Are you thinking about selling some shares, or maybe an investment property you own? There are some important points about Capital Gains Tax (CGT) that you should know first. CGT forms part of your income tax and is a tax payable on any gains you make on the disposal of shares, properties (besides for your principle place of residence) and other capital assets. A capital gain (or loss) is generally the difference between the purchase price and selling price of the capital asset. CGT is a complex area of taxation law and it is important to understand how it works. We set out 6 key things you should know about CGT that could help reduce your tax liability.
- The rate of CGT will depend on your taxable income: Capital gains form part of your taxable income for the purposes of income tax and is not a separate tax. Therefore, the amount of CGT you pay will depend on your individual tax bracket. For example, a high income earner who is taxed at the highest rate will pay an effective tax on their capital gains of 49%, while an individual who has made no other assessable income for the financial year may pay no tax at all on their capital gains (if they remain below the $18,200 threshold).
- How capital gains (or losses) are calculated: you pay CGT on your net capital gain for an income year. This means any capital losses in a particular income year are offset against any capital gains made in the same income year to provide a net amount. A capital gain (or loss) is general the difference between the asset’s purchase price and selling price. However, it is important to note that incidental costs and other costs associated with holding the asset may be added to the purchase price. For example, if you purchase a holiday house in 2010 for $500,000 and pay another $30,000 stamp duty, $50,000 of interest payments on the mortgage over the property and $80,000 on renovations and sell the property in 2016 for $800,000, your capital gain will be $800,000 less $660,000 ($500,000 + $30,000 + $50,000 + $80,000) i.e. a capital gain of $140,000.
- Timing of capital gains and losses: it is of the utmost importance to ensure you do all you (legally) can to time your disposals of capital assets in the most beneficial manner. As discussed above, any net capital gain will be added to your assessable income. However, net capital losses cannot be deducted from your assessable income. Capital losses can also only be applied to present or future capital gains, but not past capital gains. This makes the timing of your disposals of capital assets crucial. Say for example you own 2 shares, Share X and Share Y. You expect to make a $100,000 capital gain on Share X but a $100,000 capital loss on Share Y. If you sell both these shares in the same income year you will have a net capital gain of nil and not be required to pay CGT. However, if for example you sell Share X on June 30 2016 but Share Y on July 1 2016, you will be liable for CGT with respect to the $100,000 capital gain on Share X for the 2015/16 income year, but the capital loss with respect to Share Y will not be able to offset the CGT paid on Share X. By deferring the sale of Share X by just one day, you may be able to make yourself a big tax saving. Moreover, by deferring the capital gain until the next income year, you have an extra 12 months to pay off your tax liability arising from the gain, which provides the benefit of time value of money.
- CGT discounts and concessions: you may be entitled to various CGT discounts and concessions. Capital gains made by an individual with respect to assets that have been held for at least 12 months can be discounted by 50%. Again, timing becomes very important. For example, you may be very happy with the capital gain you have made on shares you have held for 11 months and now wish to sell them. By choosing to defer this sale by just one month, you may be able to reduce your CGT liability by half. However, this 50% discount is only available to individuals, not companies. Other discounts may be available, including concessions for small businesses and retirement concessions and savings that can be made by rolling over gains into your superannuation fund.
- CGT exceptions: there are a number of exceptions with respect to the imposition of CGT. CGT does not apply to assets purchased before 20 September 1985. CGT does also not apply to your primary place of residence, most personal assets (such as a TV or home furniture), motor vehicles and trading stock. CGT also does not apply to depreciating assets used in the course of business, such as equipment (which are dealt with under capital allowances regime). Special CGT rules also apply to collectibles and antiques.
- CGT can apply to gifts: You may be liable for CGT even on assets which you dispose of by way of gift for no consideration. In such a case, the asset is valued at its market value at the time of the gift. Say for example you purchased an investment property in 2013 for $400,000 and which now has a current market value of $600,000. If you were to gift the property to a family member you would be liable for a $200,000 capital gain, even though you did not receive any consideration for the transfer of the property.
As can be seen from above, CGT is a complex area of the law and it is important you act with good advice.
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