Understanding Capital Gains Tax (CGT)
Capital gains tax (CGT) is a tax imposed on the gains you make when selling certain assets in Australia. In simpler terms, if you buy an asset for a lower price and sell it for a higher price, the difference (capital gain) is subject to CGT in your annual income tax return. There is no separate tax on capital gains, it is a component of your income tax. You are taxed on your net capital gain at your marginal tax rate.
Calculating your Capital Gains Tax
When you sell an asset for more than you paid for it, you make a capital gain. This gain is the difference between the purchase price (cost base) and the selling price. CGT is then calculated on this gain, not on the total amount received from the sale.
- Start with your total capital gains: This includes profits from selling assets such as land, property (excluding your main residence), goodwill, or shares.
- Subtract any capital losses: If you sold assets at a loss, you could deduct those amounts from your capital gains.
- Factor in the CGT discount (if applicable): Individuals generally receive a 50% discount on capital gains held for more than 12 months, reducing the taxable amount.
- Apply relevant concessions (if eligible): Specific situations might qualify for additional reductions in your CGT liability.
- The remaining amount is your net capital gain: This is the portion that gets added to your assessable income for tax purposes.
How Capital Gain Tax Relates to Businesses
For businesses, CGT applies when they sell or dispose of certain assets, such as land, buildings, goodwill, or shares, less any relevant CGT discount or concessions that they may be eligible for.
Common CGT assets are land, shares in a company and contractual rights. All CGT assets are subject to the CGT rules unless they’re specifically excluded. If a business is registered for GST this may lead to a GST liability.
There rules surrounding CGT assets that are jointly owned can be intricate and seeking professional advice is crucial on matters such as this.
Small Business Capital Gain Tax Concessions
If a business satisfies basic conditions, it can use one of the following options:
- Fifteen Year Exemption: If a business owner has owned an active asset for at least 15 years and is over the age of 55, retiring, or permanently debilitated they may be eligible for a full exemption from CGT when they sell the asset.
- Small Business 50% Active Asset Reduction: Allows eligible small businesses to reduce the capital gain on the sale of an active asset by 50%, provided specific conditions are met.
- Retirement Exemption: If a business owner is under the age of 55 and is retiring, they may be eligible for a retirement exemption of up to $500,000 over their lifetime. Note, the sum that is free from CGT needs to be placed into a superannuation or retirement fund.
- Rollover: You may be eligible to defer paying CGT on a capital gain to another year when you dispose of an asset. This postpones the tax liability until a later date.
- Small Business Restructure : From the 01 July 2016, small businesses can defer paying CGT when they sell an active asset and use the proceeds to purchase another active asset.
Australian residents note: CGT applies to both domestic and overseas assets. This means any profits you make from selling assets you own internationally are subject to CGT in Australia.
Understanding Capital Gains Tax for Foreign Residents in Australia
Owning assets in Australia as a foreign resident comes with specific tax implications, particularly regarding CGT. It is important to understand the implications and application of CGT in relation to tax residency status, as well as how any changes to your tax residency may affect
CGT liability and eligibility for any exemptions or concessions. Our article Understanding Capital Gains Tax (CGT) for Foreign Residents highlights the main points to be aware of when it comes to CGT and tax residency and looks particularly at CGT considerations for foreign residents in Australia.
Understanding Capital Gains Tax when dealing with Divorce or Separation
Divorce or separation can involve complex financial considerations, CGT implications. Transferring assets between separating spouses generally doesn’t trigger a CGT event. This means there’s no immediate capital gain or tax liability. In Capital Gains Tax: Divorce & Separation we discuss how property might be handled, and possible CGT implications in the event of divorce or separation, as well as the criteria and application of the CGT Marriage or Relationship Breakdown Rollover.
Understanding Capital Gains Tax on Inherited Property
If you inherit a dwelling, there are usually no CGT implications at the time you inherit it. However, it is important to know that CGT may apply when you subsequently sell, or otherwise dispose of the dwelling.
Read Do I Pay Capital Gains Tax on Inherited Property? where we take you through the key things to understand when it comes to capital gains tax on inherited property.
Seek Expert Advice
Capital Gains Tax in Australia can be complex, especially for businesses. Understanding the rules and concessions available can help business owners manage their tax obligations and maximise their after-tax returns when selling assets. Consulting with a tax professional is recommended to ensure compliance with CGT laws and to take advantage of any available concessions.
With extensive experience across a diverse range of complex capital gains tax matters, the Quinn Group are the trusted CGT specialists in Sydney. To arrange an appointment, contact us online or call 1300 QUINNS (1300 784 667), + 61 2 9223 9166.
