As a family trust or even an individual, you don’t just pay taxes on your income from salaries and wages. You will also be liable to certain taxes if you dispose of an asset. The tax levied on the proceeds of the sale of certain types of assets is called the Capital Gains Tax (CGT).
The capital gains tax was introduced in Australia in 1985 and is applicable to any asset that has been acquired since. If you purchased an asset before 1985, you will not be subject to a CGT when you sell that asset.
It doesn’t always have to be a gain. The capital gain or the capital loss refers to the difference in value between what the asset cost when you acquired it and what it is worth when you dispose of it. However, you will only pay taxes on your capital gains. Since it is an income, the tax will be part of your income tax even though it has a different name. The capital gains in a given tax year must be included in your annual income tax returns.
What you will need to include are the net capital gains. The net capital gains refer to the total capital gains minus the total capital losses in a financial year as well as other unapplied net capital losses from your previous income years. If there any other CGT concessions and discounts that you may be entitled to, you will also need to deduct them from the net capital gains for the year.
What if you have net capital losses?
In the event that you are left with net capital losses after disposing of your assets, you need to carry the net capital loss forward to your later income years where you can subsequently deduct it from your net capital gains when computing your income tax.
However, the capital losses or net capital losses cannot be deducted from your taxable income for a financial year. The Australian Taxation Office does not impose any time limit over which the net capital losses or capital losses can be carried forward to a subsequent income year. So as long as you are incurring these losses, you can keep carrying them forward indefinitely.
Capital Losses on Personal Use Assets and Collectables
There are some exemptions when it comes to capital losses. According to the ATO, you cannot make a capital loss on personal use assets or collectables such as paintings, jewellery, coins or medallions, antiques, postage stamps and rare folios among others. The capital loss on your collectables can only be used in reducing the capital gains on the collectables. There are instances where you can disregard the capital gains or capital losses made from the sale of collectables. For more information on these, check out the ATO guidelines on capital gains for collectables.
Which are the Capital Gains Assets?
Capital gains assets are any type of asset owned by an individual. The most common include the following:-
- Stock options
- Buildings (property or real estate investments)
- Any debts owed from the Australian Taxation Office
- The units in a unit trust
- Company shares
- Foreign currency
- Any rights that are enforceable under a contract
When Does a Capital Gains Tax (CGT) Apply?
The capital gains tax applies to any gains or losses that are incurred by a person when a CGT event occurs. A CGT event is defined by the Australian Taxation Office as any transaction that involves the disposal of a CGT asset. This is often through the sale of the asset.
When Does a Capital Gains Tax not Apply?
You should be aware of the exceptions to what constitutes a Capital Gains Asset. For example, the disposal of your main residence will be exempt from a capital gains tax. The main residence refers to the address where you live most of the time.
Any loss or gain from an asset that was acquired before the year 1985 is also exempted from the capital gains tax (CGT).
There are various other capital gains exceptions that you should factor in. These include the following:-
- A personal use asset that is sold for less than $10,000.
- Any collectable item costing less than $500
- Cars, motorcycles etc. However, the sale of these assets may still be subject to a territory or state stamp duty.
- Sale of decorations that you have been awarded for bravery or valour.
- Any piece of property that was the taxpayer’s main residence.
- Compensations that you have received for injuries.
Complying with Capital Gains Tax Requirements
When you purchase any Capital Gains Asset, it is advisable to keep all the records of the transactions, expenses and any repairs done on the asset. You will need this information in computing your capital gains or capital losses when the asset is sold down the line.
Computing your capital gains taxes often involve very complex requirements. You need a detailed compilation on the transaction history of the asset that you will use to calculate your capital gains or losses. To avoid complications in the process of computing your CGT, it is always advisable to seek the assistance of a professional accountant Melbourne practice.