Capital Gains Tax (GCT) is a tax levied on any capital gain (profit) made on an investment. Laws relating to capital gains seem to continually change. Some of the general changes are: Shares purchased pre 1985 are not subject to CGT. Shares purchased pre September 1999 the Capital Gain can be calculated using the indexation model or the discount model. Capital Gains Tax

The INDEXATION MODEL takes into account inflation and the “real” gain in price of the shares to calculate the CGT. * Shares that are purchased after September 1999 and held for less than 12 months have the capital gain calculated on the entire gain. Capital Gain = total return – total cost

For shares purchased after September 1999 and held for more than 12 months the DISCOUNT RULE applies – you find 50% of the gain and pay tax on that (or just divide by 2) Capital Gain = (total return – total cost) / 2

Once the capital gain has been calculated, investors pay tax at their marginal rate (the tax bracket they are in) Capital Gains Tax = capital gain x marginal tax rate

Example 16 Fred purchased 3000 AMP shares at $6.75 each. Brokerage is 2% and a GST of 10% is applied to brokerage. 9 months later he sells them for $8.98. Fred’s marginal tax rate is 42% a)Calculate the capital gain b)Calculate the CGT owing c)Calculate the after tax return

Consideration : 3000 x 6.75 = Brokerage : 2% x = 405 GST : 10% x 405 = Total : ( ) $ Step 1 – Buy and Sell the Shares Consideration : 3000 x 8.98 = Brokerage : 2% x = GST : 10% x = Total : (26940 – – 53.88) $ Step 2 – Sell the Shares

Capital Gain = Total Return – Total Cost Capital Gain = – = $ Step 3 – Calculate the Capital Gain Capital Gains Tax = Capital Gain x marginal tax rate Capital Gains Tax = x 42% = $ Since the shares were held for under 12 months no discount rule applies and tax must be paid on the entire capital gain. b) c) After Tax Return = Total return – total cost – CGT After Tax Return = – – After Tax Return = $

Capital Losses Most investors at some point make poor decisions regarding investments and make a loss. The decision needs to be made to hold on to them and hopefully they will rise in value or sell them. If you sell them for less than you bought them for it is called a CAPITAL LOSS.

A capital loss can be used to offset any capital gains – this reduces the amount of CGT payable. Capital losses are offset against the full value of any discountable capital gains. (i.e. before the 50% rule is applied) If your capital losses exceed your capital gains in a year – then the net capital loss (the amount left over) will be carried into the next financial year. It is best to offset the loss against any gain that the 50% rule doesn’t apply to.

You buy some AAA shares for $4599 and then sell them 18 months later for $3000, and at the same time buy BBB shares for $3980 and sell them 18 months later for $6234. If your tax rate is 34% calculate the tax payable. AAA Shares Capital Gain (loss) = 3000 – 4599 Loss = $1599 (no tax payable) BBB Shares Capital Gain = 6234 – 3980 Gain = $2254 So you need to pay tax on BBB – BUT you can off-set your loss = 655 is your tax liability But as you have held them for more than 1 year – the discount rule applies. 655/2 = Tax payable = x 0.34 = $111.35