The Capital Gains Tax (CGT) is a tax regime applied to profits made from capital assets and can significantly reduce the total amount made. It becomes part of a person’s individual income tax assessment, however, the type of asset sold or the type of business conducting the transaction may warrant a CGT concession over the capital gain. Here is a breakdown of the Capital Gains Tax and available concessions potentially reducing the total tax payable.
When will the Capital Gains Tax apply?
The CGT will apply where gains or losses have occurred from ‘CGT events’. CGT events are when a capital asset is either:
- Disposed of,
- Lost, or
The most common example of a CGT event is the sale of a capital asset. After a sale of a capital asset occurs, the seller would have either made a gain or a loss from the transaction. This gain or loss is the difference between the value of the sale of the capital asset, and the original cost that the seller paid to obtain the capital asset.
Where there is a gain, it will become part of a person’s individual tax assessment and taxed at their marginal tax rate.
Where there is a loss, it can be weighed against capital gains and reduce the total amount taxed.
What is a Capital Asset?
Capital assets are those which the CGT is applied to and any gains made from these assets will be taxed.
These assets are typically ones that are of significant value, held for a long period of time without a clear timeframe for its disposal.
They may include:
- Real property/ land,
- Collectible items such as jewellery or antiques, or
- Personal assets valued over $10,000.
Reducing Capital Gains Tax Payable
Some entities may be entitled to a reduction over the CGT payable, particularly a 50% discount on the tax where the entity had held the asset for longer than 12 months.
These entities include:
- Superannuation funds or,
- Those that operate a business discussed further below.
Exemptions to the CGT will also apply to the following assets:
- Real property where the owners have lived in it for over 12 months, making it the principal place of residence.
- Personal property that is valued $10,000 or less,
- Collectible items that are sold for less than $500.
CGT Concessions for Small Businesses
Small business owners may be eligible for CGT concessions allowing them to retain a portion or all of their capital gains over active assets. CGT assets are active assets when it is used in the course of business and can either be a tangible or intangible asset. If a capital asset satisfies the necessary requirements to deem it an active asset, a business may be eligible for the following tax concessions:
- 50% reduction of the CGT: where the active asset has been owned for longer than 12 months,
- Complete exemption: Assets sold by small businesses that were owned for 15 years will be exempt from paying the CGT if the owner is over 55 years of age and intends to retire,
- Roll Over: after the sale of a business, part or all of the CGT can be deferred for two years if a replacement asset is acquired or expenses have been incurred to make capital improvements.
However, these exemptions are not afforded to companies and they will need to pay tax over 30% of any capital gains.
The CGT applies to profits made from capital assets that become part of an individual’s or business’s tax assessment. With the range of CGT exemptions provided, it may be worth seeking further information to ensure a business or individual is eligible to have their CGT reduced.
If you need assistance with Capital Gains Tax related issues, get in touch with us via the contact form by calling 1300 337 997.