When you sell an asset for more than you paid for it, unfortunately, you owe tax. Capital Gains Tax or CGT to be exact.
As an investor, this will naturally be an important part of your tax return, because part of your income will have come from selling assets at profit. In Australia, CGT forms part of your income tax, and is settled when you lodge your tax return. To calculate it, you’ll add the profit from the sale of your assets to your usual annual income, and then apply your CGT % rate (up to 45%).
In most cases, you won’t pay CGT on your principal home, your personal car, or depreciating assets like furniture. But you will pay tax on investments such as shares, investment properties, managed fund investments, ETFs and cryptocurrencies.
A short intro to CGT
CGT is based on three main factors: cost base, who owns the asset, and time owned.
Cost base incorporates everything it cost you to buy the asset. So, if you bought an investment property, your cost base would include the purchase price as well as things like stamp duty, solicitors’ fees, and renovation costs.
CGT is also calculated based on whether you’re an individual or a company. If you’re an individual, the rate paid is the same as your income tax rate for that financial year, a maximum of 45%. Companies pay a maximum of 30%.
If you own the asset as part of a self-managed super fund (SMSF), you’ll generally pay 15% in the accumulation phase, and 0% in the retirement phase.
The last metric CGT is calculated on is the time you’ve owned the asset. If you sell an asset within 12 months of buying it, you’ll be eligible for a 50% discount on your CGT (this helps to keep the costs of flipping houses and trading stocks down). Again, if it was part of your SMSF, you’ll get a 33% discount in the accumulation phase, and won’t pay any CGT in the pension phase. Time owned discounts don’t apply to companies.
You’ll owe CGT from the point you agree to sell the asset, not when the sale is settled (e.g., if you’re selling an investment property, you’ll owe tax from the date you sign the contract to sell, not the day the funds hit your bank account).
Unfortunately, certain investments don’t always pan out. So, when you sell something for less than its cost base, you have a capital loss.
Now if you are a ‘glass-half-full’ type of person, you might be able to see the bright side (the only one) of capital losses.
You can use your capital losses to offset your capital gains. Let’s say you have $20,000 in long-term gains, but $5,000 in long-term losses. You might only be taxed on $15,000 worth of long-term capital gains.
If you have capital losses, but no capital gains during the financial year or your losses surpass your gains, you can carry over your capital losses to other income years and use them to offset future capital gains.
The world of taxes can be quite complex to navigate at times. Consulting an accountant is the best approach to assess your personal situation. Book a free appointment with one of our experienced accountants to discuss your financial needs.