What is capital gains tax and how might it affect you??

What is capital gains tax and how might it affect you??

Capital gains tax (CGT) is a tax you pay on the profit made from selling or exchanging assets such as property, shares or even certain types of cryptocurrency. Though it is called ‘capital gains tax’ it is essentially considered part of your income tax, and the rate applied is the same as your individual income tax rate. In this guide, we’ll break down how CGT works, what assets attract it, and how to calculate the amount you may owe.

What assets are subject to capital gains tax?

In general, CGT applies to any asset that you sell for a profit. Some of the common assets that attract CGT include:

• Investment property: Capital gains tax is levied on any profit made from selling an investment property, but it does not apply to the sale of your primary residence (assuming the property has not been rented out).
• Shares and investments: When you sell shares or units in managed funds, any profit will be subject to CGT. This also applies to cryptocurrencies, though there are specific rules regarding crypto gains that are important to consider.
• Businesses or other investments: Any asset related to your business or other forms of investment that appreciates in value will be subject to CGT on sale.

What assets are exempt from capital gains tax?

Not all assets are subject to CGT, some common exemptions include:

• Motor vehicles: Generally cars and motorcycles are exempt because they are considered depreciating assets. This means they usually lose value over time, so no tax is levied on any sale profit (or capital loss).
• Granny flats: As of July 2021, granny flat arrangements, where a person is granted the right to occupy a property for life, were exempt from CGT.

How to calculate capital gains tax

To calculate CGT, you subtract the cost of acquiring the asset (including associated costs such as stamp duty or legal fees) from the sale price. The resulting amount is your capital gain. For example, if you bought shares for $500 in 2020 and sold them for $1,000 in 2022, the capital gain would be $500.

If you sell an asset for less than you purchased it for, you’ll incur a capital loss, but you won’t be taxed. However, these losses can sometimes offset other capital gains you’ve made.

The CGT discount: How It works

If you hold an asset for at least 12 months before selling it, you may be eligible for a 50% CGT discount. This discount is designed to encourage long-term investment and economic stability. Essentially, if you hold an asset for over a year, only half of the capital gain is taxable.

For example, if you bought a property for $500,000 and sold it for $1,000,000 after two years, your capital gain would be $500,000. With the CGT discount, you would only pay tax on $250,000.

Why does CGT matter?

Understanding CGT is crucial for making informed financial decisions, especially if you plan to sell a property or other valuable assets. Not factoring in CGT can result in unexpected tax liabilities, so it’s wise to set aside a portion of any sale profit to cover this tax. Working with an accountant can help you better understand your potential CGT obligations and ensure you are prepared for the tax bill.

While CGT can seem complex, understanding how it works and how to calculate it is essential to managing your financial future. Whether you’re selling an investment property, shares, or any other valuable asset, it’s important to factor in any potential tax implications. If you’re unsure about how CGT applies to your situation, seeking professional advice can help guide you through the process.

If you would like to speak to a broker about how CGT may affect you, click here. Or, alternatively UFinancial Tax and Accounting