Confused about capital gains tax (CGT)? You’re not alone – it’s an area of taxation many people find hard to come to grips with. This overview should help.
What is capital gains tax (CGT)?
When you sell an asset for more than the price you paid for it, the profit you make is referred to as capital gain. That capital gain (profit) needs to be included on your annual income tax return. There is no separate tax on capital gains; it is merely a part of your income tax.
When does CGT apply?
While capital gains tax can come into effect after a number of different occurrences (technically referred to as ‘CGT events’), the most common of these is the disposal of an asset.
As a rule of thumb, whenever you are changing ownership of an asset (for example selling or giving away a piece of equipment or property, including to a relative) it is more than likely that the transaction will have some CGT consequences, and you may be liable to pay CGT.
How is CGT calculated?
You are taxed on your net capital gain, which is calculated as:
Your total capital gains for the year minus your total capital losses (including any net capital losses from previous years) minus any CGT discounts or small business concessions you’re entitled to (which we’ll discuss below).
Once that figure is calculated, it is included in your total assessable income and taxed at the rate that applies to you.
What concessions might I be entitled to?
There are four types of small business CGT concessions that may enable you to minimise your CGT liability:
- Small business 15-year exemption: If your business has owned an asset for 15 years, the capital gain on that asset is not assessable if you are selling it because you’ve become permanently incapacitated or if you’re aged 55 or over and are retiring.
- Small business 50 percent active asset reduction: You can reduce the capital gain on an eligible business (active) asset by 50 percent.
- Small business retirement exemption: A capital gain from the sale of a business asset will be exempt up to a lifetime limit of $500,000. If you are under 55 years of age, the exempt amount must be paid into a complying superannuation fund or a retirement savings account to obtain the exemption.
- Small business rollover: If you sell a small business asset, you can defer your capital gain until a later year.
You can apply for as many concessions as your business is entitled to until the capital gain is reduced to nil. This choice allows you to achieve the best tax results for your circumstances.
Still got questions about capital gains tax (CGT)? Please ask them below.