Peter Quinn raises some key points to do with timing and tax when it comes to selling shares.
Over the last three years sharemarket returns have been above the long-term average. This performance prompts people to consider selling some of their share investments now with a view to buying back during a period of volatility when markets are down. Before considering such a strategy, though, one must be mindful of the tax implications. The following examples illustrate how timing and taxation can impact some investment decisions.
Example 1: Sell shares held for more than 12 months
Say that you purchased 1,000 Bank A shares at $61 more than 12 months ago, and sold 1,000 Bank A shares recently for $82.
Say then you bought back 1,000 Bank A shares during a period of volatility for $73. If the share price of Bank A goes back up to $82 in the short-term you would feel quite happy with your decision to sell out and buy back in as you have essentially made $9 per share. However, have you considered the taxation implications, in particular, the capital gains tax liability incurred by selling out and buying back into the share?
|
|
No. of shares |
Share price |
|
|
Consideration for sale |
1,000 |
$ 82 |
$ 82,000 |
|
Cost base or purchase price |
1,000 |
$ 61 |
$ 61,000 |
|
Capital Gain |
|
|
$ 21,000 |
Since these shares have been held for a period greater than 12 months you qualify for a 50 percent discount on the capital gain. Therefore, the assessable component of your gain is $10,500. If your taxable income is in the range of $75,000-$150,000 then the tax bill for the sale of the Bank A shares is $4,200.
In summary, you have sold out and bought back in at a 26 percent discount, but in doing so you have incurred a tax liability equalling 20 percent of your gain.
Example 2: Sell shares held for less than 12 months
The rule to remember is that the taxation situation is worse when you buy and sell the shares within 12 months. For example, say that you bought 1,000 Bank A shares 11 months ago for $61 per share and then recently sold 1,000 shares for $82 per share. You have realised a capital gain of $21,000.
|
|
No. of shares |
Share price |
|
|
Consideration for sale |
1,000 |
$ 82 |
$ 82,000 |
|
Cost base or purchase price |
1,000 |
$ 61 |
$ 61,000 |
|
Capital Gain |
|
|
$ 21,000 |
Since you did not own the shares for more than 12 months you do not qualify for the 50 percent discount. Therefore, the capital gain is taxed on the entire $21,000 rather than the amount of $10,500 shown in the first example. If your taxable income is between $75,000-$150,000 then the tax bill for the sale of these shares is $8,400.
The capital gain is $21,000 and the tax implication if you are in this tax bracket is $8,400.
In summary, you have sold out and bought back in at a 26 percent discount but in doing so you have incurred a tax liability of 40 percent of your gain.
The moral of the story is to take into account the date you purchased your shares, the shares and the capital gains tax implications before selling your shares. Also get professional advice as to who or what entity should be the holder of your investments. These principles are equally applicable to managed fund investments.
Peter Quinn is the director of Quinn Consultants, www.quinns.com.au
* The opinions expressed in this article are those of the author, and don’t necessarily reflect the opinions of DYNAMICBUSINESS.com or the publishers.
Disclaimer: None of the comments contained in this article are intended to be advice, whether legal, financial or professional. Do not act on the information contained in this article without first obtaining specific advice regarding your particular circumstances from a tax professional.
