As an investor, you’re likely to have heard about capital gains tax (CGT). CGT is a tax on the profit made when you sell or dispose of an asset, and it applies to a wide range of assets such as property, shares, and collectibles. The profit made on the sale of an asset is called a capital gain and is subject to CGT. While tax may not be the most exciting topic, understanding how CGT works is important to help you maximise your investment returns. So, let’s dive into this guide on how CGT works in Australia.
What Triggers a CGT Event?
When an investor sells an asset they’ve triggered a CGT event. This means the investor needs to calculate the capital gain they made on the sale and include it in their taxable income for the financial year they sold the asset. A CGT event may also be triggered if an asset is lost, destroyed, or given away as a gift.
CGT and the 50% CGT Discount
The tax an investor pays on their capital gain is determined by how long they held the asset before selling it. If the asset was held for less than 12 months, the full capital gain will be taxed at the investor’s marginal tax rate. If the asset was held for 12 months or more, the investor is eligible for a 50% discount on the capital gain before tax is applied.
For example, let’s say an investor purchased shares in a company for $10,000 and sold them for $20,000 after holding them for 18 months. The capital gain would be $10,000, and if the investor is on the top marginal tax rate of 45%, they would normally pay $4,500 in tax. However, because they held the shares for longer than 12 months, they’re eligible for a 50% discount, reducing the taxable capital gain to $5,000 and the tax payable to $2,250.
The 50% CGT Discount is available to individuals and trusts but not to companies.
It is a significant tax concession for assets subject to CGT and should be considered when planning to dispose of assets.
CGT and Capital Losses
Investors can offset any capital losses they’ve made against their capital gains. This means if they’ve made a capital loss of $5,000 and a capital gain of $10,000, they’ll only pay tax on the remaining $5,000. Capital losses can be carried forward to future income years and used to offset future capital gains.
So, as much as it might pain you to think of the times you’ve lost money, don’t forget about your capital losses! They can save you tax.
CGT Asset Exemptions
CGT is broad and covers all assets. The sale of an asset is only exempt from CGT of there is a specific exemption or concession that covers the asset.
Certain assets are exempt from CGT, such as a main residence (in most cases) and personal use assets like cars and furniture. The exemption for a main residence applies in most cases, although there are some exceptions. For example, if the main residence is used to produce income (e.g., as a rental property or a farm), it may not be fully exempt from CGT. Investors should be aware of the CGT exemptions and ensure they’re claiming all the exemptions they’re entitled to.
Record Keeping
Record keeping is crucial for accurate CGT calculations. Investors should keep track of their purchases and sales of assets, as well as any associated costs such as legal fees, brokerage fees, and stamp duty. For property investors or people with holiday houses, all costs in maintaining and holding the property can be added to the cost base for the CGT calculation. For example council rates. Say the rates averaged $2,000 per year and the property has been held for 20 years. That means that the cost base of the property increases by $40,000! Proper record keeping can also help investors identify any CGT exemptions they’re entitled to. For example, the 6 year temporary absence rule on a property that has been used to produce income but was first your main residence. Keeping records of dates is important to establish eligibility for this concession.
Investment Strategy and CGT
Investors should be aware of the CGT implications of their investment strategy. For example, they may choose to hold onto assets for longer than 12 months to take advantage of the 50% discount, or offset capital gains with losses to reduce their tax liabilities. When making investment decisions, it’s important for investors to consider the CGT implications and potential tax savings.
Seeking Professional Advice
CGT can be a complex area of tax law, and investors may benefit from seeking professional advice from an accountant or tax advisor. A professional can help investors navigate the nuances of CGT, identify all available exemptions and discounts, and ensure they’re meeting their CGT obligations. The right advisor can also provide guidance on strategies that can help minimise CGT liabilities, and their advice could potentially save you tens of thousands of dollars in tax.
Conclusion
In summary, capital gains tax is a tax on the profit made when an investor sells or disposes of an asset. The tax rate an investor pays on their capital gain is determined by the asset holding period and their marginal rate of tax, and capital losses can be offset against capital gains. Certain assets are exempt from CGT, and accurate record keeping is essential for proper CGT calculations. Investors should be aware of the CGT implications of their investment strategy and seek professional advice if needed. By understanding how CGT works and taking advantage of any available exemptions and discounts, investors can maximise their investment returns and keep more of their hard-earned money.
If you’d like to find out more or discuss your potential CGT situation, contact the experienced team at Taxlynk today!
