What is Capital Gains Tax?
Capital Gains Tax (CGT) is the taxes you pay the Australian Tax Office (ATO) when you sell an asset for a profit — you owe the government a percentage of the amount of capital you’ve gained. You may also hear CGT referred to as an investment tax. Conversely, when you sell an asset for a loss, that’s a capital loss—you’ve lost a portion of the capital you put into the asset. CGT is not limited to Australian assets; any gain anywhere in the world is subject to the tax come 30 June. Fortunately, you don’t have to pay taxes on lost money.
What triggers CGT?
ATO introduced the CGT in 1985. Any asset you have acquired since 1985, whether through a purchase or inheritance, is subject to CGT when you liquidate that asset. If you own any shares or funds, distributions from those assets are also liable for CGT unless you roll the distributions back into the investment.
This is all reasonably straightforward for assets acquired after 20 September 1985. If you inherited real estate, it gets more complicated. The first thing you need to know is that the deceased’s estate does not pay taxes on the property. Instead, that privilege is transferred to the grantee — you — and you’re responsible for CGT when you sell. However, some circumstances may exempt the grantee from paying CGT. The prudent course of action is to speak with your tax advisor to learn the tax implications of your inherited dwelling.
If you have inherited an investment portfolio, the rules are similar, although there is seldom an outright exemption. Regardless of when the deceased acquired the asset, the cost base to determine the CGT is the asset’s value on the date of death. Heirs can index the cost base of inherited assets, meaning that you can calculate the gain using a formula that considers inflation when determining the cost base, as long as the grantor died before 21 September 1999. You can also claim the standard CGT discount, which typically results in a lower tax burden. Your financial advisor can help you work out the best option.
CGT and property sales
If you sell a dwelling, the trigger date for CGT is when you sign the contract, not the date you close on the property. This valuation date may seriously impact your profit in a volatile real estate market. Be aware of that possibility and ask your agent to consider this potential tax hit in your negotiations. If you sell a property without a contract, the CGT date is when you close—when you no longer own the asset.
Understanding Capital Gains Tax percentage calculations
If you’ve never had to pay CGT, it’s important to understand this is not a freestanding tax like a sales tax; it is one component of your overall income tax picture. In the most basic terms, your net capital gains (the amount realised after the expenses you incurred in disposing of the asset) are taxed at your marginal tax rate. Calculating your net capital gain is more complex. Again, your financial advisor is an excellent resource to help you sort through all this.
Most Aussies hold shares, managed funds, or unit trusts, so this cheat sheet for figuring out your CGI is directed at these assets. In the simplest terms, your net gain is your total capital gains for the year, less the following:
- your total capital losses
- any unapplied carryover losses from prior years
From this number, you subtract the CGT discount and any small business concessions you can claim.
Capital loss and carryover
You have a net capital loss if you’ve lost more than you gained through trades and disposition. When you’re in the loss column, you can carry that loss forward and spread it out over several tax years. The advantage is that the loss can be used to offset future capital gains. You can only use losses to reduce your profits; they cannot be used to lower your overall income.
Other factors that impact CGT
How long you have owned the asset also determines your capital gains rate. If you’ve held an investment for more than a year and you pay taxes as an individual (not super), you may be eligible for a 50% discount on the gain. Supers get a 33.3% on capital gains in this scenario, while an SMSF pays a 15% tax rate on capital gains.
Reducing your risk of triggering Capital Gains Tax
There are tax exemption strategies you can deploy to reduce your risk of triggering a CGT event.
Rental property exemptions
For example, your primary residence is exempt from CGT, so if you have inherited a home, you can consider making that your permanent residence and turning your old home into a rental property and selling it within six years.
Retiree exemptions
There are CGT exemptions for retired business owners. If you are ready to retire and own an active business asset, you may be eligible to claim an exemption on that capital property. There’s also an exemption up to $500,000 if you’re over 55. If you’re not 55, the best way to avoid CGT is to put your proceeds into a super or another eligible retirement plan. Your financial advisor can guide you through your best options.
Convert to an SMSF
If real estate is a part of your long-term investment strategy, consider moving your super to a self-managed fund so that you can put your money into investment properties. Rule changes allowing an SMSF to borrow the funds to buy a property have made this an attractive way to grow your super in value while minimising CGT. If you wait until after you retire to sell the properties, there is no CGT, and gains may only be taxed at 33% with the discount calculation. Always consult with your financial advisor when you’re selling or trading assets to make the right decisions to lower your risk of triggering CGT.
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