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Capital Gains Tax (CGT) on ETFs

Discussion in 'Beginner's Lounge' started by Beginner1234, Jun 1, 2013.

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  1. Beginner1234

    Beginner1234

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    Hi,

    Quick question. I'm new to the stock market. Let's say a buy $5000 worth of ETFs, hold on to it for well over a year, and sell it for $7500 (for a $2500 profit).

    Does that mean that $2500 * 50% = $1250 would become part of my taxable income? When it comes to the calculation of the Capital Gains Tax, are ETFs treated the same way as ordinary shares?

    I think that this is the case, but wish to check with the experts here if I am thinking about it correctly. Any help is much appreciated.
     
  2. elminster13

    elminster13

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    Interested to hear others views on this but my thoughts where they are treated the same as any other equity. Your example seems correct to me.
     
  3. waimate01

    waimate01

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    The short answer is: yep, just as you describe.

    The longer answer is that sometimes ETFs include a "tax deferred amount" as part of their distribution. This works like a return of capital, and so serves to lower the cost base of your purchase and increase your capital gain. It may or may not happen.

    Here's a worked example (I've included a normal dividend to contrast the effect of a tax deferred amount):

    Buy $5000 worth of ETF

    During the year, receive dividend of $250 fully franked and $100 tax deferred.

    The $250 gets grossed up (250/7*10) to $357. You include $357 in your taxable income and claim a $107.10 tax credit.

    The $100 is untaxed (whoo hoo!).

    After 12 months, you sell for $7500. The $100 tax-deferred amount comes off your purchase price when calculating the capital gain, so your gain is 7500 - (5000-100) = $2600. Apply your 50% reduction for holding longer than 12 months, and include $1300 in your taxable income.

    Note that it's not just ETFs that can include tax-deferred amounts, and unless you end up holding for a long long time, it's rarely material. One way to think of tax-deferred amounts is "you can run but you can't hide".
     
  4. jnalad

    jnalad

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    Any stock held for more than 12 months has a 50% discount on the gains but this will apply after you offset your losses plus to optimise your gains you should offset the short term gains against losses first before offsetting against long term parcels. It is not easy especially when you have trust distributions where one can have Tax deferred and tax free and CGT components in a trust distributions. So CGT is not only about profit/losses from Buy/Sell trades. It is hard so I have found a software to take care of this for me. Whats makes it worse if you have carried forward losses from prior year. So check this site out www.unip.com.au
     
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