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Reducing Your Capital Gains Tax Liability

21.05.2015 by GTC Financial

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This Case Study shows how Tax Planning can reduce the amount of Capital Gains Tax you pay. Remember this is a guide only, we strongly recommend you seek professional advice for all investment and taxation matters.   

Helping investors to reduce their capital gains tax liability

A key part of Tax Planning is understanding the Capital Gains Tax rules and then using those rules to save tax.

50% General Discount - If an investor holds an asset (maybe a share or a property) for more than a year they are generally entitled to a 50% discount on the capital gain when they sell the asset. This means only half the Capital Gain is included in their taxable income.   

However if that investor is carrying forward a capital loss or makes a capital loss in the current year, that loss must be offset against the capital gain before the 50% discount is applied.

Investors can now select which gains they offset their losses against. Normally a better result is obtained by netting any capital losses against gains that aren’t eligible for the general 50% discount e.g. investments that have held less than 12 months.

Case Study – Ben & Gerry. 

Ben & Gerry each own the same two shares which they sell and make a $1,000 capital gain on each share.

They have held the first share for more than a year and are eligible for the 50% discount. They are not entitled to the 50% discount on the second share. 

Ben & Gerry are also carrying forward a $700 capital loss which can be offset against their gains.

Ben always prepares his own tax return but he does not realise he could choose how he applies the loss against his capital gains. He prepares his tax return by applying the half of $700 loss equally to both shares and the result is;

 

Share 1

Share 2

Total

Eligible for 50% discount

Yes

No

 -

Capital Gain

$1,000

$1,000

$2,000

Capital Loss

(350)

(350)

(700)

Sub Total

$650

$650

$1,300

General 50% Discount

(325)

0

(325)

Total Taxable Gain

$325

$650

$975

Instead of preparing his own tax return Gerry has GTC Financial prepare his. Instead of applying the losses equally, the loss is used to reduce the gain that is NOT eligible for the general 50% discount. 

 

Share 1

Share 2

Total

Eligible for 50% discount

Yes

No

 -

Capital Gain

$1,000

$1,000

$2,000

Capital Loss

 

(700)

(700)

Sub Total

$1,000

$300

$1,300

General 50% Discount

(500)

0

(500)

Total Taxable Gain

$500

$300

$800

In this example Bill is left with a $975 capital gain and Gerry with an $800 gain.

In this example the numbers are small, if the numbers were $97,500 and $80,000 being taxed at 46.5% the difference is $8,137 in tax.  

This case study highlights the value of getting the right advice. If you are expecting a capital this year now is the time to seek advice.

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