It is likely that you have heard of Capital Gains Tax and is something you may come across when tax time rolls around each year. The following article is a quick and informative guide on the basics of Capital Gains Tax.
What is it?
Capital Gains Tax or CGT will arise when you buy shares, property or other assets for a particular price and sell them for another price, in which the difference between these two amounts equates to a capital gain or loss.
If you sell the asset for more than you purchased it, you will make a capital gain. Conversely, if you sell it at a lower price point than what you bought it for, you will make a capital loss. Therefore, if you make a capital gain on the sale of an asset you will incur CGT as a result.
How much do I have to pay?
The amount of CGT you will be required to pay will be contingent on a variety of factors. These include how long you have held the asset for, your marginal tax rate and whether you have incurred any capital losses.
The reason why your marginal tax rate is an important factor in how much CGT will be payable is that any capital gain is added onto your assessable income when you lodge your tax return for that financial year. Therefore, a large capital gain could increase your marginal tax rate as it increases your taxable income.
How long you have owned the asset is a key factor in determining how much tax you will pay, as holding an asset for a period of longer than 12 months will usually provide you with a 50% tax concession. Thus, reducing the CGT you owe on a particular gain by half.
When do I have to pay CGT?
CGT will arise at any time that a CGT event occurs. This happens whenever you sell an asset that is subject to capital gains tax. This could include selling shares or an investment property at a higher price than what you purchased it for which will therefore give rise to a CGT event. This is triggered at the point in time in which you make the capital gain or loss.
Although the event is triggered when the asset is sold, the tax incurred as a result of the sale will not be payable until you are required to lodge your tax return which must be done by October 31. This is also when your marginal rate will be determined which is based on your assessable income for that financial year.
What happens if I make a capital loss?
A capital loss occurs in circumstances where you sell an asset at a lower price than what you bought it for. Although this is a loss, the advantage of this is that you can offset this against your capital gain to reduce the tax payable.
In the event, your capital losses exceed your capital gains, or you do not make a capital gain in the same financial year, these losses can usually be carried forward and used to offset a capital gain made in a future financial year. This must be done when you lodge your tax return with the ATO.
What assets are subject to CGT?
CGT applies to all assets that are sold or disposed of unless they are exempt or were acquired before CGT came into effect on September 20, 1985. Most real estate is subject to CGT including vacant land, business or rental properties, holiday houses or farms. However, this does not extend to your principal place of residence. This is called the main residence exemption and will be exempt if it meets the following conditions:
- Has been your or your partner/other dependent’s home for the whole period you have owned it
- Has not been used to produce income – such as a business premises or an investment property
- Is on land of 2 hectares of less
If the above criteria are satisfied, CGT will not be payable on any gain you make upon selling your home residence. You may still be entitled to a partial exemption if you do not meet these conditions which you can determine using this tool from the ATO.
Cars and motorcycles are exempt from CGT, however, CGT will apply to shares, units and similar investments whereby they are sold at a gain that triggers a CGT event. CGT may also be payable on personal use assets that were acquired for $10,000 or more such as a boat, furniture or electrical goods. It must also be noted that capital losses incurred from personal assets cannot be used to offset any capital gains. For a full list and explanation of the assets subject to CGT, click here.
Are there any exceptions?
There may be some exceptions in which a capital gain will not be subject to CGT. This occurs where the gain is assessed under another part of taxation law such as ordinary income in which the CGT rules will be disregarded. This also occurs in the case of depreciating assets that have their own tax regimes.
If you would like to discuss structuring your investments to reduce your tax payable or would like assistance with your investment strategy, click here to organise a complimentary 20-minute phone call with an EPG Wealth adviser.