Capital gains tax (CGT) is a frequently discussed, sometimes controversial topic in Australia.
If you're you're investing in property now or in the future, you'll need to understand this topic well. Not only can it affect your financial position, but there are certain legal obligations which you need to be aware of.
What is it?
Let's say you sell an asset for more than you paid for it. In this instance, you make a capital gain. But if you get less on disposal than what you purchased it for, you make a capital loss.
Now, if you're an Australian property investor, you'll likely be striving for solid capital growth across your real estate portfolio. Rental yields are of course important, but it's solid capital growth that can greatly assist with paying off the principal of your loan once the interest-only period comes to an end.
On September 20 1985, the CGT system was introduced in Australia. Accordingly, certain assets acquired on or after this date are subject to CGT, explains the Australian Taxation Office (ATO).
You need to establish your overall capital gain or loss annually when doing your taxes. But just how do you calculate it?
What does it mean for me?
It's important when you purchase property - whether positively or negatively geared - that you keep records from the get-go. When you're preparing your annual tax return, you'll find it much easier to establish whether you've made a capital gain or loss.
Remember that not all assets are subject to CGT. The ATO makes the following exemptions:
- Your main residence (generally)
- Your car
- Your boat
- Your furniture
- Personal-use assets
- Personal collectable items, such as antiques, jewellery, paintings and postage stamps (in certain instances)
However, remember that there are exceptions to the exceptions, so to speak, depending on the manner in which you acquired the asset.
Rental properties are subject to CGT. If you sell a rental property and the capital proceeds are greater than the dwelling's cost base, then you make a capital gain.
How is it calculated?
There are a number of ways to work out your capital gain, according to the ATO:
- The CGT discount: This applies to any asset held for 12 months or longer before the applicable CGT event
- Indexation: This applies to any asset acquired prior to September 21 1999 and held for 12 months or longer before the applicable CGT event
- Other: This applies to any asset held less than 12 months prior to the applicable CGT event
Once you've established your capital gain for a particular asset, you'll need to work out your net capital gain or loss for the relevant tax year. This is the magic number for your tax return.
Your overall capital gains, less your total capital losses, less any CGT discount and/or small-business concessions is your net capital gain.
