Tax & Off Market Transfers

[Shehan]

Hi all,

Was wondering if I could get some help regarding the taxation of off market transfers please.

I am still pretty young (19 atm) and am a full time student working part time. I have been investing in shares for a bit over a year now, and have been doing alright given the bull market of late. My downfall, however, is that when i first began investing I didn't consider the tax implications of my trades, thus come the end of this financial year I am going to be paying a fair amount of tax due to the part-time work and CG's.

Thus, in order to reduce my tax for next fin. year I have opened up an account under my mum's name and am going to be trading under both names (since my mum doesn't work, I figure i may as well use her tax-free threshold and low tax bracket as much as possible).

Now, given the volatility of the current market, I don't really want to be out of my current trades for too long, so have decided to do an off-market transfer of about half my holdings to my mum.

What I am not sure about, however, is how tax works on off-market transfers. I know you can deem the 'consideration' paid in respect of the transfer, but in terms of the taxation on the capital gains, how does it work exactly?

Any help would be greatly appreciated.

Thanks!

 

[123enen]

Re: Question Re: Tax & Off Market Transfers

Hi all,

What I am not sure about, however, is how tax works on off-market transfers. I know you can deem the 'consideration' paid in respect of the transfer, but in terms of the taxation on the capital gains, how does it work exactly?

Any help would be greatly appreciated.

Thanks!

As your question relates specifically to how CGT works on "off market" transfers as opposed to regular on market selling then the news is not good for you. There is absolutely no difference in the CGT treatment.

The off market transfer is still considered a CGT event upon which Capital gain or loss is assessed: just like a regular on market event.

As far as deemed consideration/ valuation goes, the valuation MUST be an at "arms length" valuation. That is the sale value of the share to be transferred must be a fair market rate.

On the occassions that I have done this I have used the most suitable price that that occured within the last few days of the date of transfer. I have read that you can nominate any price that the share achieved during the last three weeks. You put this valuation on you transfer document.

The best thing that you can do to reduce CGT is to keep the shares for one year and two days. If you do this you get an automatic reduction of 50% of the CGT amount payable. If you have been "trading" stocks then it is unlikely that you would hold for one year.

If your mum receives any financial govt. benefits you had better make sure that her earnings from shares are not at a level that would disqualify her from continuing to receive the benefits.

 

[bullmarket]

Re: Question Re: Tax & Off Market Transfers

Hi Shehan

My understanding is that the tax treatment in your case is the same whether you buy or sell shares on or off market.

eg.......if you buy a parcel of shares for $10k on market and then transfer them off market to someone else for $12k then you have a taxable capital gain of $2k if you held the shares for less than 1 yr or $1k if you held the shares for more than 1 yr due to the 50% discount rule for shares held more than 1 yr.

Essentially the only difference between an on market and off market transfer is that in an off market transfer you pay no brokerage. However with off market transfers it's best to set the transfer price somewhere within the share price's on market daily high and low for the day of your off market transfer in order to eliminate any chance of being thought to evade tax if audited by the ATO.

Hope this helps

bullmarket

 

[NettAssets]

Re: Question Re: Tax & Off Market Transfers

I haven't much knowledge in this area and just raise thise point for discussion.
If a student with limited outside trading income is trading at a higher income level can they get trader status with the ATO. in that case there is no CGT event AFAIK. In other words all the income from trading,dividends etc. is treated as normal income and trading losses are not confined to offsetting CGT events.
Whether this situation is preferable I don't know and I don't know if the situation can be reversed later in the event of a higher paying job.
John

 

[phoenixrising]

Re: Question Re: Tax & Off Market Transfers

Shehan,

Are you selling to your mother or gifting them for her to look after for a while.
If it's the later then no tax may be liable till she sells (please check that out, I'm not an accountant) but back to your purchase price.
Another angle to explore anyway.

Cheers

 

[Odduna]

Re: Question Re: Tax & Off Market Transfers

Below is from a private ruling from ato website
Off Market Transfer of Shares

The disposal of a capital gains tax (CGT) asset will create a CGT event A1. Section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) outlines CGT event A1. It tells us that an A1 event happens if you dispose of a CGT asset; the time of the event is when you enter into the contract for the disposal or if there is not contract – when the change of ownership occurs.

Under section 118-10 of the ITAA 1997 the market value at the time of the transfer is deemed the capital proceeds, where an off market transfer of shares occurs.
You will make a capital gain if the capital proceeds from the disposal are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base. Where the cost base exceeds the capital proceeds but does not exceed the reduced cost base there is no capital gain or loss.

However, a capital gain or a capital loss is disregarded if the CGT asset was purchased prior to the 20th September, 1985 (104-10(5) of the ITAA 1997).

 

[Odduna]

Re: Question Re: Tax & Off Market Transfers

Shehan,

Are you selling to your mother or gifting them for her to look after for a while.
If it's the later then no tax may be liable till she sells (please check that out, I'm not an accountant) but back to your purchase price.
Another angle to explore anyway.

Cheers

Shehan, please check out this edited private ruling:
Authorisation Number: 50496

www.ato.gov.au
left hadside there is a menu, put mose icon over 'Rulings, law and objections'
Another menu will 'fly out'
On the fly out menu, select 'Register of Private binding rulings'
New page with appear. on the bottom of this page select the hyperlink "search facilities"
When new page comes up, put the Authorisation Number given above in.

This will give a sort of plain english version.
The legilsation for view in private ruling will also feature.

hope this helps.

 

[Shehan]

Re: Question Re: Tax & Off Market Transfers

Thanks a LOT for your help guys, this really is a great forum!

Just to clarify my reasons though for going with the off-market transfer, as opposed to selling on market, then transferring that money into another account, and then buying the same shares from my mum's account.

Atm, my portfolio consists largely of relatively high risk shares (due to being young, i figure i may as well take the risks and see what happens), which have had a great run over the past 12 months or so. Though over the past 3 weeks or so, this also means that they have got hit extremely hard with the correction in the market.

Take for example Compass Resources (CMR), which forms a very large proportion of my portfolio. It went from a high of $4.38 to a low of about $2.20 in about a month. Now, my incentive with the off-market transfer is to hopefully 'sell' these shares to my mum for a price around the $2.20 mark, or even slightly higher if needs be. Thus MY capital gains on that share will be reduced greatly this fin. year, saving me a heap of tax.

Since its low of $2.20, CMR has since risen to a close of $3.40 in about 2 days (crazy isn't it?!). So once the shares appear in my mum's account, i plan to realise the capital gains under her name by selling the shares and buying back on market (since i sold the shares to her at $2.20, i assume that's her cost base, and so will have a capital gain of about 50% or so?). Thus i will be able to make use of my mum's tax-free threshold and low income tax-bracket this fin. year (hopefully saving me a fair bit of tax).

I have learnt my lesson though with all this. Once i sort out the tax side of this, i plan to keep the shares for min. 1 year in order to make use of the 50% tax on capital gains (will save me a lot of trouble in the future). You learn as you go eh...

That's pretty much it. Does anyone think this is good way to reduce my tax burden? Or have any better solutions?


Thanks for the help!

P.S. 123enen, as far as I'm aware my mum doesn't receive any financial gov't benefits, but I'll check with her to make sure. Thanks for the heads up!