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Juston Jirwander

Associate Director

capital gains tax

There is a simple solution to the question “how to calculate Capital Gains Tax (CGT)”. Give it to Bishop Collins Accountants to do!

Okay, if you really want to know, here we go. Remember you asked for it!

What is Capital Gains Tax?

Capital Gains Tax (CGT) occurs when the following happens.

When you sell a capital asset, such as real estate or shares, you usually make a capital gain or capital loss. This is the difference between what it costs you to acquire the asset and what you receive when you dispose of it.

At tax time you need to report capital gains and losses in your income tax return and pay tax on any capital gains you have made. Although it’s referred to as Capital Gains Tax (CGT), this is actually part of your income tax, and not a separate tax.

Plan to have enough to pay your Capital Gains Tax

When you make a capital gain, it is added to your assessable income and may significantly increase the tax you need to pay. As tax is not withheld for capital gains, you may want to work out how much tax you will owe and set aside sufficient funds to cover the relevant amount.

If you make a capital loss, you can’t claim it against your other income, but you can use it to reduce a capital gain.

What is included as a Capital Gains Tax asset?

All assets you’ve acquired since tax on capital gains started (on 20 September 1985) are subject to CGT unless specifically excluded.

Most personal assets are exempt from CGT, including your home, car and personal use assets such as furniture.

You won’t need to pay CGT on depreciating assets used solely for taxable purposes. This includes items such as business equipment or fittings in a rental property.

The point at which you make a capital gain or loss is usually when you enter into the contract for disposal, not when you settle. So, if you sign a contract to sell an investment property in June 2021, and settle in August 2021, you need to report the capital gain or loss in your 2020–21 tax return.

If you’re an Australian resident, CGT applies to your assets anywhere in the world. Foreign residents make a capital gain or loss if a CGT event happens to an asset that is ‘taxable Australian property’.

Working out your capital gain or loss

For every Capital Gains Tax (CGT) event that happens to your assets during the year, you need to work out your capital gain or loss.

If you have both capital gains and capital losses, you also must work out your net capital gain or net capital loss for the year.

If you have a distribution from a managed fund, the fund has already worked out your capital gain or loss and should have given you the information on a distribution statement.

Individuals and small businesses (excluding companies) can generally discount a capital gain by 50% if they hold the asset for more than one year.

There are three methods to work out your capital gain. There is only one way to work out a capital loss.

how to calculate your CGT

Working out your Capital Gain

For most CGT events, your capital gain is the difference between your capital proceeds and the cost base of your CGT asset. (The cost base of a CGT asset is largely what you paid for it, together with some other costs associated with acquiring, holding, and disposing of it.)

There are three methods for working out your capital gain. You can choose the method that gives you the best result – that is, the smallest capital gain.

1.      CGT Discount Method

  • Eligibility: For assets held for 12 months or more before the relevant CGT event.
    • Not available to companies.
    • For foreign resident individuals, the 50% discount is removed or reduced on capital gains made after 8 May 2012.
  • Description: Allows you to reduce your capital gain by:
    • 50% for resident individuals (including partners in partnerships) and trusts
    • 33% for complying super funds and eligible life insurance companies.
  • How to do it: Subtract the cost base from the capital proceeds, deduct any capital losses, then reduce by the relevant discount percentage.

2.      Indexation Method

  • Eligibility: For assets that have been
    • acquired before 11.45am (by legal time in the ACT) on 21 September 1999
    • held for 12 months or more before the relevant CGT event.
  • Description: Allows you to increase the cost base by applying an indexation factor based on the consumer price index (CPI) up to September 1999.
  • How to do it: Apply the relevant indexation factor, then subtract the indexed cost base from the capital proceeds.

3.      Other method

  • Eligibility: For assets held for less than 12 months before the relevant CGT event.
  • Description: Basic method of subtracting the cost base from the capital proceeds.
  • How to do it: Subtract the cost base (or the amount specified by the relevant CGT event) from the capital proceeds.

Capital Gains Tax methods and 12-month ownership period

For each of the three methods, in determining whether you acquired the asset at least 12 months before the CGT event:

  • Exclude both the day of acquisition and the day of the CGT event
  • In some situations you include the asset’s previous ownership – for example, if you acquired the asset through a deceased estate, or as a result of a relationship breakdown.

Example of how to calculate your Capital Gains Tax: 12-Month Ownership Period

Sally bought a CGT asset on 2 February. Her 12-month ownership period started on 3 February (the day after she bought the asset) and ends 365 days later (366 in a leap year), at the end of 2 February the following year.

If Sally sells the asset before 3 February the following year, she can’t claim the discount or use indexation because she hasn’t owned the asset for at least 12 months.

Working out your capital loss

If you haven’t made a capital gain, you may have made a capital loss. You need to know your reduced cost base before you can establish whether you have made a capital loss.

If your reduced cost base is greater than the capital proceeds you received (or are entitled to receive) for your asset – that is, you’ve sold an asset for less than what it cost you – you have usually made a capital loss. The difference between the two amounts is your capital loss.

Elements of the cost base and reduced cost base

Cost Base

The cost base of a Capital Gains Tax (CGT) asset is made up of five elements:

  1. Money paid or property given for the CGT asset
  2. Incidental costs of acquiring the CGT asset or that relate to the CGT event
  3. Costs of owning the CGT asset
  4. Capital costs to increase or preserve the value of your asset or to install or move it
  5. Capital costs of preserving or defending your title or rights to your CGT asset
  6. You add these elements together to work out your cost base.

Reduced cost base elements

When a Capital Gains Tax (CGT) event happens to a CGT asset and you haven’t made a capital gain, you need the asset’s reduced cost base to work out whether you’ve made a capital loss.

The reduced cost base of a CGT asset has the same five elements as the cost base, except for the third element costs of owning the CGT asset:

  1. Money or property given for the asset
  2. Incidental costs of acquiring the CGT asset or that relate to the CGT event
  3. Balancing adjustment amount, that is, any amount that is assessable because of a balancing adjustment for the asset or that would be assessable if certain balancing adjustment relief were not available
  4. Capital costs to increase or preserve the value of your asset or to install or move it
  5. Capital costs of preserving or defending your title or rights to your asset.

 

Third element: costs of owning the CGT asset

You don’t include these costs if you acquired the asset before 21 August 1991.

The costs of owning an asset include rates, land taxes, repairs and insurance premiums. You also include any non-deductible interest on loans used to finance:

  • the acquisition of a CGT asset
  • capital expenditure to increase an asset’s value.

You can’t:

  • include these costs in the cost base of collectables or personal use assets
  • index these costs
  • use them to work out a capital loss.

You need to work out the amount for each element, then add them together to find out your reduced cost base for the relevant CGT asset.

Points to note:

  • Registered for goods and services tax (GST), the elements of the cost base are reduced by the amount of any GST net input tax credits included in the cost
  • Not registered for GST, you don’t make any adjustment – the GST is included in the cost base.
  • An amount paid in a foreign currency that is included in an element of the cost base is converted to Australian currency at the time of the relevant transaction or event – for example, when the money is paid for the asset.
  • Generally for assets acquired after 13 May 1997 the cost base and the reduced cost base does not include any costs you have claimed as a tax deduction, or have not claimed but can still claim because the period for amending the relevant income tax assessment has not ended – for example, capital works deductions for capital expenditure.

But wait there’s so much more about Capital Gains Tax …

There are a number of concessions which reduce the taxing of any capital gain which relate to your home and small business , as well as deceased estates and inheritances. So, if you have sold any asset during the financial year or received an asset without paying for it in full make sure to tell your accountant so that they can take all these details into consideration.

Or better yet, before you are considering selling an asset have a call with us at Bishop Collins Accountants to ensure you reduce the tax exposure by clever timing and structuring of the sale.

For other tips on tax matters you can find lots of resources and articles here

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