CGT consequences on share sales
Scenario:
An Australian residents, Brenda and Derek, sold their real estate investment on April 1997 , which they had bought in 1965 for $2m. The couple split the proceeds 50-50 and on 11 November 1997 they both invested in shares:
Mega mining ltd, number of shares=125,000, share price=$4, investment= 500,000
Global media ltd, number of shares=62,500, share price=$8, investment= 500,000
Brenda acquired shares in her own name while Derek used his company acquired shares.
On September 2016, this couple decided to sell these shares, sale proceeds are follow:
Mega mining ltd, number of shares=125,000, share price=$10, investment= 1,250,000
Global media ltd, number of shares=62,500, share price=$6, investment= 375,000
Advise this couple on the CGT consequences of their share sales.
Explanation:
Although the gain from transactions can give rise to tax liability (FC of T v Whitfords Beach Pty Ltd 82 ATC 4031), the mere realization of an investment does not rise the tax liability (Scottish australian mining co ltd v FC of T （1950）81 CLR 188).
The acquisition and disposal of shares, acquires after 19 september 1985, attracts CGT (ITAA97 S 100-25). Any capital gain on disposal is added to the taxpayer’s taxable income while loss if not able to offset against capital gains, is carried forward to offset in future years (ITAA97 Div102).
Assets including shares, acquired before 21 september 1999 and disposed one or more years later, the taxpayer could index the cost base to reduce the capital gain (ITAA97 Div114). Assets including shares, acquired after 21 september 1999, the taxpayer could discount the taxable capital gain by 50% (ITAA97 Div115). Therefore, Assets including shares, acquired before 21 september 1999 and disposed at least one year for certain categories, the taxpayers could choose one option between these two.
For Brenda, she had capital gain and capital loss and when because she acquired shares before 21 september 1999 and disposed over than 18 years, so she could choose the option. For Derek, as was his company acquired these shares, so he could only use the index cost base (s 115-10).
It should be noticed that any capital losses are offset against capital gains before applying the discount percentages. If had capital losses in the case, then the cost base is not indexed （ITAA97 S100-40, S 10-45 and s 100-50）.
Brenda- 50% discount:
Mega mining ltd: capital gain=125,000*10(sale)-125,000*4（cost base）
=1,250,000-500,000=750,000
Global media ltd: capital loss=62500*6(sale)-62500*8（cost base）
=375,000-500,000=125,000
Nominal capital gain=750,000-125,000=625,000
Net capital gain=625,000/2=312,500
Brenda- indexed cost base
Mega mining ltd: capital gain=125,000*10(sale)-125,000*4（cost base）*1.028（indexed cost base rate） =1,250,000-500,000=750,000
Global media ltd: capital loss=62500*6(sale)-62500*8（cost base）
=375,000-500,000=125,000
Net capital gain=736,000-125,000=611,000
*indexation calculation=68.7/66.8=1.028
Derek- indexed cost base
Mega mining ltd: capital gain=125,000*10(sale)-125,000*4（cost base）*1.028（indexed cost base rate） =1,250,000-500,000=750,000
Global media ltd: capital loss=62500*6(sale)-62500*8（cost base）
=375,000-500,000=125,000
Net capital gain=736,000-125,000=611,000
Therefore, for Brenda, the 50% discount is better than indexed cost base, and the amount will add to her accessable income. However, for Derek, he could only use the indexed cost base and the amount is recognized as his company’s assessable income.