Like many financial concepts, there can be a great deal of confusion when trying to understand exactly what capital gains tax is and when you’re required to pay it. By understanding the basics of how capital gains tax works in Australia, you could reduce the amount you pay by taking advantage of tax deductible offsets, discounts and exemptions.
💵 What is capital gains tax?
Capital gains tax (CGT) is a tax that you pay when you sell certain assets (such as shares, land or equipment) and make a profit from it.
Your capital gain or capital loss is the difference between the selling price and the cost base of the asset.
If you receive more for your assets than you paid for them, you’ll have made a capital gain and may need to pay capital gains tax on it (unless it’s an exempt asset).
What happens if I make a capital loss?
If you sold your assets for less than what you paid them for, then you would incur a capital loss.
You can use the capital loss to reduce a capital gain in the same financial year. If your capital losses are greater than your capital gains, you cannot deduct it from your other income but can carry it forward to reduce capital gains you make in future years.
How much CGT do I pay?
The amount of CGT you’ll pay depends on how long you’ve owned the asset, what your marginal tax rate is and whether or not there are any capital losses to claim as well.
It’s important to consider your marginal tax rate since the capital gain will be added to your assessable income in your annual tax return.
The length that an asset is held is relevant because if it’s held for over 12 months then usually a 50% discount can apply to your capital gain.
Calculating capital gains tax can be complex and if overlooked, can result in you paying more than your fair share in taxes. That’s why it’s important to understand the tax implications of asset ownership and have a plan in mind before deciding to invest or sell.
Now is a great time of year to start this planning!
Get in touch with our expert in Tax, Sophie McDonald for expert advice tailored to your own situation.