We are often asked about the tax consequences of selling shares. Whilst we are not tax advisers, there are some basic facts which you can keep in mind if you are not familiar with the tax treatment of shares. Further information about CGT can be obtained from the relevant section of the ATO website, accessible here.
For the purposes of this discussion, I’ll assume you are not a share trader, which is the case for almost all of our clients. A person who is carrying on the business of share trading is subject to completely different tax treatment, more akin to the tax treatment of any other business activity.
First up, yes, selling shares almost always has tax consequences; that doesn’t always mean you have to pay tax, it means there will be a tax effect. As you might expect, a profit results in a capital gains tax (CGT) liability and a loss a tax credit (which can be used to offset other capital gains).
This article will focus on the most common share ownership scenario; individual or joint investors who acquired their shares after 21 Sept 1999. After the basics are covered, I’ll address two special situations which include pre 1985 share purchases and inherited shares.
Tax on Profits – Simple Situations
This applies to individual or joint investors who acquired their shares after 21 Sept 1999.
The amount of tax you pay when you make a profit depends on:
- The size of the profit.
- The length of time you have held the shares.
- Your marginal tax rate, which is effected by how much you earned.
The size of the profit is simply the sale price, after costs (such as brokerage) minus the cost base, which can include any purchase costs. If you purchased your shares on market, you will know the purchase price as the amount of money you paid for the shares. When you sell the shares, you will receive money, this amounts to the sale proceeds.
What if you didn’t ‘buy’ the shares, such as in the case of AMP, IAG (NRMA) or NIB demutualisation’s? From a tax perspective, these events all have a prescribed cost base which you can use to calculate your profit (click the links to access specific blog posts where we cover this).
Here’s three examples:
- Clive bought shares on market for $10,000 and sold them for $15,000, and paid $110 on both the buy and sell transaction in brokerage, his profit would be $4,780.
- Julie subscribed for $10,000 of shares through an IPO (such as Telstra, Medibank etc) and sold them for $15,000, and paid $110 in sales brokerage. Her profit would be $4,890, larger than the first example as she didn’t pay any brokerage to purchase the shares.
- Zack was issued 5,618 IAG shares as part of the demutualisation of NRMA. The deemed cost price for these shares is $1.78 each (more on that here) which means his cost base is $10,000. If he sold those shares for $15,000 minus $110 brokerage, his profit would be $4,890.
You pay tax on either all your profit, or half (50%) your profit, depending on how long you held the shares. Less than 12 months and you pay tax on the entire profit. More than 12 months and you pay tax on 50% of the profit only.
The amount of tax you pay is dependent on the marginal tax rate of the shareholder. Here’s the personal tax tables for the 2017 financial year, obtained from the ATO website.
|Taxable Income||Tax on This Income|
|0 – $18,200||Nil|
|$18,201 – $37,000||19c for each $1 over $18,200|
|$37,001 – $87,000||$3,572 plus 32.5c for each $1 over $37,000|
|$87,001 – $180,000||$19,822 plus 37c for each $1 over $87,000|
|$180,001 and over||$54,232 plus 45c for each $1 over $180,000|
When determining the relevant applicable tax rate, you should consider all other taxable income earned in the financial year that the shares are sold. So for example:
- A scenario of $4,890 profit, held less than 12 months, earned $40,000 in other taxable income. Shareholder would pay tax on the entire profit at 32.5%, so $1,589.25.
- A scenario of $4,890 profit, held more than 12 months, earned $20,000 in other taxable income. Shareholder would pay tax on half of the profit at 19%, so $464.55.
If there are joint shareholders, the tax is split as per the interest in the shares, usually 50% each.
The cost base is a little more complicated to calculate when the shares were enrolled in dividend re-investment program (DRP) as each reinvestment has its own cost base.
Tax Credit on Losses
This is simple, if you lose money on a share investment, you can offset the loss against other capital gains, or if you don’t have any in the current financial year, you can carry them forward for use in future years.
A capital loss can only be used to offset a capital gain, it can’t be offset against income, such as salary of business income.
Tax on Pre 1985 Share Purchases
If you acquired the shares prior to Sept 1985, no Capital Gains Tax is applicable!
Tax on Inherited Shares
If you inherit shares and the sell them, you may be liable for tax. If the share’s you inherited where purchased before September 1985, you are deemed to have acquired the shares on the date of the person’s death, and your cost base is the market price of the shares on this day.
If the shares where purchase after 1985, you inherit the cost base of the prior owner.