Capital Gains Tax (CGT)

Capital Gains Tax (CGT) is a tax levied on the profit made from the sale of assets. In Australia, CGT is part of the income tax system and is applied to the capital gains an individual or entity realises in a financial year. The tax is calculated on the difference between the purchase price and the selling price of the asset, minus any costs associated with the acquisition, improvement, and sale of the asset.

Key concepts of Capital Gains Tax

Capital gain

A capital gain occurs when an asset is sold for more than its purchase price. The gain is the difference between the selling price and the purchase price, adjusted for any associated costs.

Capital loss

A capital loss occurs when an asset is sold for less than its purchase price. Capital losses can be used to offset capital gains in the same financial year, reducing the overall taxable amount.

Cost base

The cost base of an asset includes the purchase price and other costs associated with acquiring, holding, and selling the asset. These can include:

• Purchase price
• Incidental costs (e.g., stamp duty, legal fees)
• Ownership costs (e.g., interest on loans, rates and taxes)
• Improvement costs
• Disposal costs (e.g., agent fees, advertising costs)

CGT events

CGT events are the specific transactions or occurrences that result in a capital gain or loss. Common CGT events include:

• Sale of an asset: Selling an asset for more or less than its purchase price.
• Transfer of ownership: Transferring ownership of an asset, such as through inheritance or as a gift.
• Receipt of compensation: Receiving compensation for the loss or destruction of an asset.
• Ending a lease: Terminating a lease agreement for a capital asset.

CGT exemptions and concessions

Main residence exemption

The sale of an individual’s primary residence is generally exempt from CGT. This exemption does not apply if the property was used to produce income or was not the owner’s primary residence for the entire ownership period.

Discount for individuals and trusts

Individuals and trusts may be eligible for a 50% discount on capital gains if the asset was held for more than 12 months before the sale. This discount reduces the taxable capital gain by half.

Small business concessions

Small businesses in Australia may qualify for various CGT concessions, including:

• 15-year exemption: Available if the business owner is aged 55 or older and the asset was owned for at least 15 years.
• 50% active asset reduction: Reduces the capital gain by 50% for active business assets.
• Retirement exemption: Allows business owners to exempt capital gains up to a lifetime limit if the proceeds are used for retirement.
• Rollover: Defers the capital gain if the proceeds are used to acquire a replacement active asset within a specified period.

Personal use assets

Assets used for personal enjoyment, such as cars, boats, and furniture, are generally exempt from CGT, provided they were purchased for less than $10,000.

Calculating Capital Gains Tax

Step-by-step calculation

1. Determine the cost base: Calculate the total cost base of the asset, including the purchase price and associated costs.
2. Calculate the capital gain or loss: Subtract the cost base from the sale price. If the result is positive, it is a capital gain. If negative, it is a capital loss.
3. Apply any discounts or exemptions: If eligible, apply the 50% discount or any other applicable exemptions or concessions.
4. Report the net capital gain: Add the net capital gain to your assessable income for the financial year.

Example calculation

Consider an individual who purchased a property for $400,000 and sold it for $600,000 after three years. The cost base, including purchase price, stamp duty, legal fees, and improvement costs, totals $450,000. The calculation would be as follows:

• Sale price: $600,000
• Cost base: $450,000
• Capital gain: $600,000 – $450,000 = $150,000
• 50% discount: $150,000 × 50% = $75,000
• Net capital gain: $75,000

The net capital gain of $75,000 is added to the individual’s assessable income for the financial year and taxed at their marginal tax rate.

Record keeping and reporting

Record keeping

It is essential to maintain accurate records of all transactions involving capital assets, including:

• Purchase and sale agreements
• Receipts and invoices for associated costs
• Loan documents
• Improvement and renovation records
• Correspondence related to the asset

These records should be kept for at least five years after the sale of the asset or the disposal of the capital gain or loss.

Reporting

Capital gains and losses must be reported in the individual’s or entity’s tax return for the relevant financial year. The Australian Taxation Office (ATO) provides detailed guidelines and forms for reporting CGT.

Conclusion

Capital Gains Tax is a significant aspect of the Australian tax system, affecting individuals and businesses alike. Understanding how CGT works, including the types of capital gains and losses, exemptions, and concessions, is crucial for effective tax planning and compliance. By maintaining accurate records, seeking professional advice, and strategically managing investments, taxpayers can optimise their tax position and minimise their CGT liabilities.

For more detailed information on Capital Gains Tax and related tax implications, you can visit the Australian Taxation Office (ATO) website.