Tax Tip 492: Buying Shares and Later Selling and CGT

If a person buys a parcel of shares which grow in value if they sell some of these shares they will have to pay CGT if there is a net capital gain and this is the case even if the sale proceeds is less than the overall purchase cost. Some people seem to misunderstand this point.


Example

Homer buys 100,000 shares of XXX at $1 each. He pays $100,000 overall.

Later the shares jump to $2 in value each. They are now worth $200,000 in total.



Homer sells 50,000 shares for $2 each or $100,000 in total.



Homer thinks there is no CGT to pay because there is no gain. He thinks he has not made a profit. This is because he spent $100,000 and received $100,000 on the sale.




But this is not how it works. Each share is a separate CGT asset so he will need to work out the profit on each share. Since he paid $1 for each and sold them for $2 each so he makes $1 profit on each share. Since he sold 50 shares, he would have $50,000 profit as 50 shares were bought for $50,000 and sold for $100,000.

That results in a $50,000 capital gain.


If Homer had held the shares for more than 12 months, he would be entitled to the 50% CGT discount so this would reduce the taxable capital gain to $25,000.


This $25,000 is income which would be added to Homer’s other taxable income for the year.

 

Didn’t you mean Homer sells 50,000 shares at $2 each?

 

yes thanks Datto

 

Thanks Terry... would the same CGT exemption apply if Homers shares were purchased (or held in escrow) overseas? Or does this only apply to Aus purchased/held/sold shares?

Thanks

 

No difference there