Strategies to minimise Capital Gains Tax on shares for Small and Medium-sized Entities (SMEs) can improve after-tax returns and preserve more capital for reinvestment. Understanding how to reduce gains tax and uinderstand small business concessions helps you pay less tax on profits from selling shares and boost investment income for future years.
The Challenge of Capital Gains Tax for SMEs
Holding shares for growth or dividend income can lead to unexpected tax bills when you sell. SMEs face several challenges when managing capital invested in share portfolios.
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Impact on Cash Flow and Profits
Each Capital Gains Tax (CGT) event—such as the sale of shares—increases your assessable income and may bump your business into a higher marginal tax rate, leading to more income tax payable. Transaction costs such as brokerage and other eligible incidental costs can be included in your cost base. However, ongoing account fees and loan interest are generally deductible separately, not added to the cost base.
Record-Keeping Burden
Accurate records of purchase price, market value, corporate actions, and transaction costs are essential. Without clear documentation, you may miss tax deductions or incorrectly calculate capital gains, leading to higher taxable income at tax time.
Complexity of CGT Rules and Concessions
SSmall business CGT concessions apply only if the basic conditions (e.g. aggregated turnover under $2 million or net assets under $6 million) are met. For shares and trust interests, additional rules apply — such as the 80% active asset test and significant individual requirements. Portfolio or listed investment shares typically do not qualify. Without professional advice, SMEs risk miscalculating how much tax to pay or missing opportunities to offset capital gains.
Practical Strategies to Reduce Your CGT Liability
SMEs can adopt a series of straightforward approaches to minimise Capital Gains Tax (CGT) and improve their financial situation.
Timing Sales to Maximise the 50% Discount
If you’re an Australian resident individual or a trust distributing to individuals, holding shares for longer than 12 months may entitle you to the 50% CGT discount. Companies are not eligible. Complying SMSFs receive a one-third discount (effective 10% tax in accumulation phase). For example, a $20,000 gain for an individual may be reduced to $10,000. Track each parcel’s purchase date carefully to decide which shares to sell when and reduce the future capital gains you need to pay tax on.
Tax-Loss Harvesting with Capital Losses
Review your portfolio each financial year to identify underperforming shares. Realising capital losses allows you to offset gains, reducing net gains this year and letting unused losses be carried forward to offset future gains. This approach balances your portfolio while lowering your gains tax liability.
Aligning Share Sales with Business Cycles
SMEs often have irregular income. Plan share sales during lower-profit periods—such as off-season for retailers—to be taxed at a lower marginal rate. Coordinate share transactions with major deductible expenses or superannuation contributions to smooth your taxable income across the income year.
Meeting criteria—such as shareholdings in related companies and continuity of business ownership—often requires expert guidance from a registered tax agent or financial advisor.
Structuring Investments for Long-Term Efficiency
Beyond timing and concessions, consider your overall investment structure to reduce CGT.
Use of Trusts and Companies
Discretionary trusts let you distribute gains to beneficiaries with lower tax rates, though trustees must still calculate net capital gains. Companies pay at the corporate tax rate but don’t receive the CGT discount. Weigh the benefits of each structure against your growth plans.
Self-Managed Superannuation Funds (SMSFs)
Complying SMSFs pay 15% tax on capital gains in accumulation phase. For assets held longer than 12 months, they receive a one-third discount (effective 10%). In pension phase, capital gains may be partially or fully exempt, depending on the fund’s exempt current pension income (ECPI). Using borrowed money within an SMSF, known as limited recourse borrowing arrangements, requires careful structuring and professional tax advice to understand compliance and ATO website rules.
Managing Transaction Costs and Fees
Include brokerage, account keeping fees, and advice costs in your cost base to reduce your capital gain. Keep records of all expenses, including interest on loans used to buy shares, to ensure you claim full tax deductions.
Advanced Portfolio Strategies
For SMEs with larger share portfolios, sophisticated techniques can deliver further savings.
Portfolio Rebalancing for Tax Efficiency
Align rebalancing with CGT rules by selling parcels with losses to offset gains from other parcels. When realising losses, ensure there is a genuine change in exposure. The ATO may disallow losses from wash sales (where you sell and quickly repurchase the same or substantially similar shares). Consider alternative assets or timing strategies. Monitor past performance, future performance, and future years projections to decide which assets to sell.
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Deferring Gains with Rollover Relief
If you’re replacing shares with other assets or reorganising business structures, rollover relief allows you to defer a gain to a later financial year. This reduces your immediate tax rate exposure and lets you plan for lower-income years.
Secondary Considerations: Dividends and Distributions
Dividend reinvestment plans (DRPs) issue you new shares, each with a cost base equal to the dividend amount applied. The dividend remains assessable income, often with franking credits attached. Monitor franking credits and the net capital impact of reinvested dividends. Coordinate company distributions with your business plan to smooth investment income and capital gains.
Conclusion
Reducing Capital Gains Tax on share investments requires proactive planning, disciplined timing, and an understanding of available concessions. Review your share portfolio today, consult a registered tax agent or financial advisor, and develop a clear business plan for your investments. With careful execution, you’ll reduce how much tax you pay and create a stronger foundation for long-term growth and stability.
