How Ownership Structure Impacts Your Capital Gains Tax – A Practical Example

How Ownership Structure Impacts Your Capital Gains Tax – A Practical Example

How Ownership Structure Impacts Your Capital Gains Tax – A Practical Example

Did you know that the way you hold your investments—personally or through a company—can significantly impact how much Capital Gains Tax (CGT) you pay? Today, we’re breaking down a real-life example to show how two investors with identical transactions ended up with drastically different tax outcomes.

Meet Tracy and Tom

On 1 June 1998, Tracy and Tom, both Australian residents, acquired identical share portfolios:

  • 50,000 shares in ABC Ltd for $250,000 ($5 per share)
  • 100,000 shares in XYZ Ltd for $250,000 ($2.50 per share)

Here’s the critical difference:

  • Tracy purchased her shares in her own name.
  • Tom acquired his shares through his company, Tom Investments Ltd.

Fast forward 26 years to 22 February 2024, and both sold their shares for the following amounts:

  • 50,000 shares in ABC Ltd for $600,000 ($12 per share)
  • 100,000 shares in XYZ Ltd for $180,000 ($1.80 per share)

The tax implications? That’s where things get interesting.

Tracy’s Capital Gains Tax Outcome

Tracy owned the shares in her personal name, qualifying her for the 50% CGT discount since she held the shares for more than 12 months. Additionally, because the shares were purchased before 21 September 1999, Tracy had the option to use indexation to adjust the cost base of the shares for inflation. However, she could only choose one method: the 50% discount or the indexation method.

Let’s calculate both options:

Option 1: 50% CGT Discount

  1. Capital gain on ABC shares:
    $600,000 (sale proceeds) – $250,000 (cost base) = $350,000.
  2. Capital loss on XYZ shares:
    $250,000 (cost base) – $180,000 (sale proceeds) = $70,000.
  3. Net capital gain:
    $350,000 – $70,000 = $280,000.
  4. Apply 50% discount:
    $280,000 × 50% = $140,000.

Net capital gain: $140,000

Option 2: Indexing the Cost Base

  1. Indexation factor:
    68.7 ÷ 67.4 = 1.019 (based on ATO guidelines).
  2. Indexed cost base for ABC shares:
    $250,000 × 1.019 = $254,750.
  3. Adjusted capital gain on ABC shares:
    $600,000 – $254,750 = $345,250.
  4. Subtract capital loss on XYZ shares:
    $345,250 – $70,000 = $275,250.

Net capital gain: $275,250

Tracy’s Decision

The 50% CGT discount provides the better outcome, reducing her taxable gain to $140,000—saving her $135,250 compared to the indexation method.

Applying the 50% CGT DiscountIndexing the cost base
Capital proceeds from sale of
ABC shares
$600,000$600,000
Cost base – ABC shares$250,000$250,000
Indexation factorN/A1.019
Indexed cost base – ABC
shares
N/A$254,750
Capital gain on ABC shares$350,000$345,250
Capital proceeds from sale of
XYZ shares
$180,000$180,000
Cost base – XYZ shares$250,000$250,000
Capital loss on XYZ shares($70,000)($70,000)
Capital gain on ABC – Capital
loss on XYZ
$280,000$275,250
50% CGT Discount($140,000)N/A
Net capital gain$140,000$275,250

Tom’s Capital Gains Tax Outcome

Since Tom held his shares through his company – Tom Investments Ltd, he didn’t qualify for the 50% CGT discount. His only option was to use the indexation method. Using the same calculations as Tracy’s second option:

  1. Indexed cost base for ABC shares:
    $254,750.
  2. Adjusted capital gain on ABC shares:
    $345,250.
  3. Subtract capital loss on XYZ shares:
    $345,250 – $70,000 = $275,250.

Net capital gain: $275,250

Key Takeaway

Ownership structure can significantly impact your tax obligations. Tracy, who owned her shares personally, enjoyed a significantly lower taxable gain of $140,000 thanks to the 50% CGT discount. Meanwhile, Tom, holding his shares through a company, faced a taxable gain of $275,250—nearly double Tracy’s.

Why It Matters

This example highlights the importance of understanding the tax implications of your investment structure. Choosing the right structure for your circumstances can lead to substantial tax savings over time.

Need Help?

Got questions about Capital Gains Tax or investment structures? Our tax professionals are here to help. Book a consultation through our website today.

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