A capital gain or loss is the difference between what you paid for an asset and what you sold it for. Capital assets include Shares, Real Estate, Precious metals etc. Capital gains tax applies to Capital gains made when you dispose of any asset.

By the end of this article you’ll get to know:

What is Capital Gain and what is Capital Gains Tax? 

How to calculate capital Gains/losses?

What assets generate capital gains?

What is a Capital Gains event?

What are the exemptions given to a taxpayer for filing capital gains tax?

Exemptions in capital gains tax for selling residential homes.

What is Capital Gain?

Investopedia defines capital gain as increase in Capital Asset’s value. Capital assets are property such as Real Estate, Stocks, Bond, Cars, Collectible items etc.

For example: Robert purchased a house for $200,000 and after 5 years sells it to Ryan for $500,000. 

Since, Robert received more money than he invested in to buy the house, hence Robert made a gain or in simple terms, he made a profit.

So, the capital gain would be = $500,000 – $200,000 = $300,000.

If Robert had sold the house at a price less than $200,000, he would’ve made a loss. Let’s assume Robert sold his house to Rachel for $150,000. 

It is clear that Robert makes a loss this time. The capital loss would be calculated as = $200,000 – $150,000 = $50,000.

Capital Gains Tax

Capital gains tax applies to Capital gains made when you sell any asset. 

In Australia, Capital gains are included in an individual’s annual taxable income and taxed at their marginal Tax rate.

Capital Gains Tax Discount

If you sell or dispose an asset subject to capital gains in less than 12 months, the full gain is taxable and added to your income. But if you(as an individual) held the asset for more than 12 months, then you can get a 50% discount on your gain. For example, you bought 1000 Afterpay shares for $3 in June 2017and you sold it for $99 per share in October 2020. 

The total capital gain that you made on the transaction was $96000($99,000 sale proceeds- $3000 cost base). Since, you held the share for more than 12 months, you (as an individual) will get a discount of 50% i.e. only $46,000 will be added to your taxable income and you will pay tax on $46000 at your marginal tax rate

Assets generating Capital gains

Profits earned by selling the following assets produces capital gains. They are:

• Real estate (buildings such as home or other property meant for leasing, land etc.)
• Shares (stocks, bonds etc.)
• Cryptocurrency
• Leases, Licenses, contractual rights, foreign currency, goodwill
• Personal use items and collectables with prices exceeding a certain value

What is a capital gains event?

A capital gains tax event is said to have occurred when an Individual sell or disposes an asset and makes either profit or loss in the transaction.

The concept of Capital Gains Tax was introduced in the Australian taxation system in 1985 hence any asset acquired on or after 20th September, 1985 will be subject to capital gains tax.

Exemptions under capital gains tax

Thankfully not all assets we own fall into the purview of capital gains tax. Exemptions are allowed upto certain limits on following assets. 

• Your main residence 
• Your car
• Personal use items costing less than $10,000
• Collectables costing $500 or less
• Depreciating assets (assets whose value reduces over time, like machines etc.)

Capital Gains Tax on Residential homes

Residential homes, where an individuallives and maintains a permanent address is exempt from capital gains tax.

If a person uses their residential home for a commercial activity to generate an income, then the capital gains tax exemption on the residential home ceases to exist and the individual becomes liable to pay CGT for the portion of their home used for business purposes.

Capital Gains Tax on using your home to earn money 

If a portion of the residential home is used to earn money by renting it to a tenant or opening a business, the owner of the home becomes liable to pay capital gains tax.

CGT in this case applies not from the date of the purchase of your residential property but on the date from which a moneymaking activity started on your property.

The amount of money that will be taxed under capital gains will depend on the percentage of floor area of your house and the time period when the commercial activity initiated on your property.

Managing your Capital gains Tax

If however, before the end of the financial year you have a CGT liability, there are a few strategies that you could consider to reduce your tax liability.

1. Offset against any carry forward capital losses.
2. Delay any income
3. Bringing forward tax deductions like prepaying expenses or using superannuation contribution to reduce your taxable income

Conclusion

Knowledge of capital gains tax and the method to compute it is very important, if you want to minimize your taxes. If you wish to know more about capital gains taxes and are looking forward to saving CGT by seeking an expert’s opinion, then Thinkwiser is here to help.

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Thinkwiser, The answer to all your tax related problems.

Disclaimer: The article is general in nature and anyone intending to apply the information to practical circumstances should seek professional advice to independently verify their interpretation and the information’s applicability to their particular circumstances.