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Jul 12

Reducing your capital gains tax liability

  • July 12, 2017
  • CGT

Many people may be able to save time and money on their tax return by gaining a better understanding of the Capital Gains Tax rules.

It is widely known that under the 50% rule investors only need to include half the net capital gain on those investments held for more than a year in their assessable income. It is the treatment and offsetting of losses on which most people are a little less clear.

Generally, most investors halve the capital gain and then deduct any capital loss amounts. This is incorrect. You are meant to net out any losses against the full capital gain and then apply the 50% rule. Investors can now choose the order in which they reduce their gains by applying their losses and may be better off by netting any losses against gains for which the 50% rule doesn’t apply, ie. shares held less than 12 months.

A hypothetical…

Bill has a capital gain on some shares he sold this year. This consists of a $1000 gain, which is eligible for the 50% rule, and a $500 gain, which is not. He also has a $700 loss to offset against these gains. Not realising that he could choose which order to reduce his gain Bill deducts the $700 loss from the $1000 gain and halves it leaving him with a $150 gain. Adding the other $500 gain he has a final capital gain of $650. ie. ($1000 – $700/2 plus $500)

Gerry has experienced the same gain and the same loss, but due to some investigation and doing both sets of calculations he decides to do things differently. He uses $500 of his $700 loss to cancel out the $500 gain ineligible for the 50% rule and uses the remaining $200 loss to offset the $1000 gain using the 50% rule ie. ($500 – $500) + ($1000 – $200/2) leaving a $400 gain.

In this example Bill is left with a $650 gain and Gerry with a $400 gain. If the size of the transactions is much larger, then the consequences of getting the maths right can be quite significant. These types of savings can apply to any asset class to which capital gains applies, including property.

This information is provided as a guide only. Before acting on any decision with capital gains tax implications you should seek advice from your taxation adviser.

For more information, contact us at Leenane Tempelton on 02 4926 2300 or email success@leenanetempleton.com.au

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