Q I have recently inherited  a portfolio of Australian shares from my father’s estate.  The majority were bought after 1990, however some of these he inherited from my grandfather in the early 1980s and some he purchased himself prior to 1985. I have a mortgage on my home and I was hoping to sell some of the shares to pay out the debt.  Can you please explain what the Capital Gains tax (CGT) consequences are by me doing this.  As you can imagine the shares have grown quite substantially over the years, through Capital Growth and Dividend Reinvestment plans.

A Generally speaking Capital Gains Tax (CGT) applies to any change of ownership of an investment asset acquired on or after 20 September 1985.  Death is not a CGT event that will create a tax liability on the shares transferring to your name. However when you subsequently sell the shares, the sale will trigger a CGT event at that time.

In calculating CGT for an individual, you first determine the Capital Gain.  Take the sale price of the shares and subtract the applicable cost base (usually this is the purchase price or acquisition value plus transaction costs).  This figure is referred to as the Capital Gain.  If you have owned the asset for more than 1 year, typically 50% of the Capital Gain is added  to your assessable income. For example, you sell shares for $150,000, with a cost base of $100,000, the Capital Gain is $50,000.  Therefore $25,000 would be added to your assessable income.  So if your income is $120,000, then you would pay tax at 37% plus Medicare Levy on $25,000.  If you dispose of the assets within 1 year of acquisition then 100% of the gain is added to your assessable income, thereby losing the 50% discount.

The shares that your father inherited or acquired prior to 20 September 1985 are exempt from CGT on being transferred into your name. However, if you choose to retain these shares, the cost base for determining a future Capital Gain is set as the date of your father’s death.

For shares your father acquired after 19 September 1985, the cost base is broadly the purchase price paid by your father.  When you sell these shares, you will pay CGT on the Capital Gain.

Had your father received an inheritance after 19 September 1985, the cost base for the shares inherited would be the date of the deceased’s death whom your father inherited the shares from, not your father’s death.  If you sell these shares, you will pay CGT on the Capital Gain.

Whilst Dividend Reinvestment plans provide a great opportunity to grow the quantity of shares you own, when it comes to CGT, it creates one gigantic headache.  Every time a dividend is declared and reinvested, you have a separate cost base for that parcel of shares allocated. You will need to work through your fathers transaction history on each of his shares, determining the date of acquisition and the applicable cost base.  The applicable share registry for each stock should be able to provide you a full list of share transactions and the applicable cost basis.

Identify the cost base for your father’s portfolio, estimate the likely Capital Gains and determine when you would like to dispose of the shares. Review the share portfolio and identify those you would sell. If unsure, seek the advice of a Stockbroker.

Follow Andrew on Twitter @AndrewHeavenFP. This article was originally published in The Australian