things, and requires meticulous record keeping habits more so than ordinary income tax issues and the burden of proof is on the taxpayer.

    1, Your recorded intentions when you made the acquisition, and was it to sell at a profit (a gain) or hold for income or both?
    Your records prior to the acquisition need to recorded in minutes or notes of a discussion with an adviser, and maybe a letter of advice.
    2. How long you held the asset/s before disposal.
    If you acquired the asset/s to make a profit on sale i.e. a Capital Gain and If its less than 13 months before disposal CGT would not usually apply. but ordinary income tax would and so there may be no CGT 50% discount available.in those circumstances.
    It is also possible to offset a past Capital loss against a against a gain but not against revenue losses. Your other option with a Capita Gain is to reduce your personal taxable income for the tax year by making a personal super contribution for instance or by acquiring a business use asset like a motor vehicle or office equipment to lower your personal tax incidence..
    We are currently advising on a very rare CGT event "K6" involving a $70M commercial property asset acquired post in 1989 but the shares in the company were acquired in the 1970's.
    So CGT can give rise to very complex outcomes.

    Good luck with your sale remember to keep meticulous record to prove to substantiate your case.
    AnthonyKing
     
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  7. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    I think Anthony is making it sound much more complicated than it needs to be.

    CGT always applies - to argue that sales of less than 13 months is not CGT but ordinary income tax is a bit misleading since there isn't actually a separate tax called "Capital Gains Tax" in the first place - it's all considered income tax because the net gain is added to your taxable income (with or without a discount depending on timing and certain other factors).

    Some more reading from the ATO: Capital gains tax

    The only time there may be a question is if you are carrying on a business of share trading - but that's more about claiming other expenses which would not normally be deductible in the course of ordinary share transactions (eg office expenses / stationery / etc) and you need to pass the "duck" test.

    More from the ATO: Carrying on a business of share trading

    I've not seen anything from the ATO to indicate that you need to "record in minutes or notes of a discussion with an adviser" when just buying or selling a few shares as an individual - there is nothing unusual about that very common activity and I can't see how it could be questioned that they are doing anything that would require more than the basic documentation required to establish exactly how much capital gain was accrued (ie. purchase and sale documents plus any changes to the shares while held such as dividend reinvestment / stock splits / rights issues etc).

    This isn't a $70M commercial property, nor a company trading in large volumes of shares, it's $6K worth of shares bought by an individual.
     
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  8. Arrtty

    Arrtty New Member

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    Yep nothing as complicated, it was a couple of bets on highly speculative and luckily highly profitable shares and I held it for only a few weeks. Some were sold completely whilst others partially sold. Just needed to work out the profits from the partial sales for tax time.
     
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  9. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Just to be clear about how it works from a tax perspective: your net profit (sale proceeds - cost base) with no discount applied because held for less than 12 months - is added to your taxable income and the tax you'll pay is calculated based on your income at the end of the financial year as part of your normal tax return.
     
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  10. AnthonyKing

    AnthonyKing Active Member

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    Dear Simon
    I have been a tax professional for almost 40 years giving advice based on real life experience .
    You should also note the following items:

    Australian Taxation Office
    Record keeping for CGT
    Record keeping for CGT
    NB: The "Event" means all aspects of the Acquisition and the Disposal of the asset.
    Also look up "Suibstantiation"

    You must keep records of every transaction, event or circumstance that may be relevant to working out whether you've made a capital gain or capital loss from a CGT event.
    This includes any advice you obtained at the time of Each Event.

    Penalties can apply if you don't keep the records for at least five years after the event.

    Keeping adequate records will help you work out your capital gain or capital loss correctly when a CGT event happens.

    Good records can also help your beneficiaries deal with the impact of CGT. If you leave an asset to another person, it may be subject to CGT as a result of a future CGT event. For example, if your daughter sells shares you've left her in your will, she will need your records to determine her cost base for the shares and therefore how much CGT she will have to pay.

    NB: Simon, there are rarely more than one correct answer and near enough is not good enough in CGT matters.

    Regards
    Anthony
     
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  11. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    I'm not disputing the need to keep good records to be able to prove the timing and amount of capital gains - this is absolutely the case.

    I'm only disputing the assertion you made that you have to prove your intent when you are just an ordinary investor and aren't trying to also claim other expenses by claiming to be a professional trader.

    I haven't seen anything on the ATO website which states that your average mum-and-dad investor need to "record their intentions" in "minutes or notes of a discussion with an adviser". That's the only bit I'm disputing. Again, we're not talking about $70m commercial property transactions here - the OP has $6k to invest.
     
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