Capital gains tax is something that many of us neglect to think about until it’s too late. It sounds like a pretty scary and ultra-serious tax topic, but it doesn’t need to be! The FourTwelve team is here to break down everything you need to know about capital gains tax.
What is a Capital Gain?
A capital gain occurs when you sell an asset or investment for more than you paid to acquire it. For example, if you purchased a rare painting as an investment for $20,000, and sold it for $40,000, your capital gain would be $20,000. A capital loss occurs when the asset or investment is sold or disposed of for less than it was purchased for.
What is Capital Gains Tax?
Capital gains tax is the tax you pay on that capital gain amount, though it is calculated by being added to your personal assessable income for the year, rather than paid as a separate tax.
If you incur a capital loss, you can’t include it against other income on your tax return, but you can include it to offset another capital gain.
Example: Nerida incurs a capital gain of $50,000, and a capital loss of $20,000 in the same financial year. On her tax return, she can include both, and offset the loss of $20,000 against her gain of $50,000, making her total capital gain $30,000.
Fun fact: if Nerida’s capital gain occurred in a year following her capital loss, she can carry forward the loss and offset it against the gain.
What do I pay Capital Gains Tax on?
Great question. Your personal belongings are generally exempt from capital gains tax, for example furniture in your home or your personal vehicle. All other assets acquired after 1985 are liable for capital gains tax should you incur a capital gain when you sell or dispose of the item.
What is a CGT event?
There are several different types of CGT events, and many depend on the type of asset in question and the timing around which the capital gain or loss is incurred. The ATO outlines 12 CGT event categories, but an experienced capital gains tax accountant will be able to help you best manage your capital gains.
Paying capital gains tax on real estate
Generally, real estate is subject to capital gains tax upon the sale or disposal of the asset, unless it’s your primary place of residence. The sale of rental properties are a common capital gains event for Australians, which an experienced CGT accountant will help you navigate.
Your capital gain is calculated as the difference between the amount you receive when you dispose of it, and the cost base. A capital gain on the sale of a real estate asset is calculated at the point in which you enter into the contract of sale as the vendor – not when you settle!
Fun fact: the cost base refers to the costs associated with acquiring the property, plus the administrative costs of acquiring it, i.e. stamp duty, legal fees, etc.
Paying capital gains tax on your primary place of residence
You are generally exempt from paying capital gains tax on your primary place of residence, unless you have operated a business or claimed occupancy expenses during your period of ownership.
Fun fact: working from home and deducting office expenses as an employee generally won’t impact your CGT exemption.
If you run a business from your PPR, you may be required to pay capital gains tax on a portion of the capital gain you incur upon selling the property. The same applies to properties that have both been your principal place of residence and an investment property during your period of ownership.
The 6 year rule
You can treat a property as your principal place of residence for capital gains purposes even after you move out, under the following two rules:
- If the property is used to produce income, you can continue to treat it as your PPR for up to 6 years
- If the property is not being used to treat income, you can continue to treat it as your PPR indefinitely
If you continue to nominate a residence as your PPR after you stop living in it under either circumstance, you cannot treat any other dwelling as your PPR.
PPRs across multiple family/spousal residences
Capital gains tax can be extra complicated if you and your spouse and/or dependent child(ren) live in separate dwellings.
If you live in a separate home to your dependent child(ren), you must nominate one of the properties as the PPR for both of you for the period.
If you live in a separate residence to your spouse, you can either nominate one of the homes as the principal place of residence for both of you for the period, or nominate the separate homes individually for the period. The latter may impact your CGT exemption eligibility, if you own more than 50% of the property.
Choosing the most favourable property to nominate as your PPR can be complex and may depend on a number of factors, including your ownership and the value of other assets you own. An accountant will be able to help you crunch the numbers!
Paying capital gains tax on shares
Paying capital gains tax on shares is similar to other assets, in that your capital gains event is triggered by the sale or disposal of the shares or units. The differences, however, can come up when the disposal or sale of shares is not within your control, for example mergers or administration closures.
Fun fact: only shares held as a personal investor are subject to CGT. Shares sold as part of a business of share trading are taxed as ordinary income.
Your accountant will be able to assist with capital gains tax record keeping and management of capital gains on your shares investments.
Paying capital gains tax on inheritance
A common concern for Australians is paying capital gains tax on inheritance or deceased estates when a friend or family member passes away.
What’s important to remember is that capital gains tax is not liable to be paid upon your acquisition of the asset, i.e. a property. It will only be relevant if and when you eventually sell or dispose of the asset.
If you inherit a property as part of a deceased estate, you may be eligible for a capital gains tax exemption or partial exemption. This quiz helps you work out whether your inherited property is exempt, based on a number of factors including when the previous owner died, and when the property was first purchased.
Calculating the cost base (and therefore capital gain) of an asset inherited from a deceased estate is complex, and may vary depending on when the asset was purchased. It’s important to keep detailed records of all the information you have regarding the asset during the distribution of the estate. An accountant will be able to support you in calculating your capital gain and including it in your tax return.
Got more questions about paying capital gains tax in Australia? Reach out to the team at FourTwelve accountants for support on CGT record keeping and compliance.