Capital gains tax is a tax paid on profits from assets when they are sold or exchanged. In other words, Capital gains tax (CGT) is the tax you pay on profits from selling assets, such as property. You report capital gains and capital losses in your income tax return and pay tax on your capital gains. Although it is referred to as ‘capital gains tax,’ it is part of your income tax. It is not a separate tax. Here’s how Capital gains works:
If a person buys a house and over time its value increases, tax is paid on the amount by which it increased when it is sold. If the asset is sold for less than what was originally paid for it, there is no capital gains tax to pay because no gain was made. This means instead of capital gains, there is a capital loss.
In Australia, the tax is payable when a tax return is filed—not at the time the asset is sold. Capital gains apply to:
- Investment properties excluding the primary residential home.
- Shares also attract capital gains tax when they are sold, or when a distribution is received from a managed fund but this excludes a dividend.
- Units and cryptocurrencies also attract capital gains tax.
Depreciating assets such as cars and motorcycles are exempt from Capital gains tax
If you have a capital gain, it will increase the tax you need to pay. You may want to work out how much tax you will owe and set aside funds to cover it. Below is how to calculate Capital gains:
- After selling an asset, subtract the sale price from the asset’s initial purchase price.
- Subtract the associated costs of the transaction, which may include stamp duty and legal fees.
- The amount that remains if there is a profit is the capital gain. You would then pay tax on your gain at your marginal tax rate.
In relation to Capital gains tax payable, a person can get a 50% discount if the asset was owned for 12 months before being sold, exchanged, or gifted. The person who sold the asset must also be an Australian resident for tax purposes.