Capital Gains Tax
Capital gains tax is a tax that is payable on profits made from investments. In Australia, capital gains made by individuals are taxed as income tax. This means that money that an individual makes through a capital gain is added onto their taxable income and then taxed at the rate that applies to their income bracket. Similarly, any amount of money lost as a result of an investment can be used to reduce an individual’s taxable income.
On what assets is it payable?
In Australia, capital gains tax is payable on any asset that has been bought after 20 September 1985. For Norfolk Island residents, the relevant date is 23 October 2015. Capital gains tax is payable in relation to assets acquired after this time unless the asset is excluded from capital gains tax. Assets it applies to include shares, real estate, cryptocurrency and contractual rights.
Some assets that are excluded from capital gains tax include:
- Personal assets such as a primary residence, vehicle, and assets that are for personal use, such as house furnishings;
- Depreciating assets such as fittings in a rental property or equipment used in a business.
Capital gains tax is also payable by businesses. Different rates and discounts apply to the rates and discounts that apply to individuals. Small businesses and larger businesses pay this tax at different rates. Specific rates apply to superannuation funds.
When does capital gains tax become payable?
The dates relevant for determining what capital gain or loss is to be applied for tax purposes are the point in time when the asset is disposed of. This is usually when the contract is entered into for disposal and not when the contract is settled.
Does it only apply to assets in Australia?
For Australian residences, capital gains tax applies to all assets that are owned anywhere in the world. For foreign residents, it applies to assets that are considered “taxable Australian property”. Taxable Australian property includes direct interests in real property located in Australia, rights related to mines, quarries or prospecting for petroleum or minerals situated in Australia, indirect investments in real property located within Australia or the option or right over one of these property interests.
Discounts for individuals, super funds and some life insurance providers
Once the amount of a capital gain has been calculated, a discount percentage may be applied to reduce the amount of tax payable. For individuals and trusts, the discount rate of 50% applies and for some life insurance providers and superannuation funds, a discount rate of 33.33% may be applied. This discount can be used where:
- The capital gain was made after 11.45 am on 21 September 1999;
- The capital gain asset was held for at least twelve months before the capital gain was made; and
- Another calculation for capital gains tax, the indexation method, was not used. The indexation method is an alternative calculation method that can be used in some circumstances. It is based on inflation and the consumer price index.
If the asset was a property and the land has been improved somehow, such as by the construction of a building, the discount may apply even if twelve months have not passed. Some other circumstances where twelve months may not need to be completed for the discount to apply include where the asset was acquired through an inheritance, the asset was acquired as a result of a relationship breakdown, or the asset was compulsorily acquired.
Foreign residents are not entitled to the discount for individuals of 50% for capital gains that were made after 8 May 2012.
Discounts, exemptions and deferrals on capital gains tax for small businesses
Small businesses may be able to discount the amount that is payable on profits made via four different paths. These are:
- Assets that a small business has continuously owned for over fifteen years do not attract that tax;
- The amount payable on assets that were actively used in the business (active assets) may be reduced by 50% (in addition to a further discount of 50% if it has been owned for twelve months or more);
- A person owning a small business may be able to pay the gain made into a retirement account and attract an exemption (up to a lifetime limit of $500,000);
- A person owning a small business may choose to defer payment of capital gains tax, where, as a result of the selling of the relevant asset, they incur further costs.
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