Are you planning to sell assets? Then, it’s likely that your tax bill will be affected by the Capital Gains Tax (CGT). Navigating CGT can be complex, but it is crucial to thoroughly understand its implications to meet your tax obligations and minimise tax liability.
This guide will walk you through CGT in Australia, so you can understand, calculate, and manage your capital gains tax obligations. We’ll break down the key principles, step-by-step calculations, and effective strategies to help you make informed decisions.
Table of Contents
What is Capital Gains Tax in Australia?
Capital Gains Tax (CGT) in Australia is a tax on the profit you make when you sell or dispose of an asset. It applies to various types of assets, including real estate, shares, and business sales. CGT is not a separate tax but rather a component of your income tax, meaning it’s included in your annual income tax return.
The basic principle of CGT is that when you sell an asset for more than you originally paid for it, the difference (or ‘capital gain’) is subject to tax.
A CGT event occurs when you sell an asset that’s tangible or intangible, which may result in capital gain or loss. Examples of a CGT event common to a small business, include:
- Sale of shares: A sale of a company share is a CGT event.
- Disposal: If you dispose of a CGT asset, it simply means you are selling or giving the asset away to someone else.
- Business sale: A sale of a business will trigger a CGT event. This is incurred by the seller.
CGT operates by treating net capital gains as taxable income in the tax year in which you sell or otherwise dispose of the asset.
How to calculate Capital Gains Tax
There are several steps to calculate CGT and figure out the taxable amount.
- Determine the cost base: The cost base includes the original purchase price of the asset, along with associated costs such as stamp duty, legal fees, and any costs associated with improvements made to the asset.
- Calculate the capital gain: Subtract the cost base from the sale price of the asset. The result is your capital gain or capital loss.
- Apply any discounts or exemptions: If you’ve held the asset for at least 12 months, you may be eligible for a 50% CGT discount. Superannuation funds are entitled to a 33.3% CGT discount. Small business concessions may also apply in certain circumstances. (More on discounts later on in this guide).
- Determine the tax payable: The net capital gain (after applying any discounts or exemptions) is added to your taxable income for the year. CGT is then taxed at your individual marginal tax rate.
Example Calculation
Let’s say you bought shares for $5,000 and sold them six months later for $5,500. You have no other capital gains or losses. Your capital gain is $500, which you must declare in your tax return and pay tax on at your individual income tax rate.
What to consider when calculating Capital Gains Tax
The above calculation example is quite simple. However, there are several additional factors you may need to consider when calculating CGT.
Holding period
If you have held an asset for more than 12 months, you may qualify for a 50% discount on your CGT. This means only half of the capital gain is subject to tax.
For example, if you bought a property in July 2020 and sold it in August 2024, you would be eligible for the 50% discount. However, if you sell an asset within 12 months of purchasing it, the full capital gain is taxed at your marginal tax rate.
Cost base adjustments
You need to include all eligible expenses, such as legal fees, stamp duty, and improvement costs, in the cost base to reduce the capital gain.
The cost base consists of five elements:
- Money paid for the asset
- Incidental costs
- Costs of owning the asset
- Capital expenditure to preserve the asset value
- Capital expenditure to establish the title
For instance, if you purchased a property for $400,000 and spent $50,000 on renovations, the cost base would be $450,000.
Capital losses
Capital losses can be used to offset capital gains, reducing the amount of tax payable. If capital losses exceed capital gains, you can carry the excess losses forward to future income years.
Let’s say you made a capital gain of $20,000 on the sale of shares and a capital loss of $5,000 on the sale of a different set of shares. You could offset the loss against the gain, resulting in a net capital gain of $15,000.
Capital losses can be carried over indefinitely in Australia to offset future capital gains.
Asset type
The CGT rules can vary depending on the type of asset. Personal use assets and collectables are treated as separate categories. Losses on these items are quarantined, which means they can only be applied against gains in the same category.
For example, capital losses from collectables can only be deducted from capital gains made from other collectables.
Residency status
If you are an Australian resident, you are generally subject to CGT on your worldwide assets. However, if you are a foreign resident, you are typically only subject to CGT on Australian property and other Australian assets.
Strategies to reduce Capital Gains Tax
There are several ways to reduce CGT and your taxation bottom line.
Holding assets for over 12 months
Holding an asset for more than 12 months allows you to access the 50% CGT discount, significantly reducing the taxable gain.
For example, if you sell a property after holding it for 15 months, only 50% of the capital gain is taxed.
Using capital losses to offset capital gains
If you have capital losses from other investments, use them to offset current-year capital gains. If losses exceed gains, carry the excess losses forward to future years.
For instance, if you have a capital gain of $30,000 and a capital loss of $10,000, you only pay CGT on $20,000.
Contributing proceeds to superannuation
Contributing proceeds from the sale of an asset to your superannuation fund can reduce your taxable income and, consequently, your CGT liability.
Timing asset sales strategically
Consider the timing of asset sales to take advantage of lower-income years or to align with expected capital losses.
Small business concessions and roll-over
If you run a small business with assets that are actively used in the business you can unlock small business concessions and exemptions..
CGT 6-Year Rule
If you are a homeowner and want to rent out your primary residence, you can do so for up to six years while still treating it as your main home for capital gains tax purposes.
This means if you move out of your home and rent it to tenants, you can sell it within six years and potentially avoid paying capital gains tax on the profit, just as if you had been living there the entire time. Note that this rule has specific conditions and limitations, in particular that you may only own one principal place of residence at any one time.
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FAQ
What assets are subject to capital gains tax?
Capital gains tax applies to various assets, including investments like property, shares, and crypto assets. If you make a profit from disposing of these assets, it is likely subject to CGT.
Is there a capital gains tax threshold?
There isn’t a specific capital gains tax threshold in Australia. Instead, CGT is applied to the net capital gain, which is the profit made from selling an asset, after any applicable discounts or exemptions are applied. This net gain is then added to your taxable income and taxed at your individual marginal tax rate.
How do I report capital gains tax in my tax return?
To report capital gains tax in your tax return, you need to include details of any capital gains or losses you’ve made during the financial year. This involves calculating the capital gain or loss, applying any relevant discounts or exemptions, and reporting the net capital gain in your income tax return.
It’s also important to keep detailed records of all transactions, including purchase and sale dates, prices, and associated costs, to support your calculations.
CGT compliance and professional support
Understanding and planning for capital gains tax is crucial for managing your financial obligations in Australia.
If you know how CGT works, you can calculate your potential liability and employ effective strategies to minimise your tax obligations while ensuring compliance with Australian laws and regulations.
For complex business tax compliance cases, consider speaking to a business tax professional with Lawpath. We can help you navigate CGT planning and obligations.
