Q: Brenda and Derek, Australian residents, sold their real estate investment in April 1997, which they bought in 1965 for $2 million. They split the proceeds equally and invested in shares on 11 November 1997:
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Brenda bought shares in her name:
- Mega Mining Ltd: 125,000 shares at $4 each, totaling $500,000.
- Global Media Ltd: 62,500 shares at $8 each, totaling $500,000.
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Derek used his company to acquire shares:
- Mega Mining Ltd: 125,000 shares at $4 each, totaling $500,000.
- Global Media Ltd: 62,500 shares at $8 each, totaling $500,000.
In September 2016, they decided to sell these shares:
- Mega Mining Ltd: 125,000 shares at $10 each, totaling $1,250,000.
- Global Media Ltd: 62,500 shares at $6 each, totaling $375,000.
Here's the advice on the Capital Gains Tax (CGT) consequences of their share sales:
The sale of investments can lead to tax liability, but merely selling an investment doesn't always trigger tax.
When you buy and sell shares acquired after 19 September 1985, CGT applies. Any gain from the sale adds to your taxable income, while losses can be carried forward to offset future gains.
For assets acquired before 21 September 1999 and sold at least one year later, you could index the cost base to reduce the capital gain. For assets acquired after 21 September 1999, you can discount the taxable capital gain by 50%. Assets acquired before 21 September 1999 and disposed of at least one year later fall under both rules, allowing you to choose.
Brenda had the option to apply the 50% discount or indexation as she acquired shares before 21 September 1999 and held them for over 18 years. Derek, as his company acquired the shares, could only use the indexed cost base.
It's important to note that any capital losses are offset against capital gains before applying the discount percentages.
Calculations:
For Brenda:
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Applying the 50% discount:
- Mega Mining Ltd: Net capital gain of $312,500.
- Global Media Ltd: Capital loss of $125,000.
- Nominal capital gain of $625,000.
- Net capital gain after discount: $312,500.
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Using the indexed cost base:
- Mega Mining Ltd: Net capital gain of $611,000.
- Global Media Ltd: Capital loss of $125,000.
- Net capital gain after indexation: $611,000.
For Derek:
- Using the indexed cost base:
- Mega Mining Ltd: Net capital gain of $611,000.
- Global Media Ltd: Capital loss of $125,000.
- Net capital gain after indexation: $611,000.
Conclusion:
- For Brenda, the 50% discount is better, adding $312,500 to her taxable income.
- For Derek, he can only use the indexed cost base, recognizing $611,000 as his company's assessable income.
If you have any questions, feel free to contact Tax Ideas Accountants & Advisers. You can also book an appointment through our live calendar.
