To help address the complexities of taxation, we have put together a short guide to understanding the basics of Capital Gains Tax (CGT).
What is Capital Gains Tax (CGT)?
Simply, CGT is a tax on the profit made on the disposal of a capital asset. That is, if you buy property for $400,000 and subsequently sell it for $575,000, CGT applies to the capital gain of $175,000 made on the original purchase price.
Contrary to popular belief, CGT is not a separate form of taxation. Rather, it forms part of your income tax.
When does CGT occur?
As required by the Income Tax Assessment Act 1997, CGT occurs when the following is satisfied:
- you are an Australian resident for tax purposes;
- there is a “CGT Event”;
- the asset is a CGT asset which is not exempt under the Act;
- a capital gain is made and calculated on the CGT asset.
What is a “CGT Event”?
A summary of what is considered a “CGT Event” can be found here.
The most common “CGT Events” include:
- disposal of a CGT asset;
- creating contractual or other rights;
- creating a trust over a CGT asset;
- transferring a CGT asset to a trust;
- beneficiary becoming entitled to a trust asset.
What is a CGT asset?
CGT assets can be any kind of property, or a legal or equitable right. Essentially, anything that can be owned with some kind of value.
CGT assets can come in a variety of forms. These can include:
- land and buildings;
- shares in a company;
- units in a unit trust;
- your home (in certain circumstances);
- contractual rights.
In contrast, the following are assets which are not considered CGT assets:
When is a CGT asset exempt?
Although you may have a CGT asset, it may be considered exempt under the Act. Some exempt CGT assets include:
- assets acquired before 20 September 1985;
- cars/motorcycles (designed to carry less than 1 tonne and fewer than 9 passengers);
- collectables under $500;
- personal use assets under $10,000 to acquire;
- gambling winnings or prizes;
- main residence (in certain circumstances).
In the context of individuals, trusts, superannuation entities and small businesses, there may be an eligibility for discounts to the overall CGT. Given how technical this area can be, please contact us for a detailed explanation of how these discounts operate if you need further information about your specific circumstances.
Calculating the capital gains:
The capital gains are calculated in accordance with the Income Tax Assessment Act 1997. The net capital gains are what are included in the individual’s assessable income.
Farms and CGT:
As the value of farm land in the Yorke Peninsula has grown exponentially, so too has the prominence and impact of CGT. The transition from one farming generation to the next can expose farming assets and land to CGT. Consequently, consideration must be given to how CGT will be addressed, through careful succession planning.
With our unique understanding of farming, together with our knowledge of CGT and succession planning, we can help you plan with a view to minimise any future CGT liability.
If you have any questions or concerns relating to the implications of CGT, please contact our office.