Capital gains tax (CGT) was a tax reform initiative introduced by the Hawke/Keating government on 20 September 1985. CGT now applies to specified assets such as property, shares, collectables and even cryptocurrency utilised as an investment. Where those assets increase in value after you acquire them and you then dispose of the asset, any capital gain is added to your taxable income for that financial year. If you have held the asset for 12 months or more, a 50% discount of the capital gain applies – a significant concession.
The purchase price of an asset, including costs such as legal fees and/or commissions, is referred to as the ‘cost base’. In the simplest situations, the capital gain equals the selling price less the cost base value. But the cost base may be adjusted up or down depending on the history of the asset, and this introduces an element of complexity.
Some assets are exempt from CGT. These include assets acquired before 20 September 1985, your main residence on up to two hectares of land, cars and motorcycles, personal use assets (furniture, electrical equipment), some categories of collectables (jewellery, stamps) and winnings from gambling.
Cars are normally depreciating assets – although the sale at auction last year of a Ford Falcon GTHO for $1.3 million was a record, and a massive capital gain on the initial purchase price! But regardless of when it was acquired, this sale was CGT-free. A nice ‘investment’ indeed.
Just as assets can increase in value, they can also fall, resulting in a capital loss. Capital losses can be used to offset capital gains. So, for example, if you intend to sell a parcel of shares that has made a capital gain, you could reduce that gain, and hence the tax payable, by selling some shares that have made a loss. If you do incur a loss selling an asset, but are unable to offset a capital gain at that time, your loss may be carried forward and used in a future financial year.
Probably the most common assets held by members and likely to attract CGT are shares listed on the Australian share market, an investment property or holiday home. It is imperative that comprehensive records of income and expenditure are maintained to ensure you pay no more tax than is required if the asset is sold. If you have an investment property/holiday shack, record any associated purchase costs, council rates, utility servicing costs, maintenance, capital improvements and so on. While a holiday shack may be for family getaways only and not rented out, you may still be able to use a range of ongoing expenses to ultimately lower any capital gains tax.
For shares, record the purchase price and selling price, along with any buying/selling costs. Similarly, if you participate in a dividend re-investment scheme. The dates on which you purchase and sell an asset should also be noted.
It is worth remembering that for property, the date of disposal is the initial signing of a contract of sale, usually when a deposit is paid, and not when the final payment is made at settlement. Failure to recognise this fine point could result in a substantially increased tax bill – particularly if you are looking to access the 12-month ownership capital gains concession of 50%.
In my next article, I will address some common CGT situations including tax planning, relationship breakdown and deceased estates.
Note: Capital gains tax is a relatively complex area of taxation law and if you are likely to be acquiring or disposing of assets, you should discuss the situation with your accountant or qualified tax adviser.
This article is in no way intended to provide you with personal advice and you should discuss your own financial circumstances with a qualified financial adviser before committing to any decision on matters raised in this article.