Most of ourclients are investors with significant wealth in stocks, bonds, investment real estate and similar financial assets.
Your hope, definitely, is that those assets continue to appreciate in value, if that is you. That capital gain is taxed at the taxpayer’s marginal rate for ordinary income, when yousell investment assets at a gain.
Your investment asset is simply the price youpaid to acquire the asset. The basis of an investment asset is adjusted to account for additional cash paid into the investment. Only realised gains are taxable. You see, gains are taxed as soon as the asset is sold and the gain was realised. Have you heard about something like that before? Any gain shown on that balance sheet is merely theoretical since the asset could also decline in value before yousell it, while youmight use mark to market accounting on yourpersonal balance sheet. So in case you acquire a rental property and after all invest additional money to renovate or improve the property, those additional sums invested are added to the basis.
Under Australian tax law, the length of time youhave owned the asset before selling and realising a capital gain is an important factor.
The one silver lining in this cloud is that the capital losses can be credited against the capital gains for that taxable year. For example, capital assets do not always appreciate! The capital gains tax on short term capital gains is pretty much like the rate on ordinary income. For individual and small biz clients, the capital gains tax on ‘longterm’ capital gains – those gains on assets held for longer than one year -is discounted from the ordinary income tax rate by 50.
Sometimes youwill realise capital losses in a tax year.
Capital losses can only be credited against capital gains, not against ordinary income. The tax treatment of capital gains -particularly of ‘short term’ capital gains which are taxed at your full ordinary income marginal rate -can make a very significant impact on your overall financial planning. Then again, youmay decide to stay in a position youmight otherwise sell, since of the tax consequences. I’d say in case there are insufficient capital gains in any single year to use up the capital losses for that year, hereafter the unused capital losses can be carried forward indefinitely into future years.
Likewise, with an eye to realise a capital loss in a certain taxable year, youmight decide to sell a position youwould otherwise have held.
In either case, I know it’s vital for there to be proper coordination among the professional advisors betweenthe tax and the financial advisor. Fact, it’s essential to be aware of the timing of the transactions. Nonetheless, the financial advisor needs to be aware of the tax consequences of different trades. It is important to ensure that the capital gain or loss is realised in the year that makes the most favourable impact for the client.
as in each and other part of a ‘self reporting’ tax system, substantiation of your basis in an asset and of yourtrades is vital. It also represents an area where having a professional tax counselor like Advanced Accounts can really shine and add value foryou. The majority of the claims made in the tax filings, Therefore if thegovernment must audit you. Of course the capital gains tax system is a potential trap for the unwary.