Understanding capital gains and tax
A capital gain or loss is the difference between what you paid for an asset and what you sold it for, taking into account any incidental costs on the purchase and sale. If you sell an asset for more than you paid for it, you’ve made a capital gain.
Capital gains tax applies to the above capital gains made on disposal of any asset, except for specific exemptions (the most common exemption being the family home).
To be in the best position to calculate and pay your capital gains tax, you need to be organised. Because assets are often long-term you need to be very good at keeping records. We’re talking a good chunk of your filing cabinet dedicated to your capital gains.
It’s really handy to hang onto these things:
- Initial sale contracts and other receipts for other expenses.
- Interest paid on related borrowings.
- Receipts for ongoing expenses.
- Expense records.
Good records help when working out how much you have to pay.
Deciding how to calculate capital gains tax
There are different ways to calculate your capital gains tax.
Capital gains tax discount
If you sell or dispose of your capital gains tax assets1 in less than 12 months you’ll pay the full capital gain. But, you (as an individual) could get a 50% discount on your capital gain (after applying capital losses) for any capital gains tax asset held for over 12 months before you sell it.
You can choose indexation if you acquired your assets before 21 September 1999, and have held it for at least 12 months. This is instead of the discount method. The indexation method applies a multiplier to account for inflation on the cost base of your asset (up to September 1999).
You can choose the indexation method if you’ve carried forward any capital losses for assets held before 1999.
If you’ve made a capital loss, you can deduct this from your capital gains (you’ve made from other sources) to reduce the amount of tax. If you don’t have other capital gains (in that income year) you can carry over any capital losses to other income years—something handy for another time.
Paying capital gains tax
When to pay
Although it sounds like one, capital gains tax isn’t a separate tax. Your net capital gains form part of your assessable income in whatever year the capital gains tax event occurred.
Capital gains tax is payable as part of your income tax assessment for the relevant income year.
When not to pay
If you make a net capital loss in an income year, you shouldn’t pay capital gains tax. However, the net capital loss is unable to offset tax on any other income, and can only be ‘carried forward’ to offset capital gains in future income years.
Also, some assets and events are exempt from capital gains tax. These include selling your principle home or personal car, or selling an asset acquired before capital gains tax was introduced on 20 September 1985.
Have a read of the ATO’s full list of capital gains tax exemptions.
Working out your capital gain (or loss)
A quick way to determine how much capital gains tax you’ll pay is, when selling your asset, take the selling price and subtract its original cost and associated expenses (like legal fees, stamp duty, etc.). The remaining amount is your capital gain (or loss).
If you’ve a capital gain and you‘ve held an asset for greater than 12 months (assuming you don’t have other capital losses), you can apply the 50% discount to work out your net capital gain (unless the indexation method applies).
Companies and individuals pay different rates of capital gains tax. If you’re a company, you’re not entitled to any capital gains tax discount and you’ll pay 30% tax on any net capital gains. If you’re an individual, the rate paid is the same as your income tax rate for that year. For SMSF, the tax rate is 15% and the discount is 33.3% (rather than 50% for individuals).