CGT, IP and shares

[Burramys]

Advice is sought about how to calculate CGT for an IP and shares. Both have been held for over 12 months, so the 50% rule applies. Despite a search I have been unable to determine how the two types of assets are treated together, when sold in one FY. Some approximate figures.

The IP was bought for about $550 000 after adding the reno and taking off depreciation. It should sell for $750 000. So CG of $200 000. The shares are the bad ones, down about $40 000. This will leave just the good ones, lovely dividends.

Is the CGT calculation $200 000 - 40 000 = $160 000/2 = $80 000 * MTR of 32.5% = $26 000?

 

[tess85]

Also check whether your marginal tax rate of 32.5% isn't bumped up to a higher tax bracket due to your cap gains on top of your usual salary.

 

[Burramys]

Tess, thanks, noted. The example I cited was to give an idea of my understanding, not to be too specific about the dollars and MTR. If at all possible the finances would be structured so as to have taxable income under the point where taxable income is in a higher MTR.

 

[Terry_w]

A loss on the shares could offset a gain on the property. Work it out separately and just add together.

 

[Burramys]

Terry, thanks. The problem is that I do not know how to do this. A possible way has been suggested above: $200 000 - $40 000 = $160 000/2
= $80 000 * 32.5% = $26 000 tax. Is this correct? If not, advice about the correct way would be appreciated.

 

[redwing]

You've sold all the shares, or just the underperformers?

 

[Terry_w]

Terry, thanks. The problem is that I do not know how to do this. A possible way has been suggested above: $200 000 - $40 000 = $160 000/2
= $80 000 * 32.5% = $26 000 tax. Is this correct? If not, advice about the correct way would be appreciated.

roughly correct but don't forget all the other costs and expenses you can take into account.

 

[Paul@PFI]

The 32.5 % tax rate isnt correct as tess suggests.

Your calc basis is correct. You net the gans & losses THEN discount 50% and that value is taxed at your marginal tax rate. ie see below.

Salary $70K. Now taxable income is $150K. The extra CGT income will be taxed as follows:
- 70,000 - $80,000 = $10k @32.5% +
- 150k-$80k = 70k @ 37%

PLUS $80K will also have 2% medicare levy
PLUS If taxable income > $180k a 2% deficit levy tax applies to the EXCESS above $180k. (2015 tax year)
? Do you have private health insurance for every day of the year ?? The Cap gain impacts that choice ?
? Do you have a HELP debt. The cap gain could ramp up the repayments
? PAYG Instalments for 2015 will be requested. Variation is likely.


etc etc...

I always recommend that the cap gain is checked and advice on its calc sought. If you overpay tax its a concern as much as underpaying tax. eg : Improvts, ownership costs NOT claimed as a tax deduction incl interest !! I see some large ommissions from the cost base in DIY calcs.

 

[lup15]

How CGT is calculated for sale of shares is explained in this ATO publication - Part B

https://www.ato.gov.au/uploadedFiles/Content/MEI/downloads/ind39805n41520614.pdf

From there, you would need to see what your overall net gain/loss is based on the performance of your IP and shares

 

[Paul@PFI]

lup - I wish it were as simple as reading a ATO publication. If the paper was softer it could have dots and be serated into little squares.

Westfield investors have NO IDEA on cost base in most cases. Splits, mergers, demergers, rights issues, purchase plans, DRP and reconstructions have left it looking like a mess. And they propose to do it again.

Heaps of companies cost base isnt what the shares were purchased for. BHP, Wesfarmers (Coles), Woolworths etc etc. NAB shares - Many shareholders chose bonus shares in place of DPR over the past 15+ years. Bonus shares erode the cost base. DRP adds to cost base. If you assume the wrong base method the numbers are very different. So if you owned NAB shares did you overpay tax or underpay tax or get it right (many accountants get it wrong...Cause the junior did the work) ??

I regularly encounter client CGT estimates that are just plain wrong. And accountants who do tax returns and get it wrong. Over and under. Best one I saw just a few weeks back. An inexperienced lawyer doing a deceased estate assumed share cost was its cost base. Actual cost base was just 45% of the value they used. They underpaid tax AND left beneficiary with a tax debt. And messed up estate distribution by overpaying one beneficiary and leaving two others with a tax problem. And the lawyer used a tax agent...Who got it really wrong and committed their opinion to writing when the lawyer queried it. It got worse..The agent told lawyer all shares are acquired at death at market value...Problem was all shares were post CGT and so the cost base was flawed from the start....So far its a $400,000 tax problem. So if a tax agent can do that imagine what a DIY taxpayer can do???

We offer a CGT review service and am happy to review issues. For deceased estates it often a huge money saver.

No two companies seem alike..Then there are the trusts that pay tax deferred amounts....It gets worse.

 

[Burramys]

Brilliant. Thanks. At this stage all I'm after is an approximate idea of the CGT and other liabilities. I still have the shares trading below their cost, and will hold them for another year. The intention is to sell the IP in FY16. The first week of July 2015 would be nice, but unlikely. The shares would then be sold. This defers tax for a while, about March 2017 if the rules don't change again.

I'm aware of the net costs and consideration being used. I used 32.5% MTR as there will be other deductions; I should have used the next rate. Oops.

It's recognised that there is no simple answer, which is why I have a tax professional complete my return. I give her the data in a spreadsheet, and she knows the ITAA. This is money well spent, and a deduction to boot.

Westfield sounds like a nightmare. I have some of the shares listed, all bought in one or two blocks. No DRP, bonus shares or the like. It's simple: Bought on date for $X (maybe also second date for $Y), sold on another date this FY for $Z. I've got ASX companies with tax-deferred payment, and have to wait until August or September for the statement. Pox!

Proceeds will be used to buy another property.

 

[lup15]

lup - I wish it were as simple as reading a ATO publication. If the paper was softer it could have dots and be serated into little squares.

Westfield investors have NO IDEA on cost base in most cases. Splits, mergers, demergers, rights issues, purchase plans, DRP and reconstructions have left it looking like a mess. And they propose to do it again.

Heaps of companies cost base isnt what the shares were purchased for. BHP, Wesfarmers (Coles), Woolworths etc etc. NAB shares - Many shareholders chose bonus shares in place of DPR over the past 15+ years. Bonus shares erode the cost base. DRP adds to cost base. If you assume the wrong base method the numbers are very different. So if you owned NAB shares did you overpay tax or underpay tax or get it right (many accountants get it wrong...Cause the junior did the work) ??

I regularly encounter client CGT estimates that are just plain wrong. And accountants who do tax returns and get it wrong. Over and under. Best one I saw just a few weeks back. An inexperienced lawyer doing a deceased estate assumed share cost was its cost base. Actual cost base was just 45% of the value they used. They underpaid tax AND left beneficiary with a tax debt. And messed up estate distribution by overpaying one beneficiary and leaving two others with a tax problem. And the lawyer used a tax agent...Who got it really wrong and committed their opinion to writing when the lawyer queried it. It got worse..The agent told lawyer all shares are acquired at death at market value...Problem was all shares were post CGT and so the cost base was flawed from the start....So far its a $400,000 tax problem. So if a tax agent can do that imagine what a DIY taxpayer can do???

We offer a CGT review service and am happy to review issues. For deceased estates it often a huge money saver.

No two companies seem alike..Then there are the trusts that pay tax deferred amounts....It gets worse.

wow. you'd think that's why you pay someone to deal with this stuff. guess pay someone knowledgeable is the message