Investing in shares can be a great way to grow wealth. It is also important to have an accountant Melbourne by your side who can help you plan and strategize to save Capital Gains Tax (CGT). In Australia, CGT is payable when you sell shares for a profit. However, there are legal strategies to minimize or even avoid CGT on shares. Let’s explore these strategies further.
1. Utilize the Capital Gains Tax Discount
Individuals and trusts may qualify for a 50% CGT discount if they have held the shares for at least 12 months before selling them. This means only half of the gain is added to your taxable income.
Example: If you purchase shares for $10,000 and sell them in 13 months time (i.e. after 12 months) for $15,000, your capital gain is $5,000 ($15,000 less $10,000 = $5,000). With the 50% discount, only $2,500 will be taxable ($5,000 x 50% = $2,500).
2. Offset Gains with Capital Losses
If you have incurred losses from selling other investments, such as shares or property, you can offset these losses against your capital gains. This reduces your overall tax payable. For example, suppose you sell shares in BHP and make a loss of $2,000. Suppose, you then sell your CBA shares and make a profit of $1,500. In this situation, you can offset the losses on the BHP shares against the profit made on the CBA shares. This means that no CGT is payable and $500 ($2,000 less $1,500) of losses is available to be used in the future.
Key Points:
- Unused capital losses can be carried forward to future tax years.
- Ensure that the losses are reported in your tax return. Best to contact your accountant Melbourne who will be able to prepare the tax return and claim the losses for you.
3. Contribute to Superannuation
Contributing to your superannuation fund can reduce the amount of tax you pay on Capital Gains. By making super contributions (up to the annual cap), you can lower your capital gains tax liability while growing your retirement savings.
How It Works: When you contribute money into super, your super fund will pay 15% contributions tax on your behalf (i.e. the 15% will be taken from the money that you have deposited into your super fund and paid to the Australian Taxation Office). If your marginal tax rate is higher than the 15% superannuation contribution tax (your marginal tax rate is likely to be above 15% if your annual income/profit is above circa $20,000), then this strategy can be advantageous.
4. Gift Shares to Family Members in Lower Tax Brackets
Transferring ownership of shares to a family member who pays little or no tax could minimize CGT. Please contact your accountant Melbourne who can run through the calculations with you.
5. Invest Through a Self-Managed Super Fund (SMSF)
Following on from an earlier comment about superannuation, an SMSF enjoys a concessional tax rate of 15% on earnings. If the SMSF is in pension phase, earnings and capital gains may have a tax rate of 0%. This maybe the case if you are over 60 years old.
Important Considerations:
- Establishing and maintaining an SMSF requires compliance with strict ATO requirements. Contact your financial advisor Melbourne who can run through some of these requirements with you.
- Seek professional advice (e.g. from a financial advisor Melbourne) to ensure the SMSF strategy aligns with your financial goals.
6. Hold Shares Until Death
If you never sell, you never pay CGT! In Australia, there is no CGT on shares held at the time of death. Instead, the cost base of the shares is passed to the beneficiary via your will. This means that CGT is only payable when the beneficiary eventually sells the shares.
7. Invest in a Small Business
If you’re a small business owner and the shares that you are selling are the shares in your business, then you might be eligible for CGT concessions and potentially no CGT. Best to contact your accountant Melbourne who can run through the situations where this will be possible.
8. Time Your Sales Strategically
Timing your share sales can impact your CGT liability:
- Sell in a low-income year: If your income is lower in a particular year, selling shares during that time can reduce your overall tax burden.
- Defer sales until the new financial year: This can give you more time to plan and manage your tax obligations.
You do need to be mindful of Part 4A of the tax legislation which dictates that decisions to sell shares should not be made with the predominant purpose to save tax (i.e. best to sell shares because you think it is a good time to sell and not because there is a tax benefit of doing so).
9. Seek Professional Advice
Tax laws in Australia are complex and subject to change. A qualified financial advisor Melbourne or accountant Melbourne can help tailor strategies to your specific situation and ensure compliance with Australian Taxation Office (ATO) rules.
Avoiding or minimizing Capital Gains Tax on shares in Australia requires careful planning and the use of legal strategies. By leveraging tax concessions, timing your investments strategically, and seeking expert advice such as from a financial advisor Melbourne, you can maximize your after-tax returns while remaining compliant with tax laws. Feel free to contact Nobel Thomas to run through your scenario and for a no obligation chat.
