What is CGT?
When you dispose of an asset, you may make a capital gain or a capital loss. If you make a capital gain, you may have to pay capital gains tax (CGT).
For CGT to apply you need two things:
- a CGT asset
- a CGT event
A CGT asset is almost anything of value. There are over 50 different CGT events, but the most common is CGT event A1 for disposing of an asset.
What is included in a Capital Gain? Most capital gains or loss is calculated as the capital proceeds (what you get for selling or disposing of the asset) less the cost base (what you paid to acquire and maintain the asset). There are many factors that can mean special concessions or penalties apply however.
To work out your capital gain, you need to know the following:
- The extent of your ownership of the asset during the time you held it. For example, if you owned an asset as joint tenants with someone else, you include only half of the capital gain in your net capital gain.
- If there was more than one owner of an asset during the time you held it and there was a change in ownership, different CGT rules may apply.
- Deemed capital gains can arise when shares or units are transferred not at arms length, such as a gift.
- The cost base of your asset. This is what it cost you to acquire the asset and any costs associated with holding it. It includes such things as purchase costs, improvement costs and certain finance costs
- The impact of depreciation and capital works on the cost base, if any.
- Whether it was acquired before or after 20 September 1985
- any CGT exempt amount or Small Business concessions that apply when you disposal of the asset
- any other relevant information about the acquisition or disposal of your asset. This might include whether goods and services tax (GST) applied to its purchase and whether GST applies to its sale.
- Whether any special rules apply, such as the main residence exemption.
You can calculate the capital gain or loss for each asset you hold.
What is the method to calculate capital gains and losses?
The method for calculating your net capital gains for the year is very strict and often done incorrectly. For example, one little known fact is you apply your losses before applying the CGT discount.
The method is contained in section 102-5 of the Income Tax Assessment Act 1997 as:
Step 1. Calculate your total capital gains for the year and reduce it by your capital losses.
Step 2. Apply any previous year capital losses from previous income tax years.
Step 3. For any remaining capital gain, reduce the gains by 50% is eligible for the 50% CGT discount.
Step 4. Apply the small business CGT concessions, if eligible.
Step 5. The total remaining amount is a net capital gain and is included in your taxable income.
Now that we have reviewed what factors go into working our your Capital Gains Tax let’s look at some examples
You buy a house for $600,000 and sell it 18 months later for $650,000. You hold the house as your main home throughout this period You have no other relevant amounts included in its cost base. The entire $50,000 profit is included in your net capital gain and you have no capital losses. The house capital gain is eligible for the 50% CGT discount to reduce it to $25,000. You add $25,000 to your taxable income and pay tax at marginal rates, after applying any losses i.e. negative gearing.
You buy Bitcoin for $5,000 and you sell them 11 months later for $6,500. You also incurred a total of $500 of brokerage costs. The cost base of the Bitcoin is $5,500 and the capital proceeds are $6,500, so the net capital gain is $1000. You have no losses to apply and you are not eligible for the 50% CGT discount as you did not hold the asset for more than 12 months. Your capital gain of $1000 is added to your taxable income.
You have owned a rental property since 1 July 2000 Its cost base on 30 June 2014 is $300,000. You sell it on 1 July 2014 for $400,000. It cost you $5,200 in real estate agent’s fees to sell. You also have $30,000 of prior year capital losses.
The cost base is calculated as $300,000 + $5,200. The capital proceeds are $400,000. Your net capital gain is $94,800. You apply your losses to reduce it to $64,800. You held the property for more than 12 months so you can apply the 50% CGT discount to reduce it to $32,400. The $32,400 is included in your taxable income and you pay tax at marginal tax rates.