Investing in shares can be a great way to build wealth, but when you sell, you might have to pay capital gains tax (CGT), which could reduce your profits.
While avoiding CGT entirely may not always be possible, there are strategies that could potentially reduce it or help manage when it is paid. If you’re an Australian investor looking to optimise your returns while staying compliant with Australian Taxation Office (ATO) regulations, Unconditional Finance is here to help.
This guide breaks down everything you need to know about CGT on shares in Australia, including how it works, key exemptions, and strategies to reduce CGT on shares, helping you better manage your tax obligations and potentially maximise your investment returns.
What Is Capital Gains Tax on Shares?
Capital Gains Tax (CGT) is what you pay when you sell shares for more than you originally bought them for, with the profit being taxed as part of your income. Understanding capital gains tax (CGT) is important for anyone investing in shares, as it may impact how much of your profit you retain when selling.
How Is CGT Calculated?
Capital gains tax (CGT) is calculated by subtracting the purchase price and any eligible costs, such as brokerage fees, from the sale price.
Capital Gain = Sale Price – Purchase Price – Eligible Costs (e.g., brokerage fees)
If you sell shares at a loss, you may be able to use that loss to reduce taxable capital gains in the same year or in the future.
CGT Rates in Australia
In Australia, the CGT you pay depends on how long you hold your shares. Selling within 12 months means the full gain is taxed at your marginal tax rate, but holding for at least 12 months may qualify you for a 50% CGT discount (for individuals and trusts). Superannuation funds also benefit, receiving a 33.3% CGT discount on shares held for over a year.
Strategies to Reduce Capital Gains Tax (CGT)
Reducing Capital Gains Tax (CGT) on shares requires planning, but there are legal ways to lower the amount you pay. Here are some strategies that could help reduce your CGT liability when selling shares:
1. Hold Investments for a Year to Get the CGT Discount
One strategy that could reduce CGT is holding shares for at least 12 months before selling. This may allow individual investors to qualify for a 50% CGT discount, meaning only half of the capital gain is taxed, depending on eligibility. For example, if you buy shares for $10,000 and sell them a year later for $20,000, your capital gain is $10,000. Instead of paying tax on the full amount, you would only be taxed on $5,000 if eligible for the CGT discount.
2. Using Capital Losses to Offset Capital Gains
If some of your investments haven’t performed well, selling them at a loss could help reduce your CGT. This method, often referred to as tax-loss harvesting, could help reduce your taxable gains by using capital losses in the same financial year. If your losses are greater than your gains, you may be able to carry them forward to offset gains in future years.
3. Investing Through Tax-Advantaged Structures
Holding shares through a family trust or a company may offer tax benefits compared to individual ownership. A family trust allows capital gains to be distributed among beneficiaries, potentially reducing the overall tax burden if some beneficiaries are in lower tax brackets. On the other hand, a company structure caps tax on capital gains at a fixed 25-30% corporate tax rate, which may be lower than the personal tax rates some investors would otherwise pay.
4. Structuring and Timing Your Share Sales for Tax Efficiency
The timing of when you sell shares can affect how much CGT you pay. Since capital gains are added to your taxable income, selling shares in a high-income year could result in a higher tax rate. If you anticipate a lower-income year, delaying the sale could potentially reduce your CGT liability. For those with multiple investments to sell, spreading sales over two financial years could help keep taxable income lower. If you’re planning to retire next year and expect your income to drop, delaying a large capital gain until that lower-income year could reduce the amount of tax you pay.
5. Utilising Capital Gains Tax Rollovers
A CGT rollover allows you to defer tax liability, postponing capital gains instead of paying immediately. This applies in cases like scrip-for-scrip rollovers, where shares are exchanged during mergers or takeovers, and small business rollovers, which defer CGT when replacing business assets. For example, if your shares are swapped in a company merger, CGT isn’t payable until you sell the new shares.
6. Using the Main Residence Exemption to Reduce CGT Impact
The main residence exemption primarily applies to property but can also impact investors with home-based businesses. The ATO provides a full CGT exemption when selling your main residence as long as you’ve lived in it for the entire time you’ve owned it. If the property was your main residence for only part of the ownership period or was used to generate income, you may still qualify for a partial exemption.
7. Consider Investing Through a Superannuation Fund
Superannuation funds offer concessional tax rates, which may make them a tax-efficient option for managing CGT on shares. Unlike individual investors who may pay up to 45% in CGT, super funds are taxed at a lower 15% rate on capital gains. If shares are held for more than 12 months, the tax rate drops further to 10% due to the 33.3% CGT discount. In some cases, once assets enter the pension phase, CGT may no longer apply at all, making super a tax-efficient investment option.
8. Investing in Small Business Concessions
The ATO small business CGT concessions offer tax relief that could help small business owners reduce or potentially eliminate CGT when selling business assets, depending on their circumstances. If you own a business, it’s worth reviewing the eligibility criteria to see if you can benefit from these tax-saving opportunities.
9. Utilising the ‘Six-Year Rule’ for Investment Properties
The six-year rule, while primarily for property, can be useful for share investors who also own rental properties. Homeowners can rent out their main residence for up to six years without losing their main residence CGT exemption, which may help reduce tax when managing both property and share investments. This strategy may help investors avoid double taxation and structure their portfolios more efficiently.
10. Gifting Shares to Family or Charity
Transferring shares to a lower-income family member may reduce the tax they pay on future gains, but it is considered a CGT event, meaning tax may apply at the time of transfer. Alternatively, donating shares to a Deductible Gift Recipient (DGR) charity could provide a tax deduction equal to the share’s market value while also exempting the shares from CGT.
Reducing CGT on shares requires strategic CGT planning and an understanding of available tax-saving options. By using the right approach, you may be able to minimise your tax burden while maximising your investment returns.
Methods of Disposing of Shares
Understanding how to dispose of shares properly can help you manage your tax obligations more efficiently. Disposing of shares simply means giving up ownership, which can happen in several ways, including:
- Selling shares on the stock market
- Gifting shares to another individual or organisation
- Transferring shares to a spouse due to relationship breakdown
- Share buy-backs conducted by the issuing company
- Company mergers, takeovers, or demergers
- Liquidation of a company
Capital Gains and Losses from Disposing of Shares
When you dispose of shares, you’ll either make a capital gain or a capital loss. A capital gain happens when the sale price (capital proceeds) exceeds the cost base (original purchase price plus related costs), while a capital loss occurs when the sale price falls below the cost base.
Both capital gains and losses must be reported in your tax return for the relevant income year. The net capital gain (after applying any capital losses) is included in your assessable income and taxed accordingly.
Shares Received as a Gift
If you receive shares as a gift, their market value on the date of receipt becomes the cost base for capital gains tax calculations. If you later sell or transfer these shares, a CGT event occurs, requiring you to report any capital gain or loss in your tax return based on the difference between the sale price and the cost base.
Shares Given as a Gift
When you give shares as a gift, the ATO treats it as a disposal at market value on the day of the gift, regardless of whether you receive any payment. This results in a CGT event, requiring you to report any capital gain or loss in your tax return for that financial year.
Bonus Shares
When a company issues bonus shares to existing shareholders, these additional shares may impact the cost base of your original holdings. Depending on the circumstances, the acquisition of bonus shares can have specific CGT implications when you later sell or dispose of them, affecting how capital gains or losses are calculated.
For comprehensive details on how disposing of bonus shares affects your capital gains tax obligations, refer to the ATO’s guidelines on share disposals.
Common Mistakes Investors Make When Managing Capital Gains Tax on Shares
Minimising capital gains tax (CGT) requires careful planning, and certain mistakes could lead to a higher tax burden than expected. Here are common mistakes to watch out for:
❌ Selling shares too soon
If you sell within 12 months of purchasing, you won’t qualify for the 50% CGT discount, meaning your full capital gain is taxed at your marginal rate. Holding shares for a longer period may help lower your CGT liability, depending on your circumstances.
❌ Not using capital losses to offset gains
If you have capital losses from other investments, you may be able to offset them against capital gains, reducing the amount of tax you pay. Many investors either forget to claim carried-forward losses from previous years or fail to track their losses properly.
❌ Selling too many shares in one financial year
Making a large capital gain in a single year could increase your taxable income, potentially moving you into a higher tax bracket and leading to a higher CGT liability. Spreading share sales across multiple financial years may help minimise the impact on your taxable income.
❌ Ignoring Record-Keeping
Failing to maintain accurate records of purchase prices, brokerage fees, and sale details can lead to errors when calculating CGT. Without proper documentation, you may end up overstating capital gains or missing deductions that could reduce your tax liability.
❌ Assuming All Investment Losses Are Deductible
While capital losses can be applied to reduce capital gains, they cannot be deducted against other forms of income (like salary or rental income). Some investors mistakenly expect to receive an immediate tax refund for investment losses, leading to poor tax planning.
❌ Not Seeking Professional Tax Advice
Many investors underestimate the value of professional tax advice, risking miscalculations, missed deductions, and overlooked concessions that could reduce their CGT liability. With tax laws constantly evolving, staying informed is crucial to avoiding unnecessary tax bills and compliance issues with the Australian Taxation Office (ATO).
To avoid these mistakes, track your investments carefully, plan your share sales strategically, and seek professional tax advice to ensure you’re making the most of available CGT strategies.
Need help managing capital gains tax? Contact our mortgage brokers today for expert guidance on tax-efficient investment strategies.
Reduce Your CGT and Keep More of Your Profits
While CGT is a reality for investors, smart planning can help manage its impact. Understanding the rules, timing your sales wisely, and exploring tax-efficient strategies can make a significant difference. With the right approach, you can keep more of your investment returns while staying compliant with tax regulations.
Maximising your investment returns starts with smart financial decisions. As the top mortgage brokers in Sydney, we’re here to help you find the best financing options to suit your goals. Contact Unconditional Finance today!
Frequently Asked Questions
Retirees don’t receive an automatic CGT exemption when selling shares, but selling in a lower-income year (such as after retirement) could reduce the tax impact. Additionally, contributing proceeds from share sales into superannuation may provide tax advantages.
Yes, CGT applies regardless of whether you withdraw the profits or reinvest them into new shares. Once you sell shares at a gain, that profit is taxable in the financial year of the sale, even if you use the funds to buy more shares.
No, transferring personal shares to a self-managed super fund (SMSF) is considered a CGT event, meaning you may have to pay CGT on any capital gains at the time of transfer. However, contributing the proceeds to super as a concessional contribution could reduce your taxable income.
No CGT is payable when you receive shares as a gift, but when you sell them, CGT applies based on the original cost base from the person who gifted them. This means you inherit their purchase price and holding period for tax purposes.
If you sell only part of your shares in a company, you need to determine the cost base for the shares sold. Investors can choose between the First-In-First-Out (FIFO) method or the specific identification method, depending on how they track their share purchases.
