Capital Gains Tax (CGT) is the tax you pay on any capital gain you make in the financial information that you include 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.
How does Capital Gains Tax work?
Your net capital gain is the difference between your total capital gains for the year and your total capital losses (from your business and other personal assets), less any relevant CGT discount or concessions that you may be eligible for. Any net capital gain you make for an income year must be included in your assessable income.
Four Capital Gains Tax concessions that relate to small businesses are:
- Fifteen year exemption – if the business has possessed an asset for at least 15 years, and the owner is planning to retire, and is over the age of 55 or permanently debilitated, no CG will be acknowledged when the asset is sold.
- Roll over – you are able to defer a CG of an asset sold to another year; CG is recognised when something happens that results in a CGT event occurring that involves the asset in question. Once this happens, either some or all of the CG you rolled over is now able to be assessed.
- Retirement exemption – the CG (up to a limit of $500000 over the course of your lifetime) when you sell a business is exempt from CGT. Note that if you are under the age of 55 when you sell the business, the sum that is free from CGT needs to be instead placed into a superannuation or retirement fund.
- 50 % active asset reduction – you are allowed to lessen the CG on an asset of the business by 50%.
Besides the obvious CGT assets such as land and buildings, there are other CGT assets that are not so well known. These include things such as: options and goodwill. There are NO assets that are excluded from CGT rules except if they’re specifically not included.
CGT assets can be either: Personal use assets, collectables or other assets.
There are certain rules that are especially for CGT assets which are jointly owned, and it is advised that you seek advice when it comes to more intricate CGT matters such as this.
A CGT event is a transaction regarding a CGT asset or direct acquisition of capital that leads to either a loss or gain. The sort of CGT event that occurs is pivotal to the way in which you determine the capital gain/loss, and to what period you attribute it to.
CGT events are very common, and mainly involve discarding an asset; if a business is registered for GST this may lead to a GST liability.
It is very important to know that if you own assets overseas, they too are subject to CGT here in Australia.
The Quinn Group are capital gains tax specialists located in Sydney. To arrange an appointment, contact us online or call 02 9223 9166.