Tax Tip 113: Applying Capital Losses against Capital Gains

Losses can be used to offset gains. But capital losses can only be used to offset capital gains. Losses are applied before the 50% discount.

Example
John sold a property in a mining town for a $100,000 taxable loss in 2014-2015. In 2015-2016, John sold another property with a $200,000 capital gain and John is happy because 50% of the gain is $100,000 and that equals the loss.

Sadly John’s happiness is premature. First, the gain on the current property is worked out by deducting all the usual expenses such as stamp duty etc. And then the loss from previous years is applied.

Say John had a $200,000 again after all other expenses taken into account. This would be reduced by the carried forward loss of $100,000 and John will end up with a $100,000 gain. Then the 50% discount will be applied and John’s taxable income from the property will be $50,000.

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But if John had sold both properties in the same tax year the result would be the same.

Example
John has a capital loss of $100,000 on the mining town property and a $200,000 gain on the other property (after all expenses). This is a net gain of $100,000. the 50% discount is applied and John's taxable gain is $50,000

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However if John sold the property with the gain first things may work out differently.

Example
John has both properties on the market for sale. He finds it easier to sell the property with the gain first and the contract is entered into in May. In July, he enters a contract to sell the mining property.
John would have a capital gain of $200,000 x 50% = $100,000 taxable income in 2014-2015 year.

In 2015-2016 he would have a loss. The loss wouldn't be able to be used to offset the $100,000 gain as that gain is in the past, it is in a prior tax year.

So poor old John would have to carry forward this loss and hope he can use it in the future (but he has sold all his assets so this may never benefit him).

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Also, a capital loss cannot be applied against income. Capital losses can only be applied against capital gains.

Example
John has an income of $100,000 and a capital loss of $50,000 from shares but no capital gains. John’s taxable income is still $100,000 despite the loss. The loss can be carried forward to future years.

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Planning ahead can save you money.

 

The formula for CGT is often poorly understood. Errors will either result in under or overpaid tax. Both are a concern.

The schedule attached here is a good way of following the "formula" contained in the tax act.
Note The ATO schedule doesnt explain
* how discount / non-discount gains occur and are treated
* How to calculate a capital gain or loss !!
* Cost base adjustment issues which can change what a gain or loss is
* Exempt capital gains
* Residency / non-residency issues
* Small business concessions (Very complex and often very generous if used correctly)

Im often asked to check client CGT estimates and find issues both + / -
I do recommend large CGT issues be checked.

Tip for those approaching year end :
- Have you made a capital gain ?
- Do you own and shares ? The market has fallen.
- Consider selling down enough shares to offset the capital gain ?

 

Capital losses and net capital losses are applied BEFORE the general CGT discount or small business reduction.

See step 1 & 2 of s.102-5.

 

Lesson:

If disposing of IP assets, try to sell property with expected capital loss before or in the same year as property with expected capital gain. This is in the case of having no assets with future capital gains, otherwise wait around for application to a capital gain.

Plan to have a capital Loss before or in the same year as capital Gain.

 

Not necessarily.

You might have a discount capital gain this year, you are expecting a non-concessional capital gain next year and you are carrying an unrealised capital loss.

You might choose to realise the capital loss next year.

 

Good point Rob. Timing of cashflows is a strategy.

 

I was pointing out that a discount capital gain is a poor choice for application of capital losses.

Capital losses are applied before the discount ... you discount your losses and pay more tax.

 

Hey Terry, what happens if someone has a huge Capital loss first, say the sold at $1,000,000 loss as an example. They also have 10 other investment properties which all have gained in profit 100k

Will the remaining losses continue to carry forward if one was to keep selling off one house per financial year until all losses can be offset against the gains?

 

Yes if you have a $1mil carried forward capital loss and make a $100k capital gain the next year there would be a $900k capital loss carried forward