Capital Gains Tax (CGT) was introduced in Australia on 20th September 1985. The tax applies only to assets acquired on or after that date. Gains (or losses) on earlier assets called pre-CGT assets are ignored.
CGT was introduced to reduce the inconsistency between the taxing of wealth and the taxing of income. The CGT system works by including the assessable gain on the disposal of a CGT asset in the assessable income of the entity disposing of it.
What is a Capital Gains Tax (CGT)?
Put simply, Capital Gains Tax is not a separate tax; it is part of your income tax liability. CGT is the tax you pay on the difference between the amount you sell an asset for and the amount you paid for it.
Capital Gains Tax in the context of the Australian taxation system applies to the capital gain made on the disposal of an asset, except for specific exemptions (e.g. the most significant exemption is the family home).
What is a Capital Gain?
A capital gain will occur when a capital asset is sold at a higher price than it cost you. For example:
• When you sell an asset for more than what you paid for, this is referred to as a "capital gain" , and
• If you sell an asset for less than what you paid for, this is referred to as a "capital loss"
Whether you make a capital gain or not depends on the purchase price of an asset compared to its selling price.
A capital gain usually has a different meaning for the tax department, the economists and the accountant.
Is a Capital Gain Treated as Taxable Income?
Yes, Capital Gains Tax operates by having net capital gains treated as taxable income in the tax year an asset is sold or otherwise disposed of.
It is important to note, that a Net loss in a tax year cannot be offset against any income. But, the net loss can be carried forward to be deducted against any capital gains in future years.
What is a Capital Gain Discount?
If the asset is held for at 1 year and you have determined the total capital gain, the CGT discount can then be applied. The total gain on the assessable income is first discounted by:
• 50% for individuals taxpayers, or
• 33.3% for self-managed superannuation funds
Companies and other trusts are not entitled to a CGT discount.
What Assets are Liable for Capital Gains Tax?
All assets are subject to the CGT rules unless they are specifically excluded. Capital gains and losses in a given tax year are totalled into three separate asset categories according to the class of the asset. The three separate asset categories are:
Collectables: This category includes assets acquired for above $500.00 and used for personal enjoyment, such as:
• Boats
• Furniture
• Electrical equipment, etc.
Personal Use Assets: This category includes assets acquired for above $10,000 used for personal use, such as:
• Paintings
• Art
• Jewellery
• Postage Stamps
• Antiques
• Coins, etc.
All Other Assets: This category includes assets that are not categorised as collectables or personal assets, such as:
• Land
• Shares in a company
• Rights and Options
• Leases
• Units in a Unit Trust
• Goodwill
• Licences
• Convertible notes
• Your home or unit
• Foreign Currency
• Contractual rights
• Any major capital improvement made to certain land or pre-CGT asset
The existence of separate categories for collectables and personal use assets works to prevent losses from them being offset against other gains, such as from investments. This works to prevent taxpayers subsidising hobbies from their investment earnings.
What Assets are exempted from Capital Gains Tax (CGT)?
A Capital Gains Tax exemption applies to:
• An asset owned outright
• A partial interest in an asset, and
• To both tangible and intangible assets
The current Capital Gains Tax (CGT) exemptions are:
• Any asset acquired before 20th September 1985, known as a pre-CGT asset
• The house, unit, etc. which is the taxpayers main residence and up to 2 hectares of adjacent land used for domestic purposes
• Collectables acquired for up to $500.00 used for personal enjoyment
• Personal use assets acquired for up to $10,000 used for personal use
• Capital loss made from a personal use asset (i.e. any capital loss you make from a personal asset is disregarded)
• Car and other small motor vehicles, such as, motorcycles (small being a carrying capacity less than 1 tonne and less than 9 passengers)
• Compensation for an occupational injury, or for personal injury or illness of oneself or a relative
• Life insurance policies surrendered or sold by the original holder
• Winnings or losses from gambling (which are free of income tax too)
• Bonds and Notes sold at a discount (gains and losses from these come under ordinary income tax)
• Medals and decorations for bravery and valour, provided they are acquired for no cost
• Shares in a pooled development fund
• Payments under particular designated government schemes (e.g. various industry restructuring schemes)
What is a CGT Event?
A taxpayer can only make a capital gain or a capital loss if a CGT Event happens. The CGT events include:
CGT Event A1 - The disposal of a CGT asset, which covers a change of ownership (e.g. by sale or giving away) of assets such as:
• Shares
• Units in a Unit Trust
• Debt Securities
• Land and Buildings
• Works of Art, etc.
CGT Event C2 - The cancellation, surrender or similar endings of a CGT asset, which would cover:
• The redemption of units in a Unit Trust (where the units are extinguished)
• The expiry of an unexercised option, or
• The redemption and cancellation of a debenture
There are approximately 50 different CGT events and most individuals will never experience many of these events.
What happens when an Asset is owned by more than one person?
Many assets purchased can be held in the following ownership types:
Joint Tenants - When an asset is owned under a "joint tenancy" arrangement. For CGT purposes, the joint tenants are treated as tenants in common (i.e. they have equal shares in the asset). Therefore, each party has an equal share of:
• Any Capital Gain from a CGT event, or
• Any Capital Loss from a CGT event.
For example, a couple that owns a rental property as joint tenants will split the capital gain or capital loss equally when they sell the property.
Partnerships - When an asset is owned by “partners” then the partnership itself does not own the assets. Instead, each partner owns a proportion of each CGT asset. The partners use their proportion to work out their capital gain or capital loss from a CGT event affecting any asset.
Tenants in Common - Individuals who own an asset as "tenants in common" may hold unequal interests in the asset. Each owner makes a capital gain or capital loss from a CGT event in line with their interest.
For example, a couple can own a rental property as tenants in common with:
• One person having a 20% legal interest and
• The other person having 80% legal interest.
When they decide to sell a rental property (or any other CGT event occurs), they will split the resultant capital gain or capital loss between them according to their legal interest.
Why take help of a Finance Broker?
Every financial decision requires time and expertise. It is because even a small mistake can harm you terribly. So, it is wise to seek expert advice from finance brokers. Contact a professional broker who has a thorough knowledge of Capital Gains Tax (CGT). He/she will be able to guide you through your options in determining what assets can be subject to Capital Gains Tax (CGT).
So, next time you have to pay capital gains tax, do not worry. Use this informative guide and employ the services of a finance broker to pay-off your tax liabilities quickly.
Singh Finance provides complete financial solutions to Australians. The firm’s expert property finance brokers will not only provide you with updated information on Capital Gains Tax but also offer quick loans for home business. Contact now.
