What is capital gains tax?
Capital gains tax explained…when an asset is sold, either as part of your business or as an individual, there is a tax element. For example, it could be real estate or shares.
As part of the sale there will be a capital gain or capital loss. That’s the difference between what you purchased the asset for and the amount it was sold. This is known as capital gains tax (CGT) or on the other side of the scale a claim for a capital loss.
The gain, or loss must be reported as part of your income tax return.
Worth remembering, it’s referred to as capital gains tax however it is actually part of your income tax and not a separate tax.
Also, the sale of an asset/s described above is known as a ‘Capital Gains Tax (CGT) event’.
According to the ATO;
When you make a capital gain, it is added to your assessable income and may significantly increase the tax you need to pay. As tax is not withheld for capital gains, you may want to work out how much tax you will owe and set aside sufficient funds to cover the relevant amount.
If you make a capital loss, you can’t claim it against your other income, but you can use it to reduce a capital gain.
What pay CGT on?
All assets acquired since September 1985 when the tax on capital gains was introduced are subject to CGT unless specifically excluded. For example;
- most personal assets are exempt from CGT, including your home, car, and personal use assets such as furniture.
- CGT also doesn’t apply to depreciate assets used solely for taxable purposes, i.e. business equipment or fittings in a rental property.
When pay capital gains tax?
The point at which a capital gain or loss occurs is when an asset contract is entered into, to sell the item.
Firstly, it is worth noting the capital gain tax must be reported at the time of the contract not when the contract was settled.
Secondly, Australian residents are required to pay CGT on assets anywhere in the world.
Thirdly, foreign residents are also expected to report a capital gain or loss on an asset that is ‘taxable Australian property’.
For more information about this contact the friendly CVW Accounting team.
How much CGT do I pay?
The CGT amount for payment will depend on;
- the length of ownership of the asset
- your marginal tax rate
- any other capital losses
How long the asset has been held is important. For example if you have owned shares for more than 12 months you typically get a discount on your CGT.
Taking your marginal tax rate into account, your capital gain will be added to your assessable income in your annual tax return.
CVW Accounting can assist with these intricacies. Touch base today – we are happy to help.