The Capital Gains Tax (CGT) is the tax that is applied to the capital gain or loss of a taxable asset. A capital gain or loss is basically the difference between the cost of the taxable asset at the time of acquiring it, and what it’s sale value when you disposed of it.
We all want to be good investors and make good returns from our purchases, but it is important to understand the tax implications that stem from capital gains. A capital gain, under law, is part of your income. That means that it is vital that you declare all capital gains and losses when lodging your tax return. Otherwise, you risk getting stung when June rolls around.
What Assets Fall Under the Capital Gains Tax?
Apart from a few exemptions, any asset acquired after 20 September 1985 is subject to the Capital Gains Tax. This includes any real estate, apart from your primary residence, shares in a company, or units in a trust and other specified investments.
Exemptions from the Capital Gains Tax include:
- Your main residence (your home)
- Cars and motorcycles
- Any assets purchased prior to 20 September 1985
- Personal use items that valued under $10,000
- Taxable depreciation assets, such as business equipment
- Winnings or losses from gambling
- Trading stock
How Do I Calculate My Capital Gains Tax and Losses?
If you acquire or own anything that liable to Capital Gains Tax, it is vital that you keep records of every transaction related to the asset—you will need these in order to accurately calculate your net capital gains and losses for each financial year. Keeping these records is not just so you can be honest with the ATO, it also ensures that you don’t pay more than you have to and it makes it easier for any beneficiaries of your assets.
Asset Acquisition Date
It is important that you pinpoint the exact date on which you acquired the asset in question as rules about working out gains and losses have changed significantly over time. There are different methods of calculating your gains and losses based on date of acquisition and length of ownership, and each method dictates how much tax you have to pay.
Sometimes it’s not as simple as taking note of the day you came into ownership of the asset. For example, if you enter into a contract over real estate, for the purposes of capital gains tax, the date of acquisition is the date on which you signed the contract, not the date of settlement. Similarly, if you have inherited assets from a deceased family member, the date of ownership is the date on which the family member passed away, and not the date the will was enacted.
Selling an asset is called a Capital Gains Tax event. This event is when the gain or loss is made. You must calculate the capital gain or loss for each, separate event. You must then combine all the gains and losses for the entire financial year to determine your net capital gain or loss. It is this figure that you will need to include in your tax return.
Capital Gains Tax Calculation Methods
There are various methods available for calculating your net capital gain or loss, and dates of acquisition and length of ownership dictate which methods are available to you.
For assets held for 12 months or more before the relevant Capital Gains Tax event, you can use the CGT Discount method, which allows individuals to reduce their capital gain by 50% and therefore only pay tax on that amount.
The indexation method is available to those who acquired an asset before 11.45 AM on 21 September 1999. This method allows you to increase the initial cost of the asset by applying an indexation factor based on the consumer price index up to 1999.
For assets held for less than twelve months and after the above-mentioned date, you must use the basic method of subtracting the initial cost from capital proceeds.
For more information about calculating your gains and losses, visit the ATO website here. The ATO also provides a worksheet for calculating your individual gains and losses, and your eventual net gain or loss.
If you make a capital loss in a year it is possible to carry your losses into future years, so you can use them to reduce your net gain in future years should you have future capital profits. Another reason it’s important to keep good records.
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