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The Easy Gui de For Qui ck Understandi ng Of Capi tal Gai ns Tax
Capital Gains Tax (CGT) was introduced in Australia on
20th September 1985. The tax applies only to assets
acquired on or after that date. Gains (or losses) on
earlier assets called pre-CGT assets are ignored.
CGT was introduced to reduce the inconsistency between the taxing of wealth and the taxing of
income. The CGT system works by including the assessable gain on the disposal of a CGT asset
in the assessable income of the entity disposing of it.
What i s a Capi tal Gai ns Tax (CGT)?
Put simply, Capital Gains Tax is not a separate tax; it is part of your income tax liability. CGT is
the tax you pay on the difference between the amount you sell an asset for and the amount
you paid for it.
Capital Gains Tax in the context of the Australian taxation system applies to the capital gain
made on the disposal of an asset, except for specific exemptions (e.g. the most significant
exemption is the family home).
What i s a Capi tal Gai n?
A capital gain will occur when a capital asset is sold at a higher price than it cost you. For
example:
When you sell an asset for more than what you paid for, this is referred to as a "capital gain" ,
and
If you sell an asset for less than what you paid for, this is referred to as a "capital loss"
Whether you make a capital gain or not depends on the purchase price of an asset compared
to its selling price.
A capital gain usually has a different meaning for the tax department, the economists and the
accountant.
Is a Capi tal Gai n Treated as Taxabl e Income?
Yes, Capital Gains Tax operates by having net capital gains treated as taxable income in the tax
year an asset is sold or otherwise disposed of.
It is important to note, that a Net loss in a tax year cannot be offset against any income. But,
the net loss can be carried forward to be deducted against any capital gains in future years.
What i s a Capi tal Gai n Di scount?
If the asset is held for at 1 year and you have determined the total capital gain, the CGT
discount can then be applied. The total gain on the assessable income is first discounted by:
50% for individuals taxpayers, or
The Easy Guide For Quick
Understanding Of Capital Gains
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33.3% for self-managed superannuation funds
Companies and other trusts are not entitled to a CGT discount.
What Assets are Li abl e for Capi tal Gai ns Tax?
All assets are subject to the CGT rules unless they are specifically excluded. Capital gains and
losses in a given tax year are totalled into three separate asset categories according to the class
of the asset. The three separate asset categories are:
Collectables: This category includes assets acquired for above $500.00 and used for personal
enjoyment, such as:
Boats
Furniture
Electrical equipment, etc.
Personal Use Assets: This category includes assets acquired for above $10,000 used for
personal use, such as:
Paintings
Art
Jewellery
Postage Stamps
Antiques
Coins, etc.
Al l Other Assets: This category includes assets that are not categorised as collectables or
personal assets, such as:
Land
Shares in a company
Rights and Options
Leases
Units in a Unit Trust
Goodwill
Licences
Convertible notes
Your home or unit
Foreign Currency
Contractual rights
Any major capital improvement made to certain land or pre-CGT asset
The existence of separate categories for collectables and personal use assets works to prevent
losses from them being offset against other gains, such as from investments. This works to
prevent taxpayers subsidising hobbies from their investment earnings.
What Assets are exempted from Capi tal Gai ns Tax (CGT)?
A Capital Gains Tax exemption applies to:
An asset owned outright
A partial interest in an asset, and
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To both tangible and intangible assets
The current Capital Gains Tax (CGT) exemptions are:
Any asset acquired before 20th September 1985, known as a pre-CGT asset
The house, unit, etc. which is the taxpayers main residence and up to 2 hectares of adjacent
land used for domestic purposes
Collectables acquired for up to $500.00 used for personal enjoyment
Personal use assets acquired for up to $10,000 used for personal use
Capital loss made from a personal use asset (i.e. any capital loss you make from a personal
asset is disregarded)
Car and other small motor vehicles, such as, motorcycles (small being a carrying capacity less
than 1 tonne and less than 9 passengers)
Compensation for an occupational injury, or for personal injury or illness of oneself or a
relative
Life insurance policies surrendered or sold by the original holder
Winnings or losses from gambling (which are free of income tax too)
Bonds and Notes sold at a discount (gains and losses from these come under ordinary
income tax)
Medals and decorations for bravery and valour, provided they are acquired for no cost
Shares in a pooled development fund
Payments under particular designated government schemes (e.g. various industry
restructuring schemes)
What i s a CGT Event?
A taxpayer can only make a capital gain or a capital loss if a CGT Event happens. The CGT
events include:
CGT Event A1 - The disposal of a CGT asset, which covers a change of ownership (e.g. by sale
or giving away) of assets such as:
Shares
Units in a Unit Trust
Debt Securities
Land and Buildings
Works of Art, etc.
CGT Event C2 - The cancellation, surrender or similar endings of a CGT asset, which would
cover:
The redemption of units in a Unit Trust (where the units are extinguished)
The expiry of an unexercised option, or
The redemption and cancellation of a debenture
There are approximately 50 different CGT events and most individuals will never experience
many of these events.
What happens when an Asset i s owned by more than one person?
Many assets purchased can be held in the following ownership types:
Joi nt Tenants - When an asset is owned under a "joint tenancy" arrangement. For CGT
purposes, the joint tenants are treated as tenants in common (i.e. they have equal shares in the
asset). Therefore, each party has an equal share of:
Any Capital Gain from a CGT event, or
Any Capital Loss from a CGT event.
For example, a couple that owns a rental property as joint tenants will split the capital gain or
capital loss equally when they sell the property.
Partnershi ps - When an asset is owned by partners then the partnership itself does not own
the assets. Instead, each partner owns a proportion of each CGT asset. The partners use their
proportion to work out their capital gain or capital loss from a CGT event affecting any asset.
Tenants i n Common - Individuals who own an asset as "tenants in common" may hold
unequal interests in the asset. Each owner makes a capital gain or capital loss from a CGT event
in line with their interest.
For example, a couple can own a rental property as tenants in common with:
One person having a 20% legal interest and
The other person having 80% legal interest.
When they decide to sell a rental property (or any other CGT event occurs), they will split the
resultant capital gain or capital loss between them according to their legal interest.
Why take hel p of a Fi nance Broker?
Every financial decision requires time and expertise. It is because even a small mistake can
harm you terribly. So, it is wise to seek expert advice from finance brokers. Contact a
professional broker who has a thorough knowledge of Capital Gains Tax (CGT). He/she will be
able to guide you through your options in determining what assets can be subject to Capital
Gains Tax (CGT).
So, next time you have to pay capital gains tax, do not worry. Use this informative guide and
employ the services of a finance broker to pay-off your tax liabilities quickly.
Extra Article Information
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