CGT discount and carried forward losses

Discussion in 'Accounting & Tax' started by pjjjj, 28th May, 2020.

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  1. pjjjj

    pjjjj Member

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    Hi all

    Is anybody able to confirm whether capital gains are discounted before being offset by carried forward capital losses? e.g. Say I'm sitting on $100K of capital losses and I make a $150K capital gain (over a 2 year period). Which of the following is correct?

    1) $150K gain gets reduced to $75K gain due to 50% discount for holding over 12 months. $75K gain is offset by $100K carried forward capital loss. No tax payable, still have $25K capital loss carried forward.

    2) $150K gain gets offset by $100K carried forward loss. $50K gain is reduced to $25K gain due to 50% discount. Tax payable on $25K gain, no capital loss carried forward.

    I'm 99% sure it's option 1, and the ATO website seems to agree, but the ATO website is notoriously opaque about a lot of things...

    Cheers!
     
  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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  3. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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  4. danielcannan

    danielcannan Active Member

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    Fom your example, it's 2). Capital losses are applied to the full capital gain, then the 50% discount is applied.
     
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  5. pjjjj

    pjjjj Member

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    Thanks for the replies everyone!

    I have to say, I'm a bit surprised (although not that surprised as it results in a worse result for the taxpayer...)

    It basically means that until the capital losses are consumed, you can't benefit from the 50% CGT discount. i.e. If you make a short term gain, you might as well sell out now if you want to, because you won't benefit from the 50% discount anyway.

    Disappointing, but good to know. Thanks :)
     
  6. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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    This is why different entities can work well. You might have a capital loss in a trust, but use another trust to own future assets so that you can decide when to get the 50% CGT discount and when to use up the carried forward loss.
     
  7. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    Yes income tax losses can also come into play against net gains. The taxpayer (or trust beneficiciary or even trust) can reduce the net gain and THEN apply tax losses. Net trust income may be $0 in which case no beneficiary is impacted. This issue is very complex and needs diligent tax planning as there can even be ways to pass through a share of a CGT loss to a discretionary trust beneficicary ! The common belief that a trust cant distribute a tax loss is often not understood. A trust cant pass through $0 or less of NET trust income.

    This is one of my tests for competency of tax advisers in areas of complex trust tax law.
     
  8. TheSackedWiggle

    TheSackedWiggle Well-Known Member

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  9. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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    If they are on capital account they can be
     
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  10. TheSackedWiggle

    TheSackedWiggle Well-Known Member

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    Thanks Terry,

    What does capital account mean?
    both shares (CFL) and options(CG) are on the same broker account.
     
  11. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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    a mere realisation of capital assets will be assessed under the capital gains tax provisions

    if revenue account it will treated as ordinary income under section 6 -5 of the Income Tax Assessment Act 1997

    for some property examples see

    Tax Tip 143: The sale of a property – Capital or Revenue account? Tax Tip 143: The sale of a property – Capital or Revenue account?
     
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  12. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    It would be unusual for shares to be on capital account and options are on revenue account or vice versa. Generally a person will "trade" any financial commodity, product or asset of a broad class eg ETFs, shares, options, warrants, futures, currencies, leveraged products etc as a whole aS financial asset investing (CGT) or trading (ordinary income) Its like mixed farming...Its all still farming and you need not have a profit on wool, a (deferred) loss on crops etc.

    Shareholding as investor or share trading as business?

    If a CGT tax approach is used each asset class may require a seperate report of each class of CGT asset eg

    Asset category - (S, X, U, Y, R, Z, T, C, O, or D)


    S Shares in companies listed on an Australian securities exchange
    X Shares - other
    U Units in unit trusts listed on an Australian securities exchange
    Y Units - other
    R Real estate situated in Australia
    Z Real estate - Other
    T Capital Gains from Trusts (including a managed fund)
    C Collectables
    O Other CGT assets and any other CGT events.
    D Previously deferred CGT relief for superannuation funds

    Shares would be reported using S if listed, X if not listed in Australia and O for options even if they are exchange traded options. Same with disposal of ETFs are typically reported as U not S.
     
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  13. TheSackedWiggle

    TheSackedWiggle Well-Known Member

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    Thanks for the reply Paul,
    I am confused between capital and revenue accounts,

    Let say a person has a broking account and used the same account to trade in shares and options for a couple of years,
    let's say,
    Carried forward loss (from shares) = X
    Current year ETO gain = Y

    can the current years CG be Y - X?
     
  14. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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    Broking accounts are not really relevant.

    If the shares are being traded they might be on revenue account. But some could be on revenue and other shares held on capital account.

    How was the loss recorded? Capital or income?

    If a capital loss it can only be applied to capital gains.
    income losses can reduce taxable income
     
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  15. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    The tax consequence shouldnt dictate how each are reported. That is a matter that isnt a choice
    Losses on revenue account may not always offset other income

    Each CGT event will give rise to a gain or a loss. Each gain (but not a loss) may be a discount gain, or not. Gains are reduced by current year and prior year losses first. The taxpayer may choose whether to apply a loss to a discounted or a non-diiscounted gain. (I would apply to NON_DISCOUNTED gains first.) The resulting gain if it is a discount gain is then reduced by the discount ie 50% or 33.33% if a super fund. The net gain is then a element of taxable income. Other tax matters may allow the taxpayers taxable income to be less than the net taxable gain. eg Deductions, prior year revenue losses, rental negative gearing etc

    The schedule required to be attached to some returns will guide the methodology
    https://www.ato.gov.au/uploadedFiles/Content/IND/Downloads/Capital-gains-tax-schedule-2020.pdf
     
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  16. TheSackedWiggle

    TheSackedWiggle Well-Known Member

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    thanks for the reply,

    Not sure I understand this,
    What makes a loss capital and what makes it income?

    ps: It was a trade in the same account on different instruments (shares/eto)
     
  17. TheSackedWiggle

    TheSackedWiggle Well-Known Member

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    Thanks for the reply Paul,

    let say,
    All current year gains across instruments(shares/eto) say CYG
    All current year losses across instruments say CYL
    prior years Carried Forward Loss across instruments say CFL

    As per the attached CGT schedule, as I understand,

    current year capital gain = CYG - CYL - CFL

    is this correct? (with the caveat it cannot be negative, assuming no discounted cg etc)
     
  18. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    Basically. yes. CFL assumes a carried forward prior year CGT loss

    If the CYG was a discount gain it would be

    CYG- CYL - CFL = $1,000
    Less 50% Discount $500 = $500 taxable
     
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  19. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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    When you did the tax return you would have declared it as a capital loss or an income loss in different sections.

    I think you don't understand the difference between capital account and revenue account.
    When capital account you are holding shares for their income mainly, as a long term investment.
    With revenue you are trying to profit on buying and selling - true trading
     
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  20. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    Generally speaking a CGT event occurs iof the aset is held as a capital investment. If a share trading business is conducted then the calculation may be based upon concepts of ordinary income eg profit making intentions in a business like manner. The way share traders calculate profit and loss is different.

    A CGT asset may be held for income and also experiences growth (ie a gain)
    A CGT asset is usually held for a longer term BUT this isnt required. A infrequent acquisition and disposal wont be ordinary income and may be a isolated GST event

    Features of share trading v CGT ownership
    Shareholding as investor or share trading as business?
     
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