Guide: Do I Need to Pay Capital Gains Tax?
What exactly is Capital Gains Tax (CGT)? Adelaide Accountant Tony Vroulis writes about what you need to know to understand how CGT may apply to you.
According to the Australian Taxation Office, Capital Gains Tax (CGT) is the
tax you pay when you make a capital gain on the sale of an asset such as an investment
property or shares in a public company. If you own the asset personally, this
tax is included in your income tax return in the year that the CGT-applicable
When CGT Applies to You
20 September 1985 is a key date to remember. This is when the CGT regime went into effect.
If the asset you're selling was purchased before this date, then CGT does not apply.
What Constitutes a CGT Event?
There are many varied events that can be subject to Capital Gains Tax. The most frequent case is when a CGT-applicable asset is sold or given to another person.
Other events are grouped into categories such as:
- The loss of a CGT
- Compensation for
the loss of a CGT Asset
- The disposal of an
asset used for private purposes
- Forfeiting or
cancelling shares or units
- The end of
residency as an Australian taxpayer
How Your Shares Are Affected
Whether you have a share in a company or own units in a unit trust (this includes a managed fund), these assets are subject to CGT.
CGT applies when you make a capital gain in an event such as the sale of a share or unit.
Remember, just as with any other asset, CGT won't apply to your share if it was acquired before 20 September 1985.
What if the sale of your share made a profit for the sake of business, as in share trading? In this case, the profit is considered a part of your regular income as opposed to a capital gain.
So, You Need to Pay the Tax - How Much Is It?
You'll pay a different rate depending upon how long you owned the asset before parting with it. Your marginal tax rate also is factored in to the calculation of tax payable.
The marker is 12 months. If you had the CGT asset in your possession for at least 12 months, then you'll only be taxable on 50% of the capital gain. If you've owned it for less than a year and you're already selling it, then expect to pay Capital Gains Tax on the entire gain made.
If you bought a CGT asset before 21 September 1999 and owned it for at least 12 months, then a special indexation method can be used to help you calculate the CGT rate. This index will help to account for inflation over the past several years.
In the Event of Capital Loss
The good news about a capital loss is that you can deduct the loss against capital gains made in the same financial period. This lowers the amount of CGT you'd have to pay on those gains. You can also carry forward any capital losses made to future periods.
A Few Exceptions
The sale of your primary (residential) home or vehicle is exempt from being taxed on the capital gain.
The ATO website contains a detailed and comprehensive list of events and items that are exempt from CGT. Some events are actually exempt from tax, and others which might be considered capital losses must be disregarded. This means that they cannot count towards reducing your assessable income.
See this comprehensive list here.
Good Record-Keeping - Absolutely Essential!
Finding out whether or not you have Capital Gains Tax liability, how much you need to pay, and keeping in the good books with the ATO will depend upon you keeping good records.
Make sure that you hold onto paperwork connected to the assets you acquire such as:
- Purchase documents
- Maintenance and
- Valuation documents
- Receipts Records of
expenses associated with the asset, including legal fees
The timing of a CGT event varies with its nature. For example, the disposal of an asset is generally taken to have occurred at the date you enter the contract. In some cases, the event simply occurs when you transfer ownership of the asset. Keeping a record of when such an event happens will make it easier for you to calculate your tax liability and avoid overpaying.
Even if your asset was acquired before 20 September 1985, the CGT rules may still apply to some improvements that you make on the property. That's why it's so important to keep good records throughout the entire time the asset is in your possession.
How Will Capital Gains Tax Affect You This Year?
To find out more about Capital Gains Tax and how it could affect you, contact Wallace Vroulis Bond. Our team's expert advice will give you the confidence that you're reporting and paying exactly what you need to.