Tax Tip 148: CGT and Different Parcels of the Same Shares

Discussion in 'Accounting & Tax' started by Terry_w, 19th Dec, 2016.

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  1. Terry_w

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

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    What happens if you buy shares of the same company at different stages and then sell some of your holdings? How do you know which shares you have sold?

    Example
    X buys 500 ANZ shares on 1 Jan 2012 for $20 each and 500 ANZ shares on 01 Feb 2015 for $22 each.

    On 19 Dec 2016 he sells 500 ANZ shares for $24 each.

    The CGT consequences will be different for each lot, so how do we know which lot he as sold?

    The answer is on the investchat forum (since this is a matter involving shares)
    CGT and Different Parcels of the Same Shares
     
  2. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    1. Specific identification where this is possible.
    eg Buy 200 BHP, Buy 100 BHp, Buy 300 BHP and then sell 100 BHP. You may be able to elect to choose the second parcel (esp if the CGT outcome is favourable)

    There can be instances where specific identification works and doesnt work. Refer to examples below. Can I "bundle" parcels for this method eg using above example I sell 300. I have the choice of :
    a) 200 (first parcel ) + 100 (second parcel) = 300 OR
    b) 300 (third parcel)
    Yes. That works. Instances where apportioning of any parcel fails the specific identification mathod for shares and managed units.

    2. First In First Out Otherwise.
    eg Buy 200 BHP, Buy 100 BHP, Buy 300 BHP and then sell 120 BHP. Specific identification fails so the cost of parcel #1 must be apportioned so that 120/200 x cost of the 200 shares is the costbase for the 120 when sold. The remaining costbase is 80/200th.

    Specific identification example using this scenario.
    1. Cant I use that same pro-rata on the 300 bought in the third parcel. No.

    3. Last In First Out.
    eg eg Buy 200 BHP, Buy 100 BHP, Buy 300 BHP and then sell 120 BHP. I seek to use 120 x 300 of the third parcel. This method is NOT permitted.

    I receive broker / managed fund reports. What do they do ?
    Almost always they will use first in first out for their reporting basis. This is especially the case for managed trusts. Some (few) offer a choice of reports and errors result if you tryto fiddle wit their outcomes. It can be easier to just accept and use their reports eg Colonial First State Managed Funds. Vanguard..

    Note that if you use a specific method then the remainder of the shares in that holding MUST continue to use that method. eg : In the example of the bundle of 300 shares sold in example #1. Lets assume we use option "b" then the remaining costbase for the remaining 300 on hand is that of the first two parcels. As parcel 3 was sold it cannot be used again. If that produced a seriously adverse tax outcome in a future year this CAN be fixed. The original choice may be amended and then the remaining costbase can be corrected. T

    If your broker reports allow you to choose the method (Commsec as a example who merely list trades as buys and sell) you can.

    For some clients we maintain extensive CGT records for investment portfolio's that allow us to choose optimum CGT outcomes. This can be ideal for large self directed portfolio's. When signed by us annually it complies as a "CGT record" to avoid long term retention of supporting CGT records.
     
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  3. qak

    qak Well-Known Member

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    Do you have a source for this? Wouldn't it be equivalent to specific identification where you have just tagged those shares as being the ones you sold?
     
  4. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Not if they arent the same parcel.

    eg Buy 100, Buy 100, Buy 80. Sell 100

    You can only use specific identification for either 80 or 100 (and chose parcel B)
    You can use FIFO in which case its parcel 1

    If you sold anything other than 80 or 180 shares you could never use specific identification.
     
  5. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    The ATO also accept average costing in some cases. This is very normal and common for broker trades to be split over more than one contract. If :
    • the shares are in the same company
    • the shares were acquired on the same day
    • the shares have identical rights and obligations
    • you're not required to use market value for cost base purposes.
    This is common. You place a buy order for 10,000 XYZ shares at 12cents each. The trade settles over multiple contracts :

    2000 x 11.5cents
    2850 x 12.0cents
    4000 x 11.5cents
    1150 x 11.0cents with a single Commsec cost of $19.90 for the whole of the trade.

    So you may record a single trade of Buy 10,000 XYZ at $0.11784cents per share ($1178.40)
     
  6. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    You thinking I need to prove it ? Read up what ATO think and you will find the link
     
  7. qak

    qak Well-Known Member

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    From what you are saying, if we buy two parcels of 100 shares, and then sold 50, you can't choose that they come from the second parcel?
    Date 1 - 100 shares
    Date 2 - 100 shares

    Like CGT Determination TD33?

    "2. However, on the disposal of shares which form part of a holding of identical shares i.e. of the same class and in the same company, which are acquired over a period of time, it may not always be possible for a taxpayer to distinguish or identify the particular shares that have been disposed of.
    3. In these circumstances, the taxpayer will need to decide which particular shares are being disposed of. Taxpayers in this situation will need to keep adequate records of the transaction so that the decision can be supported should the income tax return be subject to Tax Office scrutiny at a later date.
    4. In the past, where unidentifiable shares have been disposed of, the Commissioner has accepted 'first-in first-out' as a reasonable basis of identification. For CGT purposes, the Commissioner will also accept the taxpayer's selection of the identity of shares disposed of.

    And on the ATO website: Guide to capital gains tax 2013-14 it says:

    "If you have the relevant records (for example, share certificates), you may be able to identify which particular shares or units you have disposed of. In other cases, the Commissioner will accept your selection of the identity of shares disposed of.

    Alternatively, you may wish to use a ‘first in, first out’ basis where you treat the first shares or units you bought as being the first you disposed of.

    In limited circumstances, we will also accept an average cost method"
    What ATO information are you looking at???
     
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  8. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Well done.

    1. FIFO
    2. Specific identification
    3. LILO only if they satisfy specific identification of parcels etc
    4. Limited use of average cost rules

    Unless the person is share trader and CGT doesnt apply
     
  9. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    No. The second parcel is not a specific parcel (ie specific identification method). That means you would be using LIFO if its not a specific parcel which is not acceptable. To be specific the sale could be 100. Then you can choose either first or last acquired.

    These rules are designed to prevent taxpayers making unlimited choice as they see fit. Thats why the Commissioner refers to acceptable methods otherwise it would be you can choose whichever method you like". The rules dont allow you to blend parcels other than if specific parcels are combined for a sale or to split parcels other than when using FIFO.

    Identifying when shares or units are acquired includes example of NOT splitting parcels etc. That example forces the taxpayer to FIFO

    LIFO may also mean taxpayers may always sell post-CGT shares. The CGT rules were developed after CGT came in after all :) Shareholders with pre-CGT shares can use the specific method to their advantage. Otherwise it is problematic.

    There is NO acceptance of LIFO otherwise. That said LIFO is used by the Commissioner for the 45 day holding period rule. Nice how they vary the view !!
     
  10. qak

    qak Well-Known Member

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    I don't agree. The example says "he decided to use FIFO"; however Boris appears to be a bit simple (in more ways than one)!

    Luckily, TR96/4 has a specific identification example where the sale is allocated to part of a second parcel for CGT purposes - see from paras 78-80 for the "facts" of the purchase and sale allocation, and para 88 where it refers to the methods available.

    Are you convinced yet?
     
  11. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    No not at all. That ruling has NOTHING to do with CGT.

    However, Para 88 does tend to confirm the three valuation methods of specific identification, FIFO and average cost. No mention of LIFO. The examples given relate to choice available for a taxpayer operating on revenue account. Para 88(c) reiterates ...and FIFO for CGT purposes

     
  12. qak

    qak Well-Known Member

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    Nothing to do with CGT? Nothing except specific references to CGT and how the capital gain is calculated in their example??? You must have missed some parts:

    Specific identification for the purposes of subsection 25(1) and CGT
    89. For the purposes of subsection 25(1), the cost of the shares sold on 1 December 1991 is $45,000 (15,000 @ $3) and the profit assessable under subsection 25(1) for the year of income ended 30 June 1991 is $15,000 ($60,000 - $45,000).
    90. Under Part IIIA, all shares sold have a cost base of $3 each. But for subsection 160ZA(4), there would be a capital gain of $1 on each of the 15,000 shares (a total capital gain of $15,000) ...

    Income Tax Assessment Act 1936
    Part IIIA—Capital gains and capital losses
     
  13. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    The ruling relates to revenue assets. The interaction of cgt methods and changing to revenue is a cgt eventat that time. That is the limited view that has confused. Get qualified and i welcome an educated discussion.

    Try asking ato for a binding ruling. Ask...if i trade a few shares for cgt purposes can i choose to use lifo?
     
    Last edited: 13th Nov, 2017
  14. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    History - LIFO was once (just post CGT Keating era) a permitted scheme that allowed profits to be washed from one tax period to another by some taxpayers. Around the time of CGT being implemented the ATO noted a falling ASX. Hence a scheme was born.

    Share profit would be made in one tax period and in a falling market share sales would be made (at a loss) just prior to 30 June. The ATOsought to prevent a scheme to wash sale profits. However many argued specific acquisitions could well be sold. Hence the limit on LIFO. Its permits known profits to be washed with known losses. However the inverse cant occur without tax when the loss is exceeded.

    LIFO is also a measure used by FX and swap dealers in schemes to drag profits for financial institutions to the next tax period to circumvent tax on profits. Often best used across tax jurisdictions.

    Revenue rulings limit such endeavours
     
  15. Terry_w

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

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    Here is the post from investchat:

    What happens if you buy shares of the same company at different stages and then sell some of your holdings? How do you know which shares you have sold?

    Example
    X buys 500 ANZ shares on 1 Jan 2012 for $20 each and 500 ANZ shares on 01 Feb 2015 for $22 each.

    On 19 Dec 2016 he sells 500 ANZ shares for $24 each.

    The CGT consequences will be different for each lot, so how do we know which lot he as sold?

    If the shares can be distinguished then it is possible to work out which lot has been sold.

    If they cannot be distinguished then the ATO will accept the 'first in first out' rule. this means X would be considered to have sold the first lot of 500 shares - the ones he acquired for $20 each.
     
  16. RS Gumby

    RS Gumby Well-Known Member

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    Monty Python - argument.jpg

    Just read through this thread
     
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  17. qak

    qak Well-Known Member

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    Haha - yes! Much as I respect Paul, I don't agree with him on this one.
    In the context of shares on ASX/CHESS I still believe you can choose to specifically identify your most recent acquisition as having being sold, and this is = LIFO.
     
  18. Fargo

    Fargo Well-Known Member

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    Yes I think you are right. as do some clued up people who have advised me
     
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  19. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    LIFO is not specific identification if its not a parcel capable of specific identifcation. If its is go for it. . LIFO is not an accepted method on its own. Its why unqualified tax advice is not lawful

    TR 94/10 is also a ruling on share parcels that the Commissioner wil apply to CGT parcels. This is reflected in TD 33 (1991 )which tends to exclude LIFO where specific share identification is not relevant. Hence FIFO and averaging could apply

    LIFO has a specific ruling for franking credits that is often misread

    Example of specific identification and what is not

    A. Fred buys 100 BHP, 50 BHP, 200 BHP and 262 BHP. He sells 362 BHP. He could choose:
    • The first parcel plus the final parcel under specific identiifcation\
    • Choose FIFO to the first 362 acquired or
    • Avg cost to the date of what has settled when sold if he chooses

    B Fred sells 245 shares
    • Fred cannot use specific identification
    • He cant use the final parcel and some of the 200 shares as this is LIFO and not specific
    • He could use avg cost
    • He could use FIFO
    If Fred was a trader then he could use cost or market value (whichever is less) to value closing stock.
     
  20. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    CGT laws dont care about ASX, listed, unlisted or chess which is a registry IT system . Shares may be NSX. NYSE or unlisted. A CGT asset has no such concerns.