When you make a bit of money from selling an investment, this will give you a “Capital Gain”. Or to put it a little more succinctly, a capital gain is the difference between the price you paid for an investment and the money that is made from selling it.
The investments or assets that you sell, and that are potentially capital gain generators, can be more recognisable assets such as property like a house or block of land, or shares. But an asset can also be the goodwill of your sole trader business, or artwork, for example. Of course it’s never as simple as that, especially when you throw the word “tax” into the discussion. And capital gains tax (CGT) can arise to complicate a range of seemingly ordinary activities that any individual may undertake over the year.
The amount of capital gains that is subject to tax varies with the type of asset, but is also influenced by various other factors, including how long you have owned the investment.
There are always exceptions of course, and in this area the principal exception is the family home (but the exemption does not apply to any part that you use to derive income from a home business, or rental). But others include private cars, minor collectables, the proceeds from gambling (as long as you’re not doing it as a “business”) or compensation for occupational injury. (You can see an exhaustive list of exemptions here.)
The tax is triggered by what the tax legislation quaintly calls a CGT “event”, which means in the main when you sell an asset. But these events can also include giving it away, if it’s destroyed or lost, or you stop being an Australian resident for tax purposes.
There is a long list of “events”, which the legislation groups into categories. It labels selling an asset as an A1 event, hire purchase agreements are in B group, “end of a CGT asset” is in C, and so on. You can see the entire list of CGT events here; go to the table of contents, which is grouped into categories on the left side of the Tax Office website, and work down the list.
CGT operates by treating the gains you make as income – so the tax imposed on these gains is not an additional tax, but is lumped in with your income tax. So any increase in value (capital gain) is taxed in the year the asset is sold but is lumped in with the income tax you pay through your annual income tax return.
What are CGT assets?
CGT assets fall into three categories – collectables, personal use assets, and other assets. Collectables include paintings, jewellery, rare coins or stamps and such. Personal use assets, as the name implies, are for your own use and enjoyment, such as a boat, special piece of furniture or household item. Also included can be a debt arising from an activity other than one made to produce assessable income, such as a loan made to help out a family member or friend.
Other assets that fall within the capital gains gamut include:
• shares in a company
• rights and options
• units in a unit trust
• convertible notes
• contractual rights.
There are much more than the above, and you will need to check (the Tax Office web site has all the details).
As mentioned, the amounts that are subject to tax vary, but the resulting capital gain amount is lumped in with your income, and taxed at whatever marginal rate you would then pay. The amount that is added into your assessable income is known as the “net capital gain”.
This is worked out by taking the money you make from selling the asset and subtracting what the Tax Office calls your “cost base”.
The cost base includes the price you paid, any costs incurred in buying and then selling it (such as brokerage or commission) and certain other incidental costs. Also, if an asset was bought before September 1999, you may be able to increase the cost base by an “indexation” factor, which essentially adjusts the cost base to account for inflation so you’re not paying tax on the inflation portion of the gain. The resulting figure is your gross capital gain.
Next, take away any eligible capital losses. Finally, apply any applicable “discount” factor. For individuals, there is a discount of 50% if you’ve held the asset for more than 12 months (specifically more than 366 days, and note this is no longer available for foreign or temporary residents), so take that away (and there are other concessions for businesses), and there’s your net capital gain – and this is the amount that is added to your taxable income.
By way of illustration, let’s say Sandra bought a few Country Road shares in 2012 for $5,000 and sold them early in 2014 for $7,000. She is a casual investor, and has no other capital gains or losses, nor any unapplied capital losses from previous years. Sandra’s net capital gain for 2013-14 would be the $2,000 difference between the buying and selling price, minus the 50% discount, since she held the shares for more than a year (so, take off $1,000), leaving her with $1,000 that is then lumped into her assessable income for 2013-14.
And what if you make a loss?
Of course as nice as it would be otherwise, there’s no rule that says when you sell an asset you’re going to make money on it. So it is possible to make a “capital loss” if the money you realise from selling an investment is less than what you paid.
And even then, there is no consolation prize of being able to take that capital loss off the total of your income for the year. The Tax Office won’t allow deductions of capital losses from your assessable income other than capital gains. What the tax law does allow you to do is to “carry forward” any losses to be deducted from any future capital gains.
An essential in all this is to keep good records. So make sure you keep all receipts and any details of financial transactions, insurance and valuations, and records of repairs or brokerage and so on.
More guidance: See the Tax Office’s Guide to Capital Gains Tax 2015.