Is your head spinning from trying to figure out Capital Gains Tax (CGT)? No need to fret any longer – Nitschke Nancarrow’s Kym Nitschke explains the system.
What Is Capital Gains Tax?
CGT, despite what it sounds like, is actually not a separate tax.
This term refers to the tax on a profit you make from selling a capital item.
A capital item may include different types of investments such as:
– Unit trusts
That income you make on the sale qualifies to be taxed. You simply add the total into your other income when it comes time to file your tax return.
Another way to look at the profit you make from a sale is to call it a “capital gain.” So even though the tax on it isn’t a distinct or separate number, the value still needs to be taxed by factoring it into the rest of your yearly earnings.
Thus, the name “Capital Gains Tax.”
Let’s suppose that you don’t make a profit from the sale of a property. Instead, you incur a loss. This is called a “capital loss.” Unfortunately, this loss won’t count against the income you report for tax purposes. But it can help offset the total from a separate capital gain you may have made in the same year or future years.
What Does CGT Apply To?
As mentioned above, CGT applies to the sale of any capital item. There are a few exceptions, however.
CGT does not apply to personal assets like your primary residential property or furniture. Neither does it apply to depreciating assets which only serve a tax purpose such as business equipment or rental property fittings.
Do You Qualify For A Discount?
If you’ve done any research on CGT, you’ve probably come across the 50% discount rule.
What this rule means is that qualifying capital sales are only taxed on half of their resulting income.
Individuals and small businesses (not including companies) can discount their capital gain by 50% if they’ve held that asset in their name for more than a year.
This is similarly applied to super funds except the discount is only 33%.
When CGT Applies
You won’t have to pay CGT on any capital item if you purchased it before 20 September 1985, the date CGT was introduced.
CGT applies in the financial year a capital asset is sold.
When you evaluate the dates of purchase to determine which year the capital item was bought or sold, you need to look at the date of contract, not settlement.
Does this make a big difference?
It does if your sale went down at the end of one financial year but doesn’t settle until the next.
Calculate Your CGT
Calculating your capital gain may sound confusing, but it’s quite straightforward, in reality.
You’re essentially just determining the difference between the sale price and the purchase price with adjustments for associated expenses.
(SALE PRICE – EXPENSES) – (PURCHASE PRICE + COSTS OF PURCHASE) = CAPITAL GAIN
GAIN x 50% OR 33% = DISCOUNTED CAPITAL GAIN
Follow these steps to apply the formula:
1. Subtract the associated costs from your sales price.
2. Add all the extra expenses (legal fees, etc.) incurred at the time of purchase to your original purchase price.
3. Subtract the adjusted purchase price from the adjusted sales price.
There you have your capital gain!
If you qualify for a discount, multiply your total by 50% or 33%.
Add this number to your assessable income when you file your tax return for the CGT to apply.
You can lower your capital gain and thus reduce the tax you owe by keeping close track of all expenses associated with your property. If you have well-organised documents of purchase costs, maintenance costs, and sales expenses, then you’ll have accurate figures to help you close the margin on your capital gain.
Another way to ensure you successfully navigate the CGT system is to enlist the help of a professional financial adviser.
Contact the team at Nitschke Nancarrow before planning the sale of a capital item. We’ll help you get the timing just right to get the biggest financial advantage possible. Call our office on (08) 8379 9950 or send me an email.
– Kym Nitschke