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Capital Gains Tax (CGT)

A tax on profits made from selling assets such as property or shares, part of your income tax.

Sections

What is Capital Gains Tax (CGT)?

Capital Gains Tax (CGT) in Australia is a tax on the profit (capital gain) made from the sale or disposal of certain assets. It is not a separate tax but part of your income tax, and any capital gain is added to your assessable income for the financial year in which the asset was sold.

CGT applies to individuals, companies, trusts, and superannuation funds, but the rules and rates differ depending on the entity.

National Regulations

  1. Assets Subject to CGT: CGT applies to most assets acquired after 20 September 1985 (when CGT was introduced). Common examples include:

    • Real estate (e.g., investment properties, holiday homes)
    • Shares and managed funds
    • Cryptocurrency
    • Collectibles (if acquired for more than $500)
    • Business assets

    Exempt Assets:

    • Your primary residence (main home exemption, with conditions)
    • Personal use assets (e.g., cars, furniture)
    • Assets acquired before 20 September 1985 (pre-CGT assets)
    • Compensation or insurance payouts for personal injury

  2. Capital Gain vs. Capital Loss:

    • A capital gain occurs when the sale price of an asset exceeds its cost base (purchase price plus associated costs).
    • A capital loss occurs when the sale price is less than the cost base. Capital losses can be used to offset capital gains but cannot reduce other taxable income. Unused losses can be carried forward to future years.

  3. CGT Discount:

    • Individuals and trusts may be eligible for a 50% discount on the capital gain if the asset was held for at least 12 months before disposal.
    • Superannuation funds are eligible for a 33.33% discount.
    • Companies are not eligible for the CGT discount.

  4. Foreign Residents:

    • Foreign residents are subject to CGT only on taxable Australian property, such as real estate or business assets in Australia.
    • Foreign residents are not eligible for the CGT discount unless they meet specific conditions (e.g., they were an Australian resident for part of the ownership period).

  5. Main Residence Exemption:

    • If the asset is your primary home, it is generally exempt from CGT. However, partial exemptions may apply if:
      • The property was rented out for a period.
      • The property was used for business purposes.
    • Foreign residents are not eligible for the main residence exemption (since 2019).

Standard Procedures

  1. Determine the Cost Base: The cost base includes:

    • Purchase price of the asset
    • Incidental costs (e.g., legal fees, stamp duty, agent fees)
    • Improvement costs (e.g., renovations)
    • Ownership costs (e.g., interest on loans, maintenance, rates) if not already claimed as a tax deduction.

  2. Calculate the Capital Gain or Loss:

    • Capital Gain = Sale Price - Cost Base
    • If eligible, apply the CGT discount to reduce the gain.

  3. Report the Capital Gain/Loss:

    • Capital gains and losses must be reported in your annual tax return.
    • Use the CGT schedule in your tax return if you have multiple CGT events.

  4. Pay the Tax:

    • The capital gain is added to your assessable income and taxed at your marginal tax rate (for individuals).
    • For companies, the gain is taxed at the corporate tax rate (currently 30% or 25% for base rate entities).

Associated Costs

  1. Taxable Amount:

    • The amount of CGT payable depends on your marginal tax rate and whether you qualify for the CGT discount.
    • Example: If your marginal tax rate is 32.5% and you qualify for the 50% discount, the effective tax rate on the capital gain is 16.25%.

  2. Professional Fees:

    • Accountants/Tax Agents: Fees for preparing your tax return and calculating CGT can range from $300 to $1,000+, depending on complexity.
    • Legal Fees: If legal advice is required (e.g., for property sales), costs can vary widely.

  3. Record-Keeping:

    • You must keep records of all transactions, including purchase and sale documents, receipts for expenses, and valuations. Failure to maintain records can result in penalties or difficulty calculating CGT.

Country-Specific Considerations

  1. Timing of CGT Events:

    • CGT is triggered when a CGT event occurs, such as selling an asset, gifting it, or transferring it. The date of the event is usually the contract date, not the settlement date.

  2. Small Business CGT Concessions:

    • Small business owners may qualify for additional CGT concessions, such as:
      • 15-Year Exemption: No CGT if the business asset was held for 15+ years and you are retiring.
      • 50% Active Asset Reduction: A further 50% reduction on the capital gain.
      • Retirement Exemption: Exempt up to $500,000 of capital gains if the proceeds are used for retirement.
      • Rollover Relief: Defer CGT by reinvesting the proceeds into a new business asset.

  3. Inheritance and CGT:

    • Inherited assets are generally not subject to CGT at the time of inheritance.
    • If the inherited asset is later sold, CGT may apply based on the original acquisition date and cost base of the deceased.

  4. Cryptocurrency and CGT:

    • Cryptocurrency transactions (e.g., selling, trading, or gifting) are subject to CGT.
    • Each transaction is treated as a separate CGT event, and accurate record-keeping is essential.

  5. Non-Residents and CGT:

    • Non-residents are taxed only on Australian-sourced capital gains.
    • If a non-resident sells Australian real estate worth $750,000 or more, the buyer must withhold 12.5% of the sale price and remit it to the Australian Taxation Office (ATO) unless a clearance certificate is provided.

Practical Tips

  1. Plan Ahead:

    • Consider the timing of asset sales to minimize CGT (e.g., selling in a year with lower income).
    • Use capital losses to offset gains.

  2. Seek Professional Advice:

    • Consult a tax agent or accountant, especially for complex transactions or if you are eligible for concessions.

  3. Keep Detailed Records:

    • Maintain records for at least 5 years after the sale of an asset.

  4. Use ATO Tools:

    • The ATO provides online calculators and resources to help you estimate CGT.

Conclusion

Capital Gains Tax (CGT) in Australia is a significant consideration when selling assets, and understanding the rules can help you minimize your tax liability. By keeping accurate records, taking advantage of available exemptions and discounts, and seeking professional advice, you can navigate CGT effectively. Always ensure compliance with ATO regulations and report all CGT events in your tax return.

If you have specific circumstances or need further clarification, feel free to ask!