Everything You Should Know About Capital Gains Tax
Capital Gains Tax (CGT) was introduced in Australia on 20th September 1985, and the tax is applicable on any asset you have acquired since that time, unless something is particularly exempted. As per the Australian Tax Office, a capital gain or loss on a particular asset is the difference between the amount you pay and the amount you receive when you dispose of it.
The tax is applicable to your capital gains and considered as a part of your income tax and not any separate tax. However, it is referred to as CGT. All assets acquired since 1985 are subjected to CGT, but some assets are specifically excluded. They are:
- Most of the personal assets are free from CGT including your home, car and other personal use assets like furniture.
- CGT also not applicable on depreciating assets used exclusively for taxable purposes. These assets include business equipment or fittings in any rental property.
If you are an Australian resident, then CGT applies to your assets everywhere across the world. For residents of Norfolk Island, the tax is active on the assets acquired since 23rd October 2015. For the foreign residents, a capital gain or capital loss depends on the CGT event of an asset that is Australian taxable property.
The timing of CGT events
The time when a CGT event occurs depends on the type of asset. For example, if an asset is purchased completely, then the date of the purchase will be considered as the relevant date to calculate the CGT. In case the asset is a residence or a piece of land in Brisbane, the relevant date will be the date when the parties enter into the contract of purchase and not the date when the settlement was completed.
What Transactions Can Generate A Capital Gain?
These are a few examples of transactions that can generate a capital gain for you. The gain is the difference between the amount you paid for acquiring an asset and the amount you get from selling it (which should be bigger than what you paid). The assets you sell could be some property (like building or a block of land), shares in some company, a managed investment fund. It can also be something that is intangible, like contractual rights of a business or goodwill of a business. CGT can be an issue if you are selling a part of your business in Brisbane, making extensions to your factory, buying out a partner, modifying your business structure or receiving compensation for your destroyed or lost assets. This entire CGT thing can be a little confusing, so always take professional help before investing in property.
Other possible CGT exceptions
There are some other exceptions from CGT and they are as follows:
- Any collectable item that has a value of less than $500
- Any decorations awarded for bravery or valour (unless it is purchased)
- Any property that is the main residence of a taxpayer (but remember that this kind of asset can come under territory or stamp duty)
- Any compensation received due to injuries
- Any asset that has been used to produce the exempt income
- Any assets bought for personal use and sold below $10,000.
Options to Calculate Capital Gain
You can select the method that provides the best result (the smallest capital gain) as long as you complete certain conditions. There are three different types of calculations. They are as follows:
CGT discount method
This method is for those assets acquired for 12 months or more before the CGT event. It let you reduce your capital gain by:
- 50 % for individuals that include partners in partnerships, and trust
- 33 % for fulfilling the super funds and qualified life insurance companies.
Remember that this method is usually not accessible for the companies.
Indexation method is for those assets acquired before 11.45am (as per legal time in ACT) on 21st September 1999 and acquired for one year or more before the CGT event. It let you increase the cost base with the help of an indexation factor. And this factor is worked out after using the consumer price index or CPI.
It is for the assets that are owned for less than 12 months before the CGT event. To find out whether you held the asset at least one year before the relevant CGT event, excluding the day of acquisition as well as the day of CGT event. It is the primary method of subtracting your cost base from your capital proceeds.
Avoiding Capital Gains Tax by living in the Property
If you are looking for major exemption from Capital Gain Tax in Brisbane property, you can enjoy the benefit if it is your principal place of residence or home. People usually claim the exemption from CGT for home. If you are also looking for the exemption, make sure that the Brisbane property has a house on it and you have lived in it. Remember that you are not allowed to have the exemption for a vacant house in Brisbane, Queensland.
Usually, a dwelling is count as your main residence if:
- You live in it with your family
- You have your personal belongings in it
- It is the same address that you have mentioned, and the mails get delivered here
- It is the address on the electoral roll
- And the address used for services like phone, power and gas
How Does CGT Differ In Commercial Property?
Capital Gains Tax works equally on commercial and residential properties. However, there are a few differences:
- When it comes to the residential property, the family home doesn’t come under the Capital Gains Tax. But CGT is applicable on commercial property occupied by the owner. However, numerous discounts are available for some particular kind of ownership and usage structures.
- Individuals and trusts are allowed to get a CGT discount of 50% on the assets acquired for more than a year. On the other hand, companies cannot receive that 50 % discount on the assets held for the same time.
- Apart from CGT, commercial property owners also need to pay the Goods and Services Tax (GST).