Capital Gains Tax (CGT) may be incurred when you dispose of certain assets for a profit. Importantly, CGT only arises when you actually dispose of an asset. If you do not dispose of an asset, CGT does not apply, no matter how much it has grown in value.
What does disposing of an asset mean?
You do not need to sell an asset to be subject to CGT. Gifting an asset, or selling it for less than its true market value will trigger CGT. All calculations will be done on the basis as if you sold the asset for its true market value.
What assets are subject to CGT?
Most assets are subject to CGT. These include shares, investment properties and unit trust investments.
However, certain assets are not subject to CGT and these include:
• your main residence
• generally, any assets purchased before 20 September 1985
• motor vehicles (including antique cars)
• superannuation investments
How is a capital gain on an asset calculated?
There are three methods used to determine the amount of capital gains that you must include in your assessable income. Depending on when you acquired the asset, you may have a choice in which method you use. The method that results in the lowest assessable capital gain is the one you should use for tax purposes.
1. 50% discount method
This method is available to all assets held for more than one year. The assessable capital gain to be included in your tax return is determined by deducting the acquisition cost from the sale price. The cost of acquiring the asset takes into account any acquisition costs such as brokerage, stamp duty and other expenses. The sale price of the asset is calculated after deducting selling costs, such as commissions and brokerages.
2. Indexation method
This method is only available for assets acquired before 21 September 1999. Under this method the acquisition cost of the asset is deducted from the sale price, however an adjustment is made for the effects of inflation. This means that the capital gain is reduced.
3. Assets held for less than 12 months
If you acquire an asset and subsequently dispose of it within 12 months, you are unable to use either method to adjust your assessable capital gain. The full profit, after taking into account acquisition and selling costs, is assessable and included in your tax return in the year of disposal.
How much tax will you pay on your capital gain?
The amount of CGT that you pay depends on your marginal tax rate. Therefore, there can be an advantage in deferring the sale of an asset to a year when your income and marginal tax rate will be lower (eg. retirement). For some people, this may mean that no CGT is payable.
What if you suffer a capital loss?
If you dispose of an asset that results in a capital loss, that loss can be used to offset any capital gains you have made in the same financial year. If you have no capital gains, the capital loss can be carried forward to subsequent financial years until you have a capital gain. Capital losses cannot be used to directly reduce your assessable income. The actual process to offset capital losses against capital gains is quite complex and your financial planner can assist you.
The need to keep records
For tax purposes, it is very important to keep accurate and up-to-date records in relation to the acquisition and disposal of assets. This includes the date of acquisition, costs associated with acquiring the asset, capital expenses incurred in maintaining the asset as well as disposal details. This will help ensure that you pay the correct CGT.
Unit trust investments
If you hold units in a unit trust, you have to declare some capital gains in your tax return even though you have not sold any of your investment. This is because the fund manager sells assets and distributes the resulting capital gains to unit holders. Details of the capital gains you must declare in your tax return will be provided to you.
What can you do to manage CGT?
CGT is a highly complex area. Your financial planner can help you assess your CGT position and suggest strategies that may minimise the impact on your tax position.