Many investors incur the inescapable expense of capital gains tax during their investment journey. You must pay capital gains tax (CGT) to the Australian Taxation Office if you sell investments for a capital gain, whether you own shares or real estate (ATO).
The amount of tax you must pay in a given year can be greatly impacted by capital gains tax, even though it is not a “separate tax” and is instead added to your income tax return as taxable income.
Although capital gains tax on shares is handled the same as it is for any other asset, it can still be complicated because there are many moving pieces involved in buying and selling shares.
Here is all you need to know about capital gains taxes, including when you must pay them and how they are calculated for shares.
What Is Share Capital Gains Tax?
If you bought shares at a price lower than the price at which you are selling them, you have “realised” a capital gain on the sale of those shares.
However, when it comes to purchasing and selling shares, a number of factors affect your capital gains obligation, including:
- Whether you are an investor owning the shares,
- Whether or not you are trading shares for profit,
- The length of time you’ve owned the shares, and
- Whether you’ve experienced any capital losses—that is, sold your shares for less than you paid—since you bought them.
How Much CGT Liability Do You Have If You Own Shares as an Investor?
The ATO claims that if you own shares in order to generate income, you are a shareholder. As such, the capital gains tax on shares will be included in your yearly income return and you will be subject to tax at your marginal tax rate.
When Will You Pay Capital Gains Tax Alternatively?
When there is an unintentional change in the ownership of an investment, such occurrence also results in capital gains tax being applied to shares.
Additionally, if a shareholder of a corporation owns shares of that company and:
- You get money from the business that isn’t a dividend paid to you as a shareholder,
- The stock is declared to be worthless once the company is put into administration or liquidated, and
- The cancellation of the shares results from the company’s dissolution.
How Are Taxes Handled When Trading Shares for Business Purposes?
Your capital gains tax burden will be impacted by the distinction between selling shares as an investor and trading shares as a corporation.
You must consider the following aspects to establish if you are selling trading shares as a business:
The type of business activity you engage in: Do they aim to make a profit with their actions?
How frequently do you engage in these actions? In other words, the likelihood that you are operating a business increases with the volume of shares you buy and sell and the regularity of your procedure.
Do you maintain records and set up your operations in a professional manner? Are you, in other words, thinking about your prospectus for the stock market? Do you maintain annual progress reports? If so, you probably trade shares on behalf of a company.
How much money have you put into this? Although it is not a substantial issue, the ATO may take this into account when determining whether you are an investor or a trader for tax purposes.