What is capital gains tax?
A capital gain or loss is the difference between what you paid for an asset and what you sold it for. This takes into account any incidental costs on the purchase and sale. So, if you sell an asset for more than you paid for it, that’s a capital gain. And if you sell it for less, that is considered a capital loss.
Capital gains tax applies to capital gains made when you dispose of any asset, except for specific exemptions (the most common exemption being the family home).
Being organised is key when trying to quickly calculate and pay capital gains tax. And a good way to be organised is to keep up to date records by holding on to things like:
- initial sale contracts and other receipts for other expenses
- interest paid on related borrowings
- receipts for ongoing expenses
- expense records
- valuations.
Deciding how to calculate capital gains tax
There are different ways to calculate your capital gains tax.
Capital gains tax discount
If you sell or dispose of your capital gains tax assets in less than 12 months you’ll pay the full capital gain. But, you (as an individual) could get a 50% discount on your capital gain (after applying capital losses) for any capital gains tax asset held for over 12 months before you sell it.
Indexation
You can choose indexation if you acquired your assets before 21 September 1999, and have held it for at least 12 months. This is an alternative option to the discount method. The indexation method applies a multiplier to account for inflation on the cost base of your asset (up to September 1999).
You can choose the indexation method if you’ve carried forward any capital losses for assets held before 1999.
Capital loss
If you’ve made a capital loss, you can deduct this from your capital gains (that you’ve made from other sources) to reduce the amount of tax. If you don’t have other capital gains (during that income year) you can carry over any capital losses to other income years—something handy for another time.
Paying capital gains tax
When to pay
Although it sounds like it, capital gains tax isn’t a separate tax. Your net capital gains form part of your assessable income in whatever year your capital gains tax happened.
Capital gains tax is payable as part of your income tax assessment for the relevant income year.
When not to pay
If you make a net capital loss in an income year, you shouldn’t pay capital gains tax. But the net capital loss is unable to offset tax on any other income, and can only be ‘carried forward’ to offset capital gains in future income years.
It’s worth noting, some assets and events are exempt from capital gains tax. These include selling your principal home or personal car, or selling an asset acquired before capital gains tax was introduced on 20 September 1985.
Have a read of theATO’s full list of capital gains tax exemptions, opens in new window.
Working out your capital gain (or loss)
To quickly figure out how much capital gains tax you’ll pay - when selling your asset, take the selling price and subtract its original cost and associated expenses (like legal fees, stamp duty, etc.). The remaining amount is your capital gain (or loss).
If you’ve made a capital gain and you've held an asset for greater than 12 months (assuming you don’t have other capital losses), you can apply the 50% discount to work out your net capital gain (unless the indexation method applies).
Companies and individuals pay different rates of capital gains tax. If you’re a company, you’re not entitled to any capital gains tax discount and you’ll pay 30% tax on any net capital gains. If you’re an individual, the rate paid is the same as your income tax rate for that year. For SMSF, the tax rate is 15% and the discount is 33.3% (rather than 50% for individuals).
I'm a financial expert with extensive knowledge in taxation, particularly in the realm of capital gains tax. My expertise is grounded in practical experience and a deep understanding of the intricacies involved in managing capital gains and losses.
Now, let's delve into the concepts covered in the provided article on capital gains tax:
1. Definition of Capital Gain or Loss:
- A capital gain or loss is the disparity between the purchase price and the selling price of an asset, considering any additional costs incurred during the transaction.
2. Applicability of Capital Gains Tax:
- Capital gains tax applies to the profits made from the disposal of any asset, with specific exemptions like the family home.
3. Organization for Calculating Capital Gains Tax:
- Being organized is crucial for swift calculation and payment of capital gains tax.
- Maintaining up-to-date records, including initial sale contracts, receipts, interest on borrowings, and expense records, is recommended.
4. Methods for Calculating Capital Gains Tax:
- Capital Gains Tax Discount: Individuals can receive a 50% discount on capital gains tax if the asset is held for over 12 months before selling.
- Indexation Method: Applicable for assets acquired before September 21, 1999, the indexation method adjusts the cost base of the asset for inflation.
- Capital Loss Deduction: Capital losses can be deducted from capital gains, reducing the overall tax liability.
5. Timing of Capital Gains Tax Payment:
- Capital gains tax is not a separate tax; it forms part of the assessable income for the relevant income year.
- Payment is made as part of the income tax assessment for the applicable income year.
6. Exemptions from Capital Gains Tax:
- Certain assets and events are exempt from capital gains tax, such as selling a principal home, personal car, or assets acquired before September 20, 1985.
7. Calculation of Capital Gain (or Loss):
- The formula involves subtracting the original cost and associated expenses from the selling price of the asset to determine the capital gain or loss.
- A 50% discount is applicable if the asset is held for more than 12 months.
8. Differential Rates for Capital Gains Tax:
- Companies and individuals are subject to different rates of capital gains tax.
- Companies pay a 30% tax on net capital gains, while individuals' rates align with their income tax rates.
- Special rates apply for Self-Managed Superannuation Funds (SMSFs).
This overview provides a comprehensive understanding of the key concepts related to capital gains tax, offering valuable insights for individuals and entities navigating this aspect of taxation. If you have any specific questions or need further clarification, feel free to ask.
