Newbie shares & tax question

[serp]

With personal income tax, say you have a low paying fulltime job (like 30k) but you make one trade with your savings and make a profit of say, 10k, do you pay tax on the share trade as a second income or do you just add the 10k and 30k together, find your tax braket and then figure out how much tax you owe from there? Does it matter if you make 1 or 1000 trades a year on how your tax is treated? (I'm talking from being classified by the ato as an investor and not a trader).

 

[GreatPig]

As an investor, any profit you make on a share sale is capital gain, not regular income. If you've held the share for more than 12 months then you get a 50% discount on the capital gain.

So to determine the tax to pay, you would take your personal income, add the capital gain (or only half of the capital gain if you've held the share for more than 12 months), subtract any deductions (including brokerage), and then determine your tax from the standard income tax schedules.

The number of trades doesn't make any difference as long as it doesn't get you classed as a share trader. I think you'd be classified as a trader well before 1000 trades a year though.

And this is also assuming you hold the shares in your own name or receive the profit as the beneficiary of a trust.

This is all just my own understanding. See a professional accountant for proper advice.

Cheers,
GP

 

[Smurf1976]

The ATO will advise on what taxes you pay and there is NO CHARGE to ask them. They will be busy from late this month for the next few months due to the financial year end so ASK NOW if you don't like being put on hold. In my experince, calling in the afternoon (after 2pm Sydney/Melbourne time) is a good idea and don't pick a Friday afternoon or Monday morning since they'll generally be busy then.

As I said, ask the ATO. I am not a tax adviser so can't give advise but I assume that what you really want is to know now how much tax you are going to have to pay rather than waiting until the ATO sends you a bill and that is the only purpose for which my response should be used. In my own words it works as follows but FILL THE FORMS OUT ACCORDING TO THE TAX PACK INSTRUCTIONS and ignore what I have said. This is just for info so you can work it out yourself. (YOU are legally responsible for your tax return even if you use an accountant so CHECK). In summary:

1. Any profit on your shares WHEN YOU SELL THEM is counted as Capital Gains Tax (CGT). Until you sell, there is no tax to pay on Capital Gains that are accumulating but once you sell, you have a tax bill due at the end of the financial year.

2. If you hold a share for more than 12 months, you only have to pay tax on HALF of the profits. If you hold for less than 12 months, you pay tax on all profits.

3. You can deduct your "capital" expenses, such as brokerage, from your Capital Gains.

4. Losses can only be offset against other Capital Gains. You can not deduct a loss from the tax you pay on your salary but if you lost $1000 on one trade and gained $1500 on another, you will only pay tax on the $500 net profit (assuming that both are in the same financial year). But if you just lost $1000 and have nothing to offset it against, you can carry it forward to the next year to offset against future Capital Gains.

5. Dividends are taxable too. They are counted separately to CGT and you will have to pay tax on any dividends EVEN IF YOU SOLD THE SHARES AT A LOSS. You can't deduct capital losses from dividends.

6. If you are doing your own tax return, you need to get the "Tax Pack Supplement" which explains all this. It's free and you can get it by phoning the ATO once they have sent your ordinary Tax Pack to you (also free). You need both documents to complete your tax return. In these documents it tells you to get various guides to investments etc. These are free either online (www.ato.gov.au) or they can send you a printed copy (?). It's really quite simple but the first time you do this you are going to need to do a bit of reading.

7. The actual rates of tax you pay will be the normal marginal rates. Remember that you only pay tax on HALF the profit if you hold for more than 12 months. Remember to include the Medicare Levy which is in additon to the basic rates and is compulsory. (So it's really 31.5% tax etc. not the 30% they state.)

8. You can deduct your expenses from your profits. Basically, if it cost you money and relates to your investments then you can probably deduct it somewhere but there are strict rules to follow. Tax pack tells you how and where to do this. If in doubt, ask the ATO or look on their website.

9. The ATO does all the calculations for you based on the information you supply on your Tax Return. I assume that you are wanting to know how much tax you will have to pay before the ATO works it out for you(?) If you are on 30K and make 10K profit then, assuming that this profit is after deductions for costs etc and has been reduced by 50% if you held for more than 12 months (in which case it is really a 20K profit that you are only required to pay tax on half of - 10K) then you would pay 30% tax plus 1.5% Medicare Levy so 31.5% which is $3150. This is only an example.

10. Private health insurance. Once your income reaches a certain level you pay an extra 1% Medicare Levy if you don't have private health insurance. Be aware that your share profits will count towards this. Tax Pack (the ordinary one that you probably have from last year?) explains all this. If you don't want private health insurance but would have to pay the extra levy, a cheap policy (with a high excess. There are minimum Government requirements in terms of what the policy covers - has to cover hospital not just "extras") will probably be cheaper than paying the extra Medicare Levy.

CHECK EVERYTHING THAT I HAVE WRITTEN HERE. It's just a basic explanation and IS NOT TAX ADVICE. I am NOT a qualified Tax Adviser, this is not tax advice and I do not represent the ATO in any way. This is merely an explanation of how I understand it to work. I COULD BE WRONG.

Check with the ATO

 

[money tree]

Pretty good effort there smurf

Medicare Levy kicks in @ $60,000 for individuals or $100k for couples. Its 1.5%

For someone earning $30k dividends are not a problem unless they are not franked. You can earn up to $52,500 before dividends require additional tax. (and I dont know why more people dont buy instalments for this)

Capital losses can only be offset against capital gains. Capital losses are carried forward if not offset.

I teach a crafty way to offset cap gains:

Find a stock paying a div in July. Buy the stock before it goes ex in June.

You get a capital loss to offset in this financial year, and div gets added to next years income.

 

[serp]

Thanks guys that was helpful, I guess I just really wanted to know if tax on share profits were counted as income on its own or was combined with your other income, and if it was treated as a second stream of income (like if you have 2 jobs the second job is taxed at 50% or whatever).

Thanks again

 

[GreatPig]

Money Tree,

Medicare Levy kicks in @ $60,000 for individuals or $100k for couples. Its 1.5%

It's the Medicare levy surcharge that kicks in at those values, and it's 1% on top of the base Medicare levy of 1.5%.

Find a stock paying a div in July. Buy the stock before it goes ex in June.

You get a capital loss to offset in this financial year, and div gets added to next years income.

How does that give you a capital loss? Capital outlay (ie. buying shares) is not a capital loss. You don't have a capital loss to offset against anything until the shares are sold - and obviously only if they are sold for less than the purchase price plus brokerage.

GP

 

[TjamesX]

I teach a crafty way to offset cap gains:

Find a stock paying a div in July. Buy the stock before it goes ex in June.

You get a capital loss to offset in this financial year, and div gets added to next years income.

I am assuming here that you buy the stock before ex div date, sell before June 30 but after ex div date, with the payment date after June 30 (next fin year). So assuming all things being equal the stock falls div amount plus franking credits on ex div date then the loss occurs this year (capital loss) while recieveing the dividend + franking credits in the next fin year.

Cash flow wise you would end up being down the franking credits, but you would be able to delay payment of capital gains tax equivalent to dividend amount + franking credits.

I need to think about this some more its too late...... :goodnight

 

[ob1kenobi]

I am assuming here that you buy the stock before ex div date, sell before June 30 but after ex div date, with the payment date after June 30 (next fin year). So assuming all things being equal the stock falls div amount plus franking credits on ex div date then the loss occurs this year (capital loss) while recieveing the dividend + franking credits in the next fin year.

Cash flow wise you would end up being down the franking credits, but you would be able to delay payment of capital gains tax equivalent to dividend amount + franking credits.

I need to think about this some more its too late...... :goodnight

I agree! I can't see how else it could work, nor am I convinced of the benefits. At the Investor's Expo in Sydney this year, the ASX gave a seminar in which they said they were researching this practice to see how wide spread it is. They referred to it as 'Yield Play' or 'Dividend Yield Play'. Their description of it, you buy the shares, hold for at least the minimum 45 days + 2 (day acquired and day sold), still hold by the ex date and sell. I'm not convinced of its merits, surely the idea is to make a profit?

 

[money tree]

Money Tree,


It's the Medicare levy surcharge that kicks in at those values, and it's 1% on top of the base Medicare levy of 1.5%.


How does that give you a capital loss? Capital outlay (ie. buying shares) is not a capital loss. You don't have a capital loss to offset against anything until the shares are sold - and obviously only if they are sold for less than the purchase price plus brokerage.

GP

This is a 'quick trade' idea

Yes, the levy....not the surcharge

Capital loss occurs when the stock goes ex-div. Capital loss simply requires a writedown at end of year, or a sale. Franking credits are very rarely added to the ex-div fall.

Now if you end up with a capital gain doing this, would you complain?

 

[rozella]

This link may give a few answers & examples.

Useful Links

Scroll about halfway down the page to the ATO links

or go to useful links on the lefthand menu of exdividendwatchlist

rozella