Capital gains tax explained
Running a business is challenging enough without having to navigate the ins and outs of Capital Gains Tax (CGT). While it can be confusing to calculate, with some knowledge of the basic principles and a methodical approach to record keeping you can determine whether you have a capital gain or loss for tax purposes.
What is a capital gain or loss?
When you sell an asset like business equipment, shares or even your warehouse, you dispose of a capital asset. If the amount you sell the asset for is more than the amount you paid for it, you may have to pay Capital Gains Tax on the difference.
Many assets can attract Capital Gains Tax, including:
- Property or land
- Business equipment
- Intangible assets like goodwill or contractual rights
- Shares, units in a trust or investment fund
- Changes to your business structure
What’s not caught by Capital Gains Tax?
There are several items that don’t attract Capital Gains Tax. These include:
- Any asset acquired before 20 September 1985 (when the CGT rules came in)
- An asset already caught under another tax law, like trading stock or assets you’ve depreciated
- Your home, unless it has been used as your principal place of business. In this circumstance, you may need to speak to your financial advisor to determine whether your property is subject to CGT
How do you calculate capital gains tax?
There are three ways you can calculate a capital gain or loss:
1. Capital gains tax indexation
This method allows you to inflate the amount you purchased your asset for (called the cost base) to take into account the impact of inflation. This is only available if your asset was acquired before 11.45am on 21 September 1999:
- Calculate your cost base by adding what you paid for the asset (or its market value at the time you obtained it) and include any other purchase costs like stamp duty
- Then increase your cost base by the Australian Tax Office’s (ATO) CPO rates for each year you held the asset
- Subtract the inflated cost base from the amount you received for the asset – this is your gross capital gain or loss
- If you have a capital gain, subtract any capital losses you’ve carried forward from previous years – this gives you the capital gain or loss to include in your tax return
2. Capital gains tax discount
This method is available to individuals and superannuation funds but not companies:
- Add together what you paid for the asset (or its market value at the time you obtained it) and include any other purchase costs like stamp duty to calculate your cost base
- Subtract your cost base from the amount you received for the asset – this is your gross capital gain or loss
- If you have a capital gain, subtract any capital losses you’ve carried forward from previous years
- If you’re an individual simply divide this amount by two, and if you’re a superannuation fund divide it by three, to calculate the capital gain or loss to include in your tax return
This method is only available if you’ve held the asset for under 12 months. To calculate your capital gain or loss, simply subtract what you paid for the asset from what you received for it.
How do you decide which method is best for you?
If you’ve held your asset for more than 12 months, it was purchased before 11.45am on 21 September 1999 and you’re not a company, then you can calculate your capital gain or loss using either the indexation or discount method, depending on which method gives you the best result. Alternatively, the ATO has a CGT question-and-answer process that helps you choose the best method.
Is capital gains tax a separate tax?
No, Capital Gains Tax is not a separate tax. If you have a capital gain, that amount is included in your (or your business’s) income tax return. This means you will be taxed on the capital gain at your marginal tax rate or at your company’s tax rate. However, if you have a capital loss, you can only offset it against future capital gains and not against other income.
How can you expedite CGT calculations?
The simplest way to take the pain out of CGT calculations is to keep good records. This means holding on to documents like contracts, receipts and keeping your expense records up to date. Accounting software such as QuickBooks Online can store these records in one place – easy to access and a cheaper way to manage your tax compliance.
With this handy guide, you can take the confusion out of calculating your capital gains or losses this year. After all, managing your tax affairs shouldn’t take you away from running your business.
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