Your Essential Guide To Capital Gains Tax

Robert Simpson
February 14, 2019

SENIOR PROPERTY CONSULTANT, AUCTIONEER

Feeling bamboozled about capital gains tax and what the changes planned might potentially mean for you?

We break it down.

What is capital gains tax?

If you’re buying an asset, it’s fair to say that you hope that the value will appreciate over time so when you come to sell it, you make some gain.

For example, say you bought a real estate property for $500,000 and proceed to sell it ten years later for $1,000,000. The amount the property has increased by – that $500k – is known as the capital gain. That’s the good news. The bad news? You may be liable for capital gains tax (CGT).

In fact, any assets you acquired since CGT started on 20 September 1985 are subject to CGT unless specifically excluded. CGT applies to real estate, shares and similar investments and collectibles. Some assets are excluded such as your main place of residence (provided it complies with certain conditions), a car or motorcycle, and assets used solely for business purposes (depreciating assets).

Specific information on CGT assets and exemptions can be found here.

How does capital gains tax work?

The ATO requires you to report non-exempt capital gains and losses in your income tax return each year (and you’re required to keep records of everything that may affect your gains and losses). For example, you may have to pay tax on the capital gains made when you sell an investment property. This is referred to as capital gains tax or CGT, but it’s not a separate tax – it’s actually part of your income tax.

The capital gain amount calculated using methods described below will be added to your assessable income and could mean a significant increase in the amount of tax owed, so it’s worth being aware of this and allowing for it prior to doing your tax return. If you report a capital loss, you may be able to use it to reduce a capital gain amount in a given year (or carry it forward to be used in a future year).

How to calculate capital gain on an asset

While there are capital gains tax calculators out there like this one, it’s an easy calculation to do yourself. Simply take the selling price of your asset, subtract the asset’s original cost and any associated expenses (like stamp duty, legal and agents’ fees) and the amount that’s left over is your capital gain (or loss).

That said, it’s always advisable to have your tax return prepared by a tax agent or accountant to ensure you get it right.

How much capital gains tax will you pay?

There are different rates of CGT for companies and individuals. If you’re an individual, the CGT you’d pay depends on your taxable income from other sources. Technically, you’ll pay the same rate of CGT as your income tax rate for that year, but something to be aware of is that the capital gains you’ve incurred will be added to your income from other sources, which might push you into a higher tax bracket.

There are three methods for calculating CGT – here’s what’s involved with each:

CGT discount method – If you purchase an asset and decide to sell it less than 12 months after the purchase, you’ll pay the full capital gains tax on that purchase. But if you hold that asset for over 12 months before selling it, you could receive a 50 per cent discount on your capital gain (after applying capital losses).

Indexation method – This method can be applied if you acquired your asset before 21 September 1999 and held onto it for a year or longer. The indexation method works out what kind of capital gains tax you’re liable for after accounting for inflation on the cost base of your asset (up to Sept 1999).

Capital loss – If you sold at a loss, you can deduct your capital loss from capital gains you’ve made from other income sources to reduce the amount of tax you have to pay. If you don’t have any other capital gains during that financial year, you can carry over the loss to a future financial year.

This capital gain or capital loss worksheet from the ATO can be helpful in working out how much CGT you might pay with the discount or indexation methods.

Proposed changes to capital gains tax (CGT)

Proposed changes to CGT laws have been in the news a lot lately in the run-up to next year’s Federal election. Under a future Labor government, the current 50 per cent capital gains tax break would be reduced to a 25 per cent discount – a move designed to make it easier for first home buyers to enter the market.

New CGT rules may also hit Australian citizens living overseas, as the proposal will deny expats the main residence exemption. Up until now, Australians living overseas have been able to claim the CGT exemption on the family home – as long as the home was rented out for no more than six years at a time. But under the new laws, that may change when an Australian living abroad decides to sell their primary residence.

Bottom line: if you’re considering selling an asset, especially close to the end of the financial year, it’s worth consulting your accountant about the possible capital gains tax, when it might be payable and how current or future laws might affect you.

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