If you have trouble getting your head around “capital gains tax” (CGT) you are not alone. It’s a little confusing, but this article should help you understand more clearly - knowing where to start is the hardest part.
CGT is included in an individual’s assessable income and subject to tax at their marginal tax rate. There are specific rules for various “CGT events.”
The most common CGT event occurs when a person sells or disposes of real estate or shares and a profit or gain is made. There is a step-by-step system in place to help you work out the proper CGT calculation. When you break it down, it’s really quite simple.
Has there been a capital gain?
If you have sold an asset (like property) you first need to determine if there has been a capital gain. Under the tax law you can determine this by following these steps:
- Work out your capital proceeds from the disposal or sale
- Work out your “cost base” for the CGT asset (or the “reduced cost base” if a loss occurs)
- Subtract the cost base from the proceeds
If the result is a positive number (the proceeds exceeds the cost base) the difference is your capital gain. If the result is a negative number (the proceeds are less than the cost base) then you have a capital loss.
Working out the discount percentages
Current tax laws allow you to take a discount percentage against your capital gain under specific circumstances. The discount is limited to certain cgt events. In addition, the tax payer must be a resident and must have owned the CGT asset for at least 12 months.
The discounts applied to the CGT event include a:
- 50% discount if the gain is made by an individual, certain trusts or a partner in a partnership
- 33 ⅓% discount if the gain is made by a First Home Save Account (FHSA), or a life insurance company from an asset that is a “complying superannuation / FHSA” asset, or a qualifying superannuation company.
Any capital gains that are eligible for the discount are called a “discount” capital gains.
Working out your net capital gain
Each of your capital gain events must be calculated separately, then the results must be added together to figure out your net capital gain. To complete this calculation, you must:
- Reduce your capital gains for the current income year, by your current year capital losses (you have a choice to apply capital losses to either discountable or non-discountable capital gains).
- Reduce remaining capital gains by any unapplied capital losses from previous income years.
- Reduce any remaining capital gains by the applicable discount percentage. (see above)
- Apply any special business CGT concessions to which you may be eligible.
- Add up any remaining capital gains (discounted and non-discounted)
This total should be your net capital gain and is included in your assessable income.
Make sure not to confuse a capital loss with a “revenue loss”. If you have incurred a revenue loss, you may be able to deduct that from your assessable income. Certain rules apply to the loss and specific laws dictate which ones are eligible (especially for companies and trusts). If you would like additional information, need help to calculate your CGT or if you have any questions regarding eligibility, please contact this office for assistance.
Hillyer Riches Management Pty Ltd , your Caulfield accountants, is a Corporate Authorised Representative (No 466483) of Capstone Financial Planning Pty Ltd. ABN 24 093 733 969. AFSL / ACL No. 223135.This document contains general advice only and is not personal financial or investment advice. Also, changes in legislation may occur frequently. We recommend that our formal advice be obtained before acting on the basis of this information.