Taxing capital gains–January 2013

The taxation of capital gains

When you make a bit of money from selling an investment, this will give you a “capital gain”, or to put it a little more succinctly, a capital gain is the difference between the price you paid for an investment and the money that is made from selling it.

The investments or assets that you sell, and that are potentially capital gain generators, can be recognizable assets such as property like a house or block of land or shares, but an asset can also be, for example, the goodwill of your sole trader business or artwork. The amount of capital gain that is subject to tax varies with the type of asset, but is also influenced by various other factors, including how long you may have owned the investment.

CGT operates by treating the gains you make as income – so the tax imposed on these gains is not an additional tax, but is lumped in with your income tax. Any increase in value (capital gain) is taxed in the year the asset is sold and is lumped in with the income tax you pay through your annual income tax return.

There are always exceptions of course, and in this area the principal exception is the family home (but the exemption does not apply to any part that you use to derive income from a home business, or rental). But others exceptions include private cars, minor collectibles, the proceeds from gambling (as long as you’re not doing it as a “business”) or compensation for occupational injury. (You can see an exhaustive list of exemptions here.)

The tax is triggered by what the legislation calls a CGT “event”, which means in the main when you sell an asset. But these events can also include giving it away, if it’s destroyed or lost, or you stop being an Australian resident for tax purposes.

There is a long list of “events”, which the legislation groups into categories. It labels selling an asset as an A1 event, hire purchase agreements are in B group, “end of a CGT asset” is in C, and so on. You can see the entire list of CGT events here if you’re interested; go to the table of contents on the right side of the Tax Office website and work down the list.

What are CGT assets?

CGT assets fall into three categories – collectibles, personal use assets, and other assets. Collectibles include paintings, jewelry, rare coins or stamps and such. Personal use assets, as the name implies, are for your own use and enjoyment, such as a boat, special piece of furniture or

household item. Also included can be a debt arising from an activity other than one made to produce assessable income, such as a loan made to help out a family member or friend.

Other assets that fall within the capital gains gamut include:

  • land
  • shares in a company
  • rights and options
  • leases
  • units in a unit trust
  • licences
  • convertible notes
  • contractual rights.

There are much more than the above, and you will need to check with this office (and the Tax Office web site also has all the details).

Capital gain

As mentioned, the amounts that are subject to tax vary, but the resulting capital gain amount is lumped in with your income, and taxed at whatever marginal rate you would then pay. The amount that is added into your assessable income is known as the “net capital gain”. This is worked out by taking the money you make from selling the asset and subtracting what is known as your “cost base”.

The cost base includes the price you paid, any costs incurred in buying and then selling it (such as brokerage or commission) and certain other incidental costs. Also, if an asset was bought before September 1999, you may be able to increase the cost base by an “indexation” factor, which essentially adjusts the cost base to account for inflation so you’re not paying tax on the inflation portion of the gain. The resulting figure is your gross capital gain.

Next, take away any eligible capital losses. Finally, apply any applicable “discount” factor. For individuals, there is a discount of 50% if you’ve held the asset for more than 12 months (specifically more than 366 days), so take that away (and there are other concessions for businesses, so consult this office), and there’s your net capital gain – and this is the amount that is added to your taxable income.

Assessable income

By way of illustration, let’s say John Smith bought a few Country Road shares in 2010 for $5,000 and sold them early in 2012 for $7,000. He is a casual investor, and has no other capital gains or losses, nor any unapplied capital losses from previous years. John’s net capital gain for 2011-12 would be the $2,000 difference between the buying and selling price, minus the 50% discount, since he held the shares for more than a year (so, take off $1,000), leaving him with $1,000 that is then lumped into his assessable income for 2011-12.

And what if you make a loss?

Of course as nice as it would be otherwise, there’s no rule that says when you sell an asset you’re going to make money on it. So it is possible to make a “capital loss” if the money you realize from selling an investment is less than what you paid.

However, there is no consolation prize of being able to take that capital loss off the total of your income for the year. The Tax Office won’t allow deductions of capital losses from your assessable income other than capital gains. What the tax law does allow you to do is to “carry forward” any

losses to be deducted from any future capital gains.

An essential in all this is to keep good records. So make sure you keep all receipts and any details of financial transactions, insurance and valuations, and records of repairs or brokerage and so on. And see this office for any further guidance you may require.

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