Capital Gains Tax (CGT) is a tax on the profit you make when you sell a capital asset (property, shares or business assets) for more than what you paid for it. In Australia, more than 50% of taxpayers who declare capital gains do so through property sales. Whether you’re an individual investor, a business owner, or simply looking to sell an asset, understanding CGT is critical.
Given the complexity of CGT calculations and the significant financial impact of getting it wrong, seeking professional advice can help you navigate your obligations and explore legitimate strategies to minimise your tax liability.
What Is Capital Gains Tax (CGT)?
What Is Capital Gains Tax (CGT)?
CGT is a tax levied on the profit made when you sell a capital asset for more than what you paid for it. Although it’s often referred to as a separate tax, it actually forms part of your income tax and is included in your annual tax return.
You may incur CGT when you sell:
- Real estate, including investment properties, holiday homes and commercial properties.
- Shares and investments, whether held personally or through an investment portfolio.
- Business assets, such as goodwill, patents and equipment.
CGT generally applies to residents of Australia, but foreign residents may also be liable for CGT on Australian property and certain business assets. It’s crucial that you understand whether an asset sale will trigger CGT and how much tax you’ll be liable to pay.
How Is CGT Calculated?
There is a simple formula for calculating CGT:
Capital gain = Selling price – Cost base
The cost base includes the purchase price plus any costs associated with acquiring, holding and disposing of the asset, such as legal fees, stamp duty and improvement costs. For example, if you purchased an investment property for $500,000, spent $50,000 on renovations and sold it for $700,000, your cost base would be $550,000. Your capital gain would be $150,000.
Capital gain = $700,000 – $550,000 = $150,000
If the result is positive, you have a capital gain. If it’s negative, you have a capital loss that can be used to offset future capital gains.
CGT discounts and methods:
- 50% discount: Individuals and trusts may receive a 50% discount on capital gains if the asset was held for more than 12 months. This means only half of your capital gain is added to your assessable income.
- Indexation method: For assets acquired before 21 September 1999, you may choose to apply indexation to adjust the cost base for inflation.
Note: The discount method is the most common for individuals, while companies are not eligible for the 50% discount.
Key CGT Exemptions and Concessions
You may be able to reduce your CGT liability through certain exemptions.
Primary Residence Exemption:
- Your main residence is generally exempt from CGT.
- If you rent out part of your home or use it for business purposes, you may be eligible for a partial exemption.
- The 6-year rule: Allows you to treat your home as your main residence for up to 6 years while renting it out, provided you don’t nominate another property as your main residence.
Small Business CGT Concessions:
- 15-year exemption: If you’re aged 55 or older, have owned your business asset for at least 15 years and are retiring, you may be exempt from CGT.
- Rollover relief: You can defer CGT by rolling proceeds into a new business asset.
- 50% active asset reduction: Selling an active business asset (like goodwill or equipment) could reduce the capital gain by 50%, in addition to the standard 50% discount for holding the asset for more than 12 months. This means only 25% of the gain might be taxable.
- Retirement exemption: You can exclude up to $500,000 of a capital gain from tax if you sell a business asset. If you’re under 55, the exempt amount must be paid into your superannuation fund to qualify.
Other Exemptions:
- Pre-20 September 1985 assets: Assets acquired before this date are exempt from CGT.
Personal use assets and collectibles: Items such as cars or furniture for personal use may not attract CGT.
Common Assets Subject to CGT
Real Estate:
- Investment properties: Selling an investment property will likely trigger CGT.
- Holiday homes: Unless it qualifies as your main residence, a holiday home is subject to CGT.
- Foreign residents: Non-residents are generally no longer eligible for the main residence exemption, so they may face full CGT liability on Australian property sales.
Shares and Investments:
- CGT applies to share sales, regardless of whether they were held directly or through a managed fund.
- Dividend Reinvestment Plans (DRPs): Shares acquired through DRPs add to your cost base and must be recorded accurately.
- Cryptocurrency: The ATO treats cryptocurrency as an asset, meaning CGT applies to profits made from selling, exchanging or gifting digital currencies.
Business Assets:
- Business owners may face CGT when selling goodwill, intellectual property or equipment.
- Selling part of your business or merging with another entity may also trigger CGT events.
Reporting CGT to the ATO
Record-Keeping Requirements:
Keep documents detailing purchase prices, legal fees, valuations and improvements. The ATO requires you to keep these records for at least 5 years after the CGT event.
Lodging CGT on Your Tax Return:
- Calculate your net capital gain or loss.
- Report this in the CGT section of your tax return.
- Apply any eligible discounts or concessions.
- Ensure you meet key dates—most individual tax returns are due by 31 October each year.
Strategies to Minimise CGT Liability
Timing Your Asset Sales:
- Delaying sales until after 12 months allows you to access the 50% discount.
- Consider deferring a sale until the next financial year to spread income over two years.
Utilising Capital Losses:
- Offset capital gains with capital losses from the same or previous years.
- If you have no gains this year, carry losses forward indefinitely.
Taking Advantage of Exemptions and Discounts:
- Ensure your main residence exemption is valid.
- Small business owners should explore all available concessions.
Seeking Professional Advice:
- A tax lawyer or accountant can identify legal ways to reduce CGT and manage your broader tax strategy.
Common Mistakes to Avoid
- Misunderstanding CGT discounts: Holding an asset for less than 12 months disqualifies you from the 50% discount.
- Poor record-keeping: Missing documents can result in a higher cost base and unnecessary tax liability.
- Non-disclosure: Failing to report capital gains or losses can attract penalties from the ATO.
- Incorrectly claiming the main residence exemption: Ensure you meet all conditions to avoid unexpected tax bills.
Speak to Us Today
Capital Gains Tax can be complex, but understanding how it works will help you manage your finances effectively. By knowing what triggers CGT, how it’s calculated and what exemptions apply, you can avoid costly mistakes and ensure full compliance.
If you need expert assistance managing your CGT obligations, contact FP Lawyers today to schedule a consultation. Our Brisbane tax lawyers can guide you through your CGT options and help you make informed decisions.