Introduction to Capital Gains Tax

Capital Gains Tax (CGT) is the tax that needs to be paid on profits gained through selling assets like property. In another way, if the selling price is lower than the cost gained, it will be a Capital loss. This tax was introduced to Australia in 1985. Ever since then there are changes to the Capital Gains Tax. The best example is, the popular cryptocurrency which was introduced recently is considered as a Capital gain taxable asset. There are many rules on the calculation of this tax.

Reporting & Calculation

Both the capital gains and capital losses need to be reported in the income tax return and pay tax only to net capital gains. That is total capital gains less any allowable capital losses & any allowed discounts. When a capital gain tax allowable asset is acquired, it is important to keep records of the acquisition date, the share of ownership, and all the costs incurred for the asset since the date it was bought. This will help to identify the capital gain or loss correctly at the time of the CGT event. CGT event is the date the asset is sold or disposed of. Capital Gain Tax is only payable in the financial year in which the CGT event took place.

The calculation of capital gain tax is simple.

·         First, the capital proceeds by selling the assets need to be identified. If the asset is sold less than its’ value, the capital proceeds equal the market value of the assets. If the asset is lost, stolen, or destroyed; capital proceeds will be the compensation received.

·         Once the capital proceeds are identified, the cost of the asset needs to be calculated. Cost is what has been paid or payable to acquire, hold and dispose of the assets. These can be costs such as repairs, rates, insurance, borrowings, stamp duties, etc. However, the costs that are eligible for any tax deduction claims cannot be included.

·         Finally, the Capital proceeds identified need to be reduced by the costs of the asset that was calculated. These three steps need to be repeated for each of the assets that have been sold.

·         Once completed, allowable capital losses and discounts can be applied and arrive at the net capital gain. This is taxed based on the marginal income tax rate. There is no fixed tax rate for Capital Gains Tax.

Capital Losses

If there is a net capital loss in the current year, that loss cannot be reduced from the income but can be carried forward for future years to set off against a capital gain that may incur in the future. If in the current year there is a net capital loss carried forward from the previous year, that needs to be reduced from the capital gains first. Not every capital loss can be deducted from the capital gains. For example, below are some of the non-deductibles.

• Assets used for personal use such as home (exclude if rented, used for business, more than 2 hectares)
• Assets acquired before 20th September 1985. (Exclude property improvements after this date)
• Assets that are exempt from capital gain tax such as cars and motorcycles
• Collectables under a certain value. (Losses from collectibles above par needs to be deducted only from gains incurred through collectibles)
• A leased property except the main purpose is producing income
• Personal service income through an entity set up

Capital Gain Discounts

If an individual owns an asset for more than 12 months, the tax payable needs to be 50% of the capital gain incurred. However, the discount is only available for Australian citizens. Also, it should be noted that Capital Gains Tax applies to assets anywhere in the world for Australian citizens whereas the foreign residents pay tax only for the taxable Australian property. There is also a 33.33% discount available only for individuals for complying with super funds. But if the assets are incurred before 21st September 1999 and the cost base is indexed there are restrictions for the discount.

It is clear that the capital gain tax is part of the income tax and not a separate kind of tax. This is a tax that changes over the years based on economic changes. It is always best to keep a track of the changes as there are many guidelines and tricky areas in calculations and this article identifies only the key fundamentals important to identify Capital Gains Tax.

Written by Tholishi Ranasighe.