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What is capital gains tax?
taxes

What is capital gains tax?

A capital gain is the difference between what you pay for an asset and what you sell it for. When you sell something for less than you paid for it is a capital loss. Capital gains taxes take incidental costs into account, so if your selling price is over what you paid, it's a capital gain. 

Capital gains tax rates apply to gains you make when you sell an asset. There are specific exemptions to capital gains taxes, such as a family residence exemption. The most important aspect of calculating CGT rates and paying the correct amount on your tax return is organisation. 

How To Calculate Capital Gain Tax 

How does one go about calculating capital gains tax in Australia? There are several ways to calculate capital gains tax percentages. 

Capital Gains Tax Discount

You will need to pay the full capital gain if you sell/dispose of the asset within 12 months of purchase. However, it is possible to leverage a 50% discount on the capital gain for tax assets you held for more than 12 months before selling. 

Indexation

For assets acquired prior to 21 September 1999 and held for twelve months, you can choose indexation. This is an alternative to a discount. This method uses a multiplier to account for inflation on your asset's cost base. If you have carried capital losses forward from assets you held before 1999, then you can opt for the indexation method. 

Capital Loss

If you have any capital losses, then you can deduct these losses from your gains to reduce the amount of capital gains tax you owe. You can carry your capital losses into other financial years if you don't have capital gains for that year. It is handy to have further down the line even if it isn't useful for the current year. It's a legal way to essentially avoid capital gains tax by offsetting it against your losses.

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When To Pay & When Not To Pay 

So, how do you pay capital gains tax and when? Though it may sound like it is a separate tax, capital gains are part of your taxable income. When you file your income tax assessment at the end of the financial year, if you have net capital gains then you will need to pay your capital gains tax. 

When shouldn't you pay capital gains tax? When you have a net capital loss. The net capital loss cannot offset taxes on other income, however, and if you want to carry it forward it can only be used to offset capital gains in future financial years. 

There are events and assets which are exempt from CGT. You can find a full list of exemptions on the ATO's website, but it includes selling assets you acquired before CGT was created in September of 1985 or selling your personal car. You don't need to pay capital gains on a property if it is your principal residence. But if you sell real estate, such as rental properties, you will be due to pay capital gains tax. 

So, there is no capital gains tax on a primary residence. But there is capital gains tax on property you hold outside your principal residence. Business premises, rental properties, vacant land, holiday homes, etc. are all taxable Australian real property. 

How do you calculate how much CGT you will pay? It's simple. When you sell an asset, just subtract the selling price from the original purchase cost. The remainder is your gain or loss. The original purchase cost includes legal fees and stamp duties. 

How To Calculate Capital Gains Tax 

  • Calculate what you received for your asset
  • Calculate the cost of your asset
  • Subtract the cost of the asset from what you received from the asset
  • Repeat the steps above for each capital gains tax event you trigger in the financial year
  • You can subtract your capital losses from the capital gains
  • If the remainder is more than 0, you can apply for a 50% discount if you have had assets for over a year
  • If the remainder is less than zero, simply report the net gain or loss on your tax return

Example

Robert purchased $5,000 worth of shares and sold them for a profit of $500 after 8 months. He has no capital losses, and no capital gains, so he would declare the $500 capital gain on his tax return. He will be taxed on this gain at his individual tax rate. The following year, Robert purchased a plot of land. He sold it after 14 months of ownership for a profit of $10,000. He had no other capital gains and no capital losses. Robert can apply the 50% discount so he would declare $5,000 of capital gains in his return. The year rule provides a 50% discount for those who hold onto assets for longer than a year.

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