Capital gains tax (CGT) is charged whenever you sell, exchange, or otherwise dispose of assets for profitable gain. For investors, the need to pay CGT when selling shares can lead to notable profit losses. Instead, investors may choose to hold their Shares and reap the benefits of an income stream from Dividends. Dividends can be “franked,” which means that the tax paid by the company is passed on to shareholders to avoid a double taxation situation. But what if the company has paid tax on capital gains?
Thanks to LIC capital gains deductions, investing with the help of listed investment companies (LICs) can be an effective way to mitigate this problem. These deductions, which apply to stock sales conducted through an LIC, can be passed down to shareholders.
In this article, we’ll consider the important aspects you need to know about capital gains tax in Australia and discuss what LIC capital gains deductions could mean for you. Please note Australian Tax legislation is complex. We recommend discussing your financial situation with a professional adviser for a detailed understanding of the tax consequences of your investments.
How Does Capital Gains Tax Work?
CGT is taxable to any profits you make when disposing of assets, including stocks and shares. If you’re wondering how much capital gains tax is in Australia, bear in mind that the amount of CGT you can expect to pay on your stocks depends on how long you’ve held that investment. Amounts can be as high as 100% at your income tax rate on stocks owned for less than a year. This amount drops to around 50% on stocks owned for over 12 months.
So, when do you pay capital gains tax? A ‘CGT event’ is triggered as soon as you give up ownership of a stock investment, and you will then need to include CGT within your standard income tax return.
Does Capital Gains Tax Apply to all Stock Investments?
Generally speaking, CGT is chargeable on all private stock investments made after 20th September 1985 — the date that CGT came into effect. Capital gains tax on shares is also applicable regardless of whether you’ve sold those stocks or given them away. A CGT event will always arise when stock ownership changes.
There are, however, ways to reduce the impact of CGT on your stock profits. For instance, a capital loss in your investment portfolio can be applied against future gains when you report a capital loss in your annual tax return.
Securing shares with the help of an LIC is another way to reduce the amount of CGT you pay.
What Are LIC Capital Gains Deductions?
LICs are publicly traded investment companies that pool money from investors to build a diverse portfolio of assets. Investors can then purchase equity in the company, which can be sold on the stock exchange.
LICs stand to simplify investments and increase your access to high-quality assets. Long-standing, quality LICs also benefit from capital gains deductions because the Australian Taxation Office (ATO) recognises them as long-term investors rather than traders.
These discounts are applied when a trusted LIC makes a capital gain on a long-term holding in its portfolio, which can be passed down to shareholders. If individual shareholders are Australian residents at the time they receive LIC attributable dividends, they can claim a tax deduction of 50% of the LIC capital gain amount, which they’ll find noted on their dividend statement.
Choose the Right LIC to Enjoy Capital Gains Deductions
To benefit from CGT deductions, it’s important to invest in equity through a listed investment company with a reserve of LIC capital gain credits. This means an LIC should have a solid reputation for long-term quality investments, with a track record that has generated taxable profits, much like the ones we’ve worked to build here at Flagship Investments (FSI).
We’ve been on the Australian Securities Exchange (ASX) for over twenty years, and our extensive portfolio amounts to more than $92m. We’re proud to provide our shareholders with capital gains deductions and a range of other benefits. Simply get in touch with our team today to discuss how FSI can help you achieve your investment goals.
