Capital gains tax (CGT) is a term you’ll often hear as tax time draws near. When you sell an asset, it can be all too easy to forget about the tax implications related to your sale.
However, selling assets, like shares and investment properties, can involve capital gains tax. Here’s what you should know.
Capital gains tax is the tax you pay on profits from selling assets, such as property.
Capital gains taxes are due only after an investment is sold.
You report capital gains and capital losses in your income tax return and pay tax on your capital gains. Although it is referred to as ‘capital gains tax’ it is part of your income tax. It is not a separate tax.
If you have a capital gain, it will increase the tax you need to pay.
Basically, if you buy shares, property or other assets for one price and sell them for another price, the difference between the amounts is your capital gain or capital loss. If you receive more for your assets than you paid for them, you’ll have made a capital gain and you may need to pay capital gains tax on it. It is owed for the tax year during which the investment is sold.
How much capital gains tax will you pay?
The amount of capital gains tax you’ll pay depends on factors including how long you’ve owned the asset, what your marginal tax rate is, and whether you’ve also made any capital losses. Your marginal tax rate is important because your capital gain will be added to your assessable income in your tax return for that financial year.
There is a capital gains tax discount of 50% for Australian individuals who own an asset for 12 months or more. This means you pay tax on only half the net capital gain on that asset.
If you own the investment for one year or less, short-term capital gains tax applies. The short-term rate is determined by the taxpayer’s ordinary income bracket. For all but the highest-paid taxpayers, that is a higher tax rate than the capital gains rate.
Case Study 1: Susan
Susan buys some shares for $6,000.
She owns the shares for 6 months and sells them for $6,600. She has no other capital gains or losses.
Susan declares a capital gain of $600 in her tax return. She will pay tax on this gain at her individual income tax rate.
Case Study 2: Ben
Ben, an Australian resident, buys a block of land. He owns it for 18 months and sells it, making a profit of $10,000. He has no capital losses.
Ben is entitled to the 50% capital gains tax discount for the land. He will declare a capital gain of $5,000 in his tax return.
Case Study 3: Stephen
Stephen bought $2,000 worth of shares (50 shares at $40 per share) in a technology company.
After 18 months he sold the shares. They had fallen in price to $20 per share. He made a capital loss of $1,000.
Stephen also made a profit of $1,500 from selling other shares he held. He had held these shares for five years.
Stephen can deduct the $1,000 he made a loss on from the $1,500 capital gain. This leaves him with a profit of $500. As Stephen held the shares from more than 12-months, he only included half the capital gain in his tax return. He’ll pay tax on this $250 at his marginal tax rate.
How much capital gains tax will you pay?
What happens if I make a capital loss?
You’d make a capital loss on your assets if you sold them for less than you paid for them.
If you make a capital loss, you can use it to reduce a capital gain in the same financial year.
If your capital losses are greater than your capital gains, or if you make a capital loss in a financial year in which you don’t make a capital gain, you can generally carry the capital loss forward and deduct it against any capital gains you make in future years.
Are there any exceptions?
There are always exceptions of course. And with capital gains tax the principal exception is if the gain is also assessable under another part of the tax law, for example, if it qualifies as ordinary income. In this situation, the capital gains tax rules take last place. As prime examples, sales of depreciating assets and trading stock are not taxed under the capital gains tax rules because they have their own tax regimes.
Another common exception relates to the disposal of your family home. Provided the house you’re selling is your main residence – basically the house you live in on a daily basis – no capital gains tax will arise when it’s sold.
Find out more about capital gains tax transactions, assets and exceptions at the ATO website.
Important information and disclaimer
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