One of the most commonly asked questions is how do taxes work with stock market investing in Australia.
Investments are taxed by the Australian Taxation Office (ATO), as something called a ‘Capital Gain’.
This term is given to any profit you make, when you sell your shares.
Capital gains from selling assets like shares are added on top of any income you make in the financial year. This would typically be your salary from your employer, that is over the minimum tax free threshold.
This total income is also known as your Total Taxable Income (TTI) in that financial year.
Let’s say I buy a $20 share and sell it for $30, I’ve made a $10 Capital Gain.
There are two things to know about Capital Gains.
- If you hold a share for longer than 12 months (and 1 day) only 50% of your profit is added to your TTI. Meaning in the above example you would only add half of $10, which is $5 to your TTI.
- When you make a Capital Gain it can be offset by any Capital Losses you’ve made in your lifetime. So if you gain $30 this financial year but lost $10 in the last financial year, you only pay $20 in Capital Gains and immediately use up your $10 offset.
Also note that brokerage fees are included in your purchases, which means that if I want to buy a $100 share but the brokerage fee is $2 my entry price is $102.
Like wise if I sold the share for $150, I would actually only make $148.
Note: Dividends from shares are added to your TTI in the same financial year you receive them.
Example: Person earning $80K, selling shares for a profit of $10K
Let’s say you earn $80,000 per year as a salary from your job.
And you’ve owned some shares for over a year and have now sold them this financial year to make a profit (the difference between price sold on market and initial cost of purchase after removing the brokerage).
Assume the shares were purchased at $5,000 and sold at $10,020. $10 brokerage each for the buy and sell transactions.
This gives you: $10,020 – ($5,000 + $10 + $10) = $5,000 as your profit.
As you owned the shares for over a year, your capital gains is only 50% of your profit, which is half of $5,000 = $2,500.
Add this to your yearly taxable income of $80,000, that gives you a TTI of $82,500.
Plug this into ATOs Simple Tax Calculator and it applies the different tax scales for 2019-2020.
Based on the table from ATO, for $82,500 we apply the tax from row 3.
$3,572 + ($82,500 -$37,000) x 0.325
= $18,359 total tax on a TTI including capital gains of $85,0000
Without the capital gains of $2,500 from selling the shares, your tax would have been $17,500 on $80,000 TTI.
So the portion of tax paid on $5,000 of profit from sale of shares ends up being $859, meaning you keep $4,141, your net return on investment.
Paying taxes on shares is a good problem to have
In general worrying about your potential profit from shares being eaten away by a large tax bill isn’t practical.
If you do get a massive tax bill you should be fist pumping with the success, because it will mean you made a profit much larger than the tax bill itself.
If you have any questions specific to your circumstances, your accountant will be able to explain things and how they might apply to you, all you have to do is ask.
Selling shares if they’re owned for less than 12 months is out of the scope of this article as we almost never do it, as long term value investors at Tabarruk.
This is not financial advice. Please view our disclaimer.