Selling a valuable asset seems like a profitable way to get funds, right? Not necessarily, as you might find that the Capital Gains Tax (CGT) significantly reduces the profit you thought you’d receive. Although referred to as a ‘tax’, it’s a tax which ends up being included as part of your individual income tax assessment on assets on which you’ve made a capital gain.
Here we will discuss the assets which are taxable under the Capital Gains Tax and the available exemptions.
What’s a Capital Gain?
Capital Gains are where you sell certain assets at a higher rate than what you paid for it. From this sale you make a ‘capital gain’.
Some of these assets include:
- Shares
- Real estate
- Collectible items such as expensive jewellery or artworks
- Personal use assets with a value greater than $10,000 (such as boats, furniture and household items)
For example, an investment property you purchased in 1990 would cost significantly more in 2018 due to inflation and the tendency for property to appreciate in value over time. A capital gain forms part of your individual income, and you are taxed under individual income rates (depending on your income bracket).
Exemptions
Property which is your home or a Principal Place of Residence (PPOR) is exempt from the CGT, as are properties which an owner has lived in for 12 months or more. Further, personal use assets which are equal or less than $10,000 and collectible items sold for less than $500 are not considered a CGT asset. A tax lawyer can provide further advice if you’re not sure.
Capital losses
Capital losses are exactly the opposite to capital gains, that is where you sell something at a lower price than what you paid for it. If you sold the same investment property, but there had been a significant downturn in the market, and it was sold for less than what you paid for it, this would constitute a capital loss. Capital losses can be weighed against capital gains to reduce the amount you pay, and can also be included in the gains of other years.
CGT for small businesses
There are also some significant exemptions for assets which are sold by small businesses. This includes:
- Assets which have been owned for 15 years
- Assets sold upon retirement
- A 50% reduction on active assets
- A rollover for 2 years
However, there are no CGT exemptions available for companies, and they pay a standard rate of 30% (company tax) on any capital gains made by them.
The CGT is a complex tax that is added to your individual tax assessment, or your business’s. However, there are a number of exemptions that apply, so be sure to check if you’re eligible.
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