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New shareholders - don't get caught in the capital gains tax trap

Publication date: 24 Jul 98 | Source: THE TAX INSTITUTE

Wins for first time shareholders could quickly turn to losses if proper record keeping procedures and documentation of share sales and gifts are not kept to satisfy Tax Office requirements, according to the Taxation Institute of Australia.

"Recent public listings of companies such as Telstra and AMP have enabled many ordinary Australians to become shareholders for the first time," said Taxation Institute of Australia President, Mr Ken Spence.

"The AMP listing alone generated over $1.6 billion in taxable capital gains which the Australian Tax Office are obviously very interested in. In fact, in releasing Tax Pack earlier this year, the ATO stated that they will be using data matching systems to check share dividends against declared income of new shareholders," Mr Spence said.

"The Taxation Institute has received feedback from its members who assist taxpayers with such matters that some new shareholders are unsure of their CGT liabilities when selling or transferring shares," he said.

"There are some 'traps for young players' in the share market, such as the potential to trigger CGT by giving away your shares to a family member or relative if at the time of the gift the shares had a market value more than their original cost."

"Also, if shares have been bought for someone else's benefit, capital gains may arise for the beneficiary where the shares are sold. Where some or all members of a family have each bought shares in a float such as Telstra and it is decided that all the shares should be held by one family member, transferring the shares into the one name could trigger capital gains for the person transferring the shares, unless the shares were in fact bought for the benefit of the transferee," he said.

To avoid tax problems new shareholders should keep adequate records of the shares including records of all transfers and information as to the cost of shares and transactions costs which can include brokerage, stamp duty, professional advice and the cost of preparing your tax return.

"Most first time shareholders will be subject to capital gains tax if they sell their shares for more than their original cost. To work out the capital gain the transaction costs are added to the original cost and deducted from the sale price. Allowance for inflation is allowed on the original cost and other transaction costs where the shares are held for more than 12 months, though in recent times with almost negligible movements in the CPI, this has not affected the calculation of gains," Mr Spence said.

"For example, original cost of share $2, sale price $10, other costs (broker and stamp duty) 50 cents. Capital gain per share ignoring inflation will be $7.50 ($10 - $2.50). This same taxable gain would arise even if the shares are only gifted to a relative rather than sold."

"The amount of any capital gains you make in a income year is normally added to your ordinary income and you pay tax on the total. If your ordinary income is less than $50,000 you may benefit from the averaging provisions which apply to capital gains. Under averaging, the rate of tax is worked out by taking 1/5 of the capital gain and adding that to your ordinary income. The extra tax is then multiplied by 5 to work out how much tax you will pay on the whole of the capital gain," Mr Spence said.

"New shareholders must also be aware that a capital loss can arise if they sell at a loss that is the sale price was less than your original cost together with the transactions costs. If you make a capital loss, the loss can be used to offset other capital gains in the same income year or in a later year. But it cannot be used to reduce your ordinary income," he said.

"The key message for new shareholders is to hold onto all your paperwork and if you are unsure of your liabilities with regard to disposal (by sale or transfer) of your shares, get some advice," Mr Spence said.