Understanding capital gains tax
When you sell an asset – be it shares, a home or other investment – Capital Gains Tax may apply. Is your asset exempt? Find out the basics about CGT.
What is capital gains tax?
Capital Gains Tax (CGT) in Australia applies to the capital gain made on disposal of any asset, except for specific exemptions. The most significant exemption is the family home. Rollover provisions apply to some disposals, one of the most significant relating to transfers to beneficiaries after a death. (This is so that CGT does not become a quasi death duty).
How are you taxed?
CGT operates by having net gains treated as taxable income in the tax year an asset is sold or otherwise disposed of. If an asset is held for at least one year then any gain is first discounted by 50 percent for individual taxpayers, or by a third for superannuation funds. Net losses in a tax year may be carried forward, but not offset against income.
Personal use assets and collectables are treated as separate categories and losses on those are quarantined so they can only be applied against gains in the same category, not other gains. This works to stop taxpayers subsidising hobbies from their investment earnings.
A capital gain is…
According to the Australian Taxation Office, generally speaking a capital gain is the difference between what you are paid for an asset (capital proceeds) when you sell it and the cost base of the asset for which there is a potential capital gain. If, when you sell, you get more for an asset than you paid for it then you have made a “capital gain”. You make a capital loss if your reduced cost base is greater than your capital proceeds.
Exemptions from capital gains tax
Gains on some items will not be taxed under the capital gains tax, they are as follows:
Assets obtained before 1985, unless major changes have been made to the asset after this date, for example a renovation or addition to a home, or if the original owner of the asset has died and ownership has passed after 1985.
The main residence of the taxpayer and personal items obtained for less than $10,000, which could include television, boats, furniture, as long as they are for personal use. However if they are classed as collectibles, the $10,000 limit reduces to a $500 initial purchase price, unless they are medals awarded for bravery and valour (if they were obtained for no cost). Vehicles, including motorcycles, are also exempt.
Other main items exempt are compensation payments for things such as injuries or illness, although not for compensation for contract breaches. Gambling winnings (or losses) are also exempt from capital gains tax.
Capital losses carried forward
To use a bit of Tax Office jargon, if your total capital losses for the year are more than your total capital gains, the difference is your net capital loss for the year. This loss can be carried forward to later income years to be deducted from future capital gains. You cannot deduct capital losses or a net capital loss from your income. There is no time limit on how long you can carry forward a net capital loss. Net capital losses are applied in the order that you make them.
Loss or gain: receipts and records
To be able to work out whether you have made a capital gain or a capital loss you need to keep good records. Ideally, you will keep records of every transaction, event, act or circumstance that may be relevant to the gain-loss calculation. What that means is although you may not sell the asset for many years you will need to record the history of the asset, and the expenses you have incurred to hold it, to help reduce your tax liability when it is sold.
Here are some suggestions for records you may need to keep to help with this calculation:
- receipts of purchase or transfer
- details of interest on money you borrowed relating to this asset
- records of agent, accountant, legal and advertising costs
- receipts for insurance costs, rates and land taxes
- any market valuations
- receipts for the cost of maintenance, repairs and modifications, and
- accounts showing brokerage on shares.
Your income tax bill will also be relevant. In many cases if you have claimed an income tax deduction for an amount, that amount cannot be taken into account when calculating your capital gains tax liability.
If you have questions about CGT or capital gains related items, the Australian Tax Office which has mountains of advice available on its website. Alternatively a taxation agent can help.