What is Capital Gains Tax (CGT)? – Everything about CGT

Capital gains tax (CGT) came into effect on September 20, 1985 and is a very important part of the income tax (Income Tax).  In today’s topic of tax filing season, this article will briefly explain CGT and some of its exempt conditions. 

1. How does Capital Gains Tax (CGT) work? 

Capital gains or capital losses occur when individuals dispose of or sell an asset (such as stocks, bonds, real estate, etc.). For example, in a simple case, real estate capital gains refer to the difference between the relevant costs of acquiring the real estate and the income obtained when the real estate is sold. 

Individuals need to include the generated capital gains in personal taxable income (Assessable Income), thereby increasing the total amount of taxes that individuals need to pay, and this part of the tax generated due to capital gains is CGT. 

Therefore, we can know that CGT is not actually a separate tax. For individuals and businesses, it is a part of Income Tax, which is paid at the rate of income tax. 

2. What assets are CGT applicable to?

Normally, CGT is applicable to: 

  • Real estate 
  • Company shares, unit shares in unit trusts (including custodial funds), or similar investment projects
  • Cryptocurrency 
  • Lease agreement, goodwill, licenses, foreign currency, contract rights and capital improvements to land or pre-CGT assets 
  • Collectables and personal use assets exceeding a certain value.

3. What are the exemptions that can be exempted from CGT? 

Some capital gains are tax-exempt (that is, taxpayers do not need to include them in taxable income). But at the same time, taxpayers cannot use capital losses to offset capital gains, thereby reducing taxable income. 

The exemption includes capital gains or losses in the following areas: 

  • Individual’s primary residence (but there are exceptions) 
  • Personal cars (motor vehicles with a weight of less than one ton and fewer than nine passengers), motorcycles or similar vehicles 
  • Purchase items for personal use less than A$10,000
  • Collectables purchased at a price of A$500 or less, or collectables worth A$500 or less 
  • Depreciating assets and inventories used only for taxable purposes 
  • Assets acquired before September 20, 1985 (called “pre-CGT assets”). Please note that there are exceptions 
  • Gifts obtained as a result of bravery or heroic behaviour, unless the individual has paid or exchanged property for it 
  • Certain types of will gifts (gifts obtained through a will). 
  • Other 

When you acquire CGT assets, you need to clarify the starting date of becoming the owner of the asset, keep records of transactions and events related to the asset, and understand each owner’s share or equity in the asset (when sharing assets with others). These three points of information are very important for the correct calculation of capital gains and losses. 

4. What is a CGT event?

In the world of CGT, the more complicated point is that before calculating the amount of capital gains and losses, we must first determine the CGT event (CGT Event). When we sell assets, this is one of the CGT events, and there are many other events such as the loss or destruction of CGT assets, the creation of contracts or other rights, etc. 

When calculating CGT, we need to first determine which CGT event is applicable. The type of event will affect the method of calculating profit and loss and the point in time when it is included in profit and loss. 

5. How is CGT calculated? 

Generally speaking, there are three methods to calculate capital gains

  1. Capital gains tax discount method (CGT Discount method) 
  2. Capital gains tax index method (CGT Indexation method)
  3. Other methods

and one method to calculate capital losses.

6. For small businesses, what are the four CGT benefits?

ATO has four rules that allow you to ignore or postpone part or all of the capital gains on active assets used by small businesses. 

The conditions that need to be met include: 

  • You are a small business with a total annual turnover of less than AUD 2 million 
  • Assets need to be used to conduct business, that is, active assets 
  • Your net worth does not exceed AUD 6 million (excluding personal use assets, such as your own house)
  • Other basic qualifications that must be met.

It should be noted that usually leased properties will not be active assets.

And active assets refer to: 

If you own CGT assets, and the assets are: 

  • You use or intend to use it in the course of conducting business (whether alone or in partnership);
  • It is an intangible asset that is inherently related to the business you are engaged in (for example, goodwill);
  • Satisfy the active asset test (the time the asset is used to conduct business);
  • If the holding time exceeds 15 years, it needs more than 7.5 years; if the holding time does not exceed 15 years, it needs more than half of the holding time. 

It should be noted that usually leased properties will not be active assets. 

The four rules are: 

  1. Small business 15-year exemption-if your business has an active asset for 15 consecutive years, and you are 55 years of age or older and you are retired or permanently incapacitated, then the sale of the asset will not generate appraised capital gains . 
  2. 50% discount on active assets-You can reduce the capital gains of active assets by 50% (if you hold for 12 months or longer, you can enjoy a 50% CGT discount). 
  3. Retirement tax exemption-the capital gain allowance from the sale of active assets, with a lifetime cap of A$500,000. If you are under 55 years of age, the allowance must be paid to an eligible pension fund or retirement savings account. 
  4. Postponement – ​​If you sell your active assets, you can postpone all or part of your capital gains for two years. Or it can be postponed for a longer period of time if it is the purchase of alternative assets or the capital improvement of existing assets. 

7. Conclusion

CGT is a very complicated tax sector. This article hopes that through a brief explanation of CGT, everyone can understand some common sense of CGT, so as to have a more transparent understanding of the corresponding tax expenditures when filing taxes. If you want to know more about the tax filing season, check out our Facebook Page for more info.

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Source: ATO.gov.au