​All about Australia’s Capital Gains Tax

Australia, like any other country, also charges different kinds of tax such as income tax, corporate tax, payroll tax and the well-known goods and services tax (GST). Aside from those tax kinds, there’s also another one that you can be subject to paying – that’s capital gains tax.

What is Capital Gains Tax?

The Australian taxation system dictates that capital gains tax is charged when you earn capital gains. This is applied whenever you sell or dispose any assets (that are not covered by the exemptions).

Even though it’s referred to as ‘capital gains tax’, it’s still simply a part of your income tax and not categorized as a separate transaction.

Capital gains tax work by treating net gains as a taxable income during the year the asset was sold or disposed of. Holding the asset for at least a year will have the gains discounted by half (for individual taxpayers) or 33 1/3 % (for superannuation funds).

CGT Events

The time when you sell or dispose of an asset is called a “CGT event”. In selling assets, be aware of the dates and instances as it will help determine the rates that will be charged unto you.

The most common CGT event is when an asset is sold or given away – perhaps to an immediate family member or a close relative.

Here are the different kinds of CGT events:

• Disposal
• an asset is either sold or given to another individual               

• Bringing an asset subject to CGT into existence
• A contract is created and entered into

• Ending a CGT asset
• A CGT asset is lost or destroyed

• Leases
• When a lease is granted, or when payments are received by the lessor or lessee

• Trusts
• Trusts are involved; when trusts are created, transferred or converted to unit trusts

• Shares
• Serves as payment for shares

• Hire purchases and other similar agreements
• When a CGT asset can no longer be used and enjoyed

• Cessation of residency
• You stop being an Australian resident

• Consolidations
• In relation to joining and compiling assets

• Special capital receipts
• When deposits are forfeited

• Rollovers
• When companies stop being part of a corporation after a rollover

• Other CGT events

History of Capital Gains Tax

The capital gains tax in Australia only started on the 20^th of September, 1985; all the assets you’ve acquired since that day are subject to capital gains tax otherwise indicated.

The rules for taxation of capital gains had undergone different modifications. There was a time when assets were not taxed when the prices rose due to inflation. An averaging process was also implemented for tax calculations. Other implementations for small businesses were also introduced that helped small business owners.

CGT Inclusions and Exclusions

You are subject to a capital gain (or loss) when you sell your assets such as a company or vehicles.

When are you subject to capital gains tax?

• Your assets are acquired after 20^th of September 1985, unless the assets are included in the exemptions.
• Your assets are sold or given to someone else
• You have assets that are lost or destroyed
• You are no longer an Australian resident
• Your company issues you payments (not dividends if you’re a shareholder)
• Your shares are redeemed, surrendered or cancelled

When are you not subject to capital gains tax?

• You have assets purchased or acquired prior to September 20, 1985.
• When you have sold motorcycles, cars or other similar vehicles
• Selling or disposing of your main residence
• Receiving compensation for personal injury
• Having an asset for personal use e.g. furniture, electrical goods, boats and kept simply for enjoyment
• Purchasing a collectible such as jewellery or antique item for $500 or lower.
• Exchanging units or shares in a company (certain conditions have been met)
• Selling shares of a company
• Selling inherited property within 2 years of the person’s death, if the inherited property was the deceased person’s main residence

Your home, car and other assets for personal use such as furniture are not subject to CGT. You shouldn’t be charged CGT as well for depreciating assets and business items.

Be it known as well that your assets are subject to capital gains tax even in other countries if you are an Australian resident. You can still have capital gains as a foreign resident if your asset is considered a taxable Australian property.

Exemptions

There are instances wherein an asset that’s supposedly not subject to capital gains tax is actually taxed.

• An asset purchased prior to the 20^th of September shouldn’t be taxed, but if the owner makes any major changes to it, or if the owner dies, then it will be subject to capital gains tax.
• You’ll be charged capital gains tax for selling your main residence if:
• the land measures more than 2 hectares,
• the house wasn’t your main residence for the entire duration of you owning it
• you used the property for producing business income, such as having it rented
• You might be charged capital gains tax for personal items if the said items were acquired for more than $10,000.

Foreign and Temporary Residents

Foreign and temporary residents can still be subject to capital gains tax, if they have the following:

• Having assets used to establish a business in Australia
• Have interests in Australian real estate locations
• Having interests in an entity on which he, along with his colleagues, already hold 10% of the said entity that is considered real estate in Australia
• A chance or opportunity to have any of the abovementioned.

Capital Gains or Profits?

As previously discussed, capital gains are achieved whenever you gain profits out of selling your assets. And profits, on the other hand, are the gains you get when your sales is bigger than your expenses.

Would you rather get capital gains or profits?

If you study their definitions, capital gains are profits obtained out of profits. It’s comparable to having twice the usual profits. Capital gains are also achieved out of holding assets over time. And capital gains usually have lower tax rates compared to that of profits.

Capital gains or profits? Receiving them will always make you thankful either way.