What capital gains tax on shares will I pay?
Buying and selling shares is listed as one of the activities that may result in tax payable to the Australian Taxation Office (ATO). Understanding how capital gains tax on shares work will allow you to be informed on any tax implications you may have from trading shares. This article is for informational purposes only and should not be relied upon for tax, legal or financial advice.
What is the capital gains tax on shares in Australia?
The Australian Taxation Office (ATO) has different forms of taxation it requires all residents to pay. Capital gains tax (CGT) is one of them, and it's the tax specifically levied on any profit or gain earned from the disposal of an asset that has increased in value over time. CGT is applicable to several types of assets, including shares, investment properties, and mutual funds.
When tax time comes, any net capital gain made must be added to your total taxable income on your income tax return, and is paid at your marginal tax rate. It's important to understand how capital gains tax works in Australia, especially when it comes to buying and selling shares.
How is capital gains tax on shares calculated for individuals?
Capital gains tax is a tax on the profits, or capital gain, of an asset subject to CGT. Shares are one of the assets subject to capital gains tax. CGT for shares is calculated the same way it is calculated with other assets subject to it.
To calculate capital gains tax, the first step is to compute the exact amount of capital gains you have made. This is done by subtracting the cost base of the shares from the capital proceeds received from their sale. The resulting figure is either a capital gain or loss.
The cost base of the shares is the sum of all costs associated with acquiring, holding, and disposing of the shares. This includes the purchase price, brokerage fees, stamp duty, and any other costs.
On the other hand, capital proceeds are what you receive from selling an asset. Proceeds are generally received as money, but if you may receive non-monetary compensation, the ATO also outlines how to calculate the value of your capital proceeds.
Once you have calculated your capital gain, it is then added to your assessable income and taxed at the marginal tax rate. If the shares have been held for more than 12 months, you may be eligible for the capital gains tax discount – the capital gain is discounted at a rate of 50%, and only that part is added to your assessable income. Do note however that the CGT discount only applies to Australian residents for tax purposes and not for foreign or temporary resident individuals.
We also discuss below what happens if you end up with a capital loss rather than a capital gain.
Capital gains tax on shares example
To give you an idea of how CGT works, here is a simple example:
Do note that specific circumstances will vary between different individuals, and any changes in CGT calculations may affect other parts of your tax return such as your income tax bracket, medicare levy, and tax offsets.
Let's say you bought 100 shares in XYZ company for $10 per share, which cost you a total of $1,000. If you later sold those shares for $15 per share, you will have made a capital gain of $5 per share, or $500 in total.
Example with CGT discount
If you held the shares for at least 12 months before selling them, you would be entitled to receive a CGT discount.
In this scenario, instead of reporting the entire $500 you gained in the sale within your tax return, you only report 50% of it – which is $250. This lowers your total taxable income for the financial year, and subsequently your tax liability.
Example without CGT discount
On the other hand, if you are not eligible for the CGT discount, the same scenario above would require you to report the entire $500 profit you made from selling your shares. This increases your total taxable income and your tax liability.
NB: The two examples above provide a simple theoretical illustration of the impact of the CGT discount on your tax payable, all other things held constant. In reality, having capital gains eligible for the discount may affect other variables (e.g. your tax bracket, Medicare levy & surcharge, HECS-HELP repayment, etc), or may be affected by other variables (e.g. applying carried-over capital losses) which may make your tax calculation more complex than illustrated above.
What events trigger CGT on shares?
While the previous sections mainly covered how capital gains tax works in the event of selling shares, there are actually other events that could trigger capital gains tax liability when they happen.
These include:
- Accepting an offer from a company for them to buy-back your shares
- When a company you own shares in gets taken over by, or merges with, another company
- When you own shares that are declared worthless after the company is placed in liquidation or administration
- and a few other CGT events outlined in on the ATO website.
On the other hand, capital gains tax does not apply to:
- Dividends received from investments – this is taxed as ordinary income
- If you are carrying on a business of share trading
Investing or trading in shares: What difference it makes to your tax
Your tax implications regarding your shares are not all black and white – the ATO taxes gains from shares differently, depending on whether you are a buy-and-hold investor or whether you are a share trader.
Firstly, you have to work out which one you are based on the ATO's definition. Which one you personally consider yourself to be does not matter in the eyes of the taxation office (e.g. you consider yourself to be a share investor but the ATO’s definition makes you fall in the category of a share trader).
Determine if you are a share trader or share investor
To determine which one you are for tax purposes, the ATO takes the following factors into consideration:
The nature and purpose of your activities
A trader carries on business activities to make income from buying and selling shares
An investor invests in shares with the intention of earning from dividends
Repetition, volume and regularity of your activities
The higher the volume of your share transactions, the higher likelihood that you are a share trader
Your activities are organised in a business-like way
A few examples from the ATO of this are around studying daily and longer-term trends, analysing companies' annual reports, and seeking advice from experts. Additionally, having qualifications, expertise, training and skills in the area are considered relevant
Keeping records of your share transactions could also show that you are in the business of share trading
Amount of capital invested
While not a telling point on its own, the ATO considers this a relevant factor if they were to examine your activities.
If you have determined yourself to be one or the other, do note that you may make the change anytime as long as you follow the ATO's instructions.
Tax implications as a share trader vs. share investor
Find out the tax implications for share traders and share investors.
Trader | Investor | |
|---|---|---|
Profit from selling shares | Included as assessable income | Subject to capital gains tax |
Loss from selling shares | Deductible against income | Used to offset other capital gains or carried forward to offset capital gains in future years |
Dividends | Included as assessable income | Included as assessable income |
Purchase price of shares | Deductible in year incurred | Used in calculating capital gains/loss when CGT event is triggered |
Transaction costs in buying or selling shares | Deductible in year incurred | Used in calculating capital gains/loss when CGT event is triggered |
Costs incurred in earning dividend income (e.g. interest on loans) | Deductible in year incurred | Deductible in year incurred (subject to conditions) |
CGT discount | Not eligible | Eligible (subject to conditions) |
Source: ATO - Tax treatment
Records to keep for your investments
Generally, most records you would need to have prepared for the ATO are provided for by your fund manager or stockbroker. These records include your purchase date, purchase price, fees, events such as takeovers, mergers, share splits, share consolidations, etc., and finally, your selling price.
An important thing to note is that if you decide to purchase the same share in different parcels, each parcel of shares may have different costs, and when you partially sell holdings, the ATO allows you to pick which parcel of shares you sell from. Your capital proceeds are then calculated using the cost base of that specific parcel.
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How to claim a capital loss on shares?
If you have been characterised as a share investor and not a share trader, you may claim any capital losses on shares against any capital gains from the sale or disposal of other CGT assets.
To do this, you first need to calculate the total amount of capital loss you have incurred by subtracting the capital proceeds of the shares from their cost base.
If the amount is negative (i.e. capital proceeds are lower than the cost base), it means you have incurred a capital loss. You can then offset your capital loss against any capital gains you may have from the sale of other assets within the same financial year, which can help reduce your overall tax liability.
Alternatively, if you have excess capital losses that can't be offset against capital gains in the current tax year (i.e. net capital loss for the year), you may be able to carry them forward to future years to offset against future capital gains.
How to calculate taxes on dividend reinvestment plans?
Companies have the option to offer their investors a dividend reinvestment plan, which works out as shareholders receiving more shares of a company rather than receiving a cash dividend.
If you decide to reinvest your dividend to gain more shares instead of money, the taxation laws require you to take note of a few things:
- The dividend's cash value must be declared on your tax return and is taxed as assessable income.
- The new shares become subject to capital gains tax.
- The cost of acquisition for the new shares is the amount that was declared on your tax return when you first received the dividends (i.e. the dividend's cash value).
The ATO has provided a useful example on their page here.
Frequently asked questions about CGT on shares
What is the capital gains tax on shares held for 10 years?
We highlighted the capital gains tax discount in the previous section, which may enable you to receive a 50% discount on CGT if you held shares for over 12 months. Whether you hold shares for 12 months or 10 years, as long as you tick the boxes for the CGT discount eligibility, you will be able to receive the same CGT discount.
How long do you have to hold stock to reduce capital gains tax?
Holding shares for 12 months may reduce your capital gains tax liability due to the ATO's capital gains tax discount. Additionally, if you have incurred a capital loss from the sale of another investment, you may be able to offset it against your capital gains. This can reduce the amount of CGT you need to pay.
Is there capital gains tax on inherited shares?
According to the ATO, just the act of inheriting any CGT assets, including shares, does not incur a capital gains tax liability. It is only when a CGT event (see the above section on CGT events for more information) is triggered after the shares are transferred under your name that you may need to pay capital gains tax. Find out more about capital gains tax for inherited assets.
The contents of this article are intended to be of a general informative nature only. Any material relied upon in connection with the preparation of this article is believed to be accurate and current as at the time of publication. This article has been prepared without considering your personal circumstances and does not take into account your specific tax needs or objectives. Please consider seeking independent tax advice prior to making any investment decisions.
Stella is a markets analyst and writer with almost a decade of investing experience. With a Masters in Accounting from the University of Sydney, she specialises in financial statement analysis and financial modelling. Previously, she worked as an equity analyst at Australian finance start-up, Simply Wall St, where she took charge of the market insights newsletter sent out to over a million subscribers. At Stake, Stella has been key to producing the weekly Wrap articles and social media content.
