What is Capital Gains Tax (CGT)?
What is Capital Gains Tax?
Capital Gains Tax or CGT is a tax that is paid when you sell an investment or asset for more than it cost.
For example, you may be liable for capital gains tax if you sell shares, property, a banana ice cream business, Bitcoin or a contract for more than it cost to buy.
Is CGT the same as income tax?
Capital gains tax is different to the income tax you pay on your wages but both CGT and income taxes are paid in your yearly tax return.
For example, short-term capital gains are added to your income tax.
What is a Capital Loss?
A capital loss is a tax that is paid when you sell an investment or asset for LESS than it cost. These losses cannot be used to lower the tax paid on your salary (E.g. PAYG) but they can be used to reduce your other capital gains.
Gimme an example
Georgia buys $1,000 of Australian shares and sells them for $1,500 6 months later. That's a capital gain of $500 ($1,500 - $1,000). Georgia also receives dividend income of $100.
Georgia will pay taxes on $600 in total. That is, she will pay taxes on both the dividend income ($100) and the increase in the value of her shares ($500).
If her tax rate is 20%, Georgia will pay $120 in tax for her investment (20% x $600).
How about if Georgia owned the investment for more than 1 year?
Individuals can receive a capital gains tax discount for owning an investment for more than a year.
For example, if Georgia owned her shares for more than 1 year she would pay tax on only half ($250) of the capital gain ($500).
Why only half?
The 'CGT discount' (as it's called in the finance biz), encourages people to be investors and hold assets for longer periods of time.
Capital Gains on the family home
You won't be liable to pay capital gains tax on some assets.
For example, capital gains made on the family home or a car that was used for personal reasons only are exempt from CGT (source).
I work from home or drive for Uber
If you use your house as a home office or workshop, or use your car to make money (e.g. Uber), you may be liable for some capital gains tax when you sell.
Check with your accountant if you're worried about paying a large tax bill.
Tax planning is vital
If you're like most Aussies, tax is the biggest bill you'll pay each year. In fact, if you think about it long enough you realise that if you're paying 30% tax it means you're working for the Government for 3 months of the year. Yikes!
Therefore, tax planning is essential, especially if you're investing, retiring, inheriting some money or about to make a big personal purchase.
Speaking to a qualified tax agent and doing those things correctly could save you thousands of dollars.
- Is buying/selling this investment tax effective?
- Do I have capital losses to offset capital gains?
- Is it better to invest in my personal name, via a trust or company?
A good accountant or adviser could help you answer these questions.
Test Your Knowledge
Philip makes a $100,000 profit on an investment property that he bought six months ago. What is Philip's capital gain for tax purposes?
Philip's capital gain for tax reasons is $100,000 because he held the investment property for less than a year.
If Philip made $100,000 in capital gains and has a tax rate of 20%, how much capital gains tax will he pay for his investment?
Philip will pay $20,000 in capital gains tax. That is, $100,000 (the capital gain) x 20% (his tax rate) = $20,000.
If Philip holds an investment for more than 1 year, is he likely to pay less tax?
If Philip owned his investment property for more than one year his capital gain for tax purposes would be $50,000 -- not $100,000. Meaning, he would pay less tax.
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