Capital Gains Tax
It’s those three golden words that so many people dread… Capital Gains Tax! Some of the most common questions we are asked by our clients are; when do we pay capital gains tax? Is there a capital gains tax on real estate? How much tax do you pay on capital gains? Is there capital gains tax when it comes to cryptocurrency? With so many questions and different circumstances leading to different answers, we’ve put together A Guide To Capital Gains Tax – Frequently Asked Questions (FAQs)!
The Financial Information You Need to Know: What Is Capital Gains Tax?
Capital Gains Tax is the tax that is payable on the realisation or disposal (sale) of items or assets of a certain value. For many people, this would be property, but it could apply to shares, art, and a range of other possessions if they are of a certain value. Capital Gains Tax (CGT) comes under the heading of income tax.
A person’s main place of residence – their home – is exempt from capital gains tax. However, this may not be the case if the following applies:
- Part of it is rented out for income (this doesn’t include a “granny flat arrangement”)
- It is being used for business purposes
- It is on more than two hectares of land
The Australian Taxation Office (ATO) has certain requirements for establishing a home as the main, or principal place, of residence.
Cars and motorbikes are also exempt from capital gains tax. Personal use assets – such as boats, electrical goods and household items are subject to CGT when sold if their purchase cost was greater than $10,000. Collectables such as jewellery, antiques and artwork are subject to CGT when sold if their purchase price was over $500.
The sale of shares which have been held as an investment (rather than used in a share trading business) also attract CGT.
Capital gains tax also applies to inherited items of a certain value, but it doesn’t apply to assets acquired before 20 September 1985.
Selling or disposing of assets within 12 months after purchase will mean paying the full amount of capital gains tax, however, if held for over 12 months it means that you may be eligible for a 50% discount on the amount of CGT to be paid. In this case, the tax is levied without any adjustment to the cost base for inflation, and the amount left, after applying the discount, is added to your assessable income for that financial year.
Intangible assets such as intellectual property and business goodwill may also be subject to Capital Gains Tax. The Australian Accounting Standards Board defines an intangible asset as:
an identifiable non-monetary asset without physical substance.
By definition, these assets are applicable to a business, rather than an individual situation. Valuation of intangible assets is a complex process and should be undertaken by a specialist, such as an accountant or financial advisor, like the team at Canny Group who have both teams under one roof.
Inherited assets are treated the same as acquired assets for the purpose of Capital Gainst Tax. If a house is inherited and becomes the main or principal place of residence, it will be exempt from CGT.
How Is Capital Gains Tax Calculated?
Any increase in value from the time the asset was acquired is calculated by subtracting the cost involved in acquiring and holding an asset (the cost base) from the proceeds of the sale of the asset. From this total – the gross capital gain – are subtracted any eligible capital losses from other assets. This gives you net capital gain. If you are entitled to the 50% discount, it is taken off the net capital gain and the final amount is reported in your income tax return.
While the ATO has capital gains tax calculation details and a calculator tool on its website, it is always a good idea to get advice from your financial or tax advisor to ensure that, as with all taxation matters, you are complying with current legislation and maximising your potential tax return.
When Do You Pay Capital Gains Tax?
A net capital gain forms part of your assessable income and is reported in your annual income tax return, not as a separate or additional tax. It needs to be included in your income tax assessment for the year in which it occurred. The percentage paid in capital gains tax is the same as the percentage paid on other income tax or your marginal tax rate.
Capital Gains Tax On Real Estate + Property?
As a person’s residential home is generally exempt from capital gains tax, real estate CGT is most often applied to investment properties. When a property sale involves a contract, CGT is assessed from the contract date; however if sold without a contract, CGT is assessed after the property has been transferred out of your name.
While assets acquired before 20 September 1985 are exempt from CGT, any major capital improvements made to the property after this date are considered separate assets and are subject to CGT. Additions, renovations and improvements are considered major capital improvements if their cost is both more than 5% of the amount you received when you dispose of the asset and more than the improvement threshold for the income year in which you dispose of the assets.
The ATO lists a schedule of improvement threshold amounts, which differ every year due to inflation. The 2021-22 financial year improvement threshold is $156,784. There are detailed instructions for calculating any capital gain on major improvements on the ATO website.
With property and real estate, it is important to keep accurate records for:
- Purchase and related expenses – such as the contract, payment of stamp duty, legal fees etc.
- Disposal/sale of the property and related expenses – such as the contract of sale, legal fees and sales commission
- Costs of owning the property – such as rates notices, interest and insurance paid, cost of any repairs
- Expenditure on major capital improvements
These records are required to be kept for at least five years after the sale of the asset.
Want to know more about the tax requirements when it comes to investment properties for your income tax return? We’ve got everything you need to know in this blog post: Investment Properties + Their Tax Implications.
Capital Gains Tax Cryptocurrency
No longer the new kid on the block, cryptocurrency is becoming more and more popular, and often as an investment. Cryptocurrency is not considered a personal use asset (refer to ‘What is Capital Gains Tax’ above) if it is used in a profit-making scheme or in the course of carrying out a business.
Anyone dealing with cryptocurrency needs to keep records for taxation purposes. As cryptocurrency is often complex and legislation surrounding it is fairly new, it is best to get professional advice from your financial advisor or your accountant if you wish to claim capital gains tax on cryptocurrency. In addition, dealing in foreign cryptocurrency may involve taxation implications from other countries.
Want to know more about the tax requirements for cryptocurrency when it comes to your income tax return? We’ve got everything you need to know in this blog post: Tax Returns, The ATO + Cryptocurrencies.
Capital Gains Tax Accountants Geelong Turn To For Trusted Help… Canny Group
Canny Group has been assisting the community for many years when it comes to capital gains tax, if you would like help when it comes to ‘those’ three words that everyone seems to flinch at, get in touch with our team and we will make it as easy as possible for all circumstances.