Capital Gains Tax (CGT) might not be the first thing on your mind when selling an asset, but it can significantly impact your profits. So, what is capital gains tax in Australia?
In Australia, CGT is a tax on the profit you make when you sell an asset—such as property, shares or a business—for more than you paid for it. It forms part of your income tax and applies to both individuals and businesses. Understanding how CGT works is crucial for managing your tax obligations effectively and making informed financial decisions.
In this article, we’ll explain what capital gains tax is, how it applies to different asset types and strategies to minimise your CGT liability.
A Quick Overview: What is Capital Gains Tax in Australia?
CGT is a tax on the profit you earn when you sell an asset, like property, shares or a business, for more than its purchase price.It is calculated based on the profit made from selling a taxable asset. Key points include:
- Taxable Assets: These include property, shares and collectables exceeding $500 in value.
- Exemptions: Main residence and personal use items are generally exempt.
- How It’s Calculated: Profit is added to your taxable income and taxed at your marginal rate.
- Discounts: Individuals and certain trusts may qualify for a 50% CGT discount if the asset is held for more than 12 months.
How Does Capital Gains Tax Work?
Knowing how CGT works is key to managing your finances. Here’s a simple breakdown of how CGT applies:
1. What Assets Are Taxable?
CGT applies to most assets, including:
- Real Estate: Investment properties and vacant land.
- Shares: Profits from selling shares or units in a managed fund.
- Collectibles: Items like art or jewellery valued over $500.
- Business Assets: Includes goodwill and intellectual property.
2. What Assets Are Exempt?
Some assets are exempt from CGT, including:
- Your primary place of residence (main residence exemption).
- Personal use assets under $10,000 (e.g., cars, boats).
- Assets acquired before 20 September 1985 (pre-CGT assets).
3. How is CGT Calculated?
CGT is calculated as follows:
- Determine your capital gain: Subtract the asset’s cost base (purchase price plus associated expenses) from the sale price.
- Add the capital gain to your taxable income.
- Apply your marginal tax rate to the total taxable income.
For example: If you sell an investment property for $800,000 and its cost base is $600,000, your capital gain is $200,000. If you’re eligible for a 50% discount, the taxable gain is reduced to $100,000.
Who Pays Capital Gains Tax in Australia?
CGT doesn’t just apply to big investors. It can affect anyone who sells certain assets. Below are the groups that typically pay this tax:
- Individuals: Residents pay CGT on worldwide assets, while non-residents pay CGT only on Australian taxable property.
- Companies: Pay CGT at the corporate tax rate, with no eligibility for discounts.
- Trusts: CGT is passed through to beneficiaries.
- Superannuation Funds: Pay a reduced CGT rate of 15% on gains.
Strategies to Minimise Capital Gains Tax
There are ways to reduce the amount of CGT you owe, and smart planning can make a big difference. Some common strategies to help minimise your tax liability are:
1. Use the Main Residence Exemption
If you sell your primary place of residence, you can claim the main residence exemption, avoiding CGT on the property.
2. Hold Assets for Over 12 Months
Individuals and trusts can reduce their taxable gain by 50% if they hold the asset for more than 12 months before selling.
3. Offset Capital Losses
Capital losses from other asset sales can be used to offset capital gains, reducing your overall tax liability.
4. Timing of Sales
Strategically timing your asset sales to fall in a financial year with lower taxable income can reduce the CGT payable.
5. Contribute to Superannuation
You can use some of the proceeds from selling an asset to make tax-deductible superannuation contributions, which may reduce your taxable income.
Common Scenarios Involving CGT
CGT can apply in a variety of situations, from selling property to selling shares. Below are some common situations where CGT comes into play:
Selling an Investment Property
When selling an investment property, CGT is based on the difference between the sale price and the cost base, which includes purchase price, stamp duty, legal fees and capital improvement costs.
Inheriting Property
Inherited property may be subject to CGT if sold. The cost base depends on whether the deceased acquired the property before or after 20 September 1985.
Selling Shares
Shareholders must calculate CGT on the sale of shares, considering brokerage fees as part of the cost base.
Common Questions About Capital Gains Tax
1. Is CGT Payable When Transferring Assets to Family?
Yes, CGT may apply unless exemptions (such as spousal transfers) are available.
2. Are Gifts Subject to CGT?
Yes, gifting an asset is treated as a sale at market value for CGT purposes.
3. Can I Defer CGT?
In certain cases, such as rollovers for small business owners, CGT can be deferred.
Get Expert Guidance on Capital Gains Tax with Rotstein Commercial Lawyers
Capital gains tax in Australia can be challenging, but expert legal advice can guide you through it. At Rotstein Commercial Lawyers, we offer tailored guidance to help you manage your CGT obligations and minimise your liability. Whether you’re selling an investment property or planning your estate, we’re here to assist.
For expert advice on CGT, call us on +61 3 9604 7888 or visit our Contact Us page to schedule a consultation. Let us help you navigate the complexities of capital gains tax and achieve the best outcomes for your financial situation.
Final Thoughts
Capital gains tax (CGT) in Australia plays a vital role in managing your financial obligations. Knowing which assets are taxable, how CGT is calculated and strategies to minimise your liability allows you to make informed decisions and safeguard your financial interests.
Contact Rotstein Commercial Lawyers today for expert assistance in navigating CGT and other legal matters.
