Understanding Capital Gains Tax (CGT) may seem like a challenge for those unfamiliar with the tax system. But, when it comes to making smart financial decisions in Australia, whether you’re an investor, property owner, or retiree, it’s crucial to grasp how CGT works.
At Rixon Capital, we encourage investors to learn about the potential capital gains taxes associated with managed funds and annual returns.
This guide simplifies the process and walks you through the essential steps for how to calculate capital gains tax, so you can manage your financial planning with confidence.
What is Capital Gains Tax (CGT)?
Capital Gains Tax (CGT) is the tax you pay on the profit (or gain) you make when you sell certain assets, such as property, shares, or collectibles and reflects your income tax bracket. CGT isn’t a separate tax to income tax. CGT is applied to the difference between the amount you sell an asset for and the price you paid for it, which is known as the capital gain.
CGT was introduced in Australia in 1985. It applies to various asset classes, including real estate, shares, and cryptocurrencies. There are exceptions – for example, your primary place of residence is exempt from CGT.
When you sell an asset for more than you paid for it, you make a capital gain. But, if you sell it for less, you make a capital loss, which may be offset against future capital gains. So, how do capital gains taxes work in this context? Essentially, taxes are only applied to the gain (profit) you make from selling an asset.
How Capital Gains Are Calculated
To figure capital gains tax, the first thing you need to do is calculate the capital gain. How are capital gains calculated? It’s relatively simple: subtract your cost base from the sale price.
The cost base is the amount you paid for the asset plus any associated costs incurred while purchasing, holding, or selling it. These can include:
- The original purchase price
- Stamp duty
- Legal and agent fees
- Costs of improving the asset (e.g., renovations on a property)
For example, if you sold an investment property for $500,000 and it cost you $300,000 (including the cost base), your capital gain would be $200,000.
Step-by-Step Guide: How to Calculate Capital Gains Tax in Australia
So, how is capital gains calculated? Follow these simple steps:
Step 1: Determine the Sale Price of the Asset
The sale price is the amount you receive from selling the asset. It includes the amount you receive minus any associated selling costs (such as agent fees).
Step 2: Work Out the Cost Base
The cost base is the amount you originally paid for the asset plus any additional costs you incurred to hold and sell it. This can include purchase costs, agent fees, and costs of improvements.
Step 3: Subtract Cost Base from Sale Price
Once you have both the sale price and the cost base, subtract the cost base from the sale price to figure out the capital gain (or loss).
Step 4: Apply Any Capital Losses
If you have capital losses from other assets, you can offset these losses against your capital gain, which can help reduce your tax liability.
Step 5: Consider the CGT Discount
If you’ve held the asset for more than 12 months, you may be eligible for a 50% CGT discount on the gain. This means you only need to include half of the capital gain in your assessable income.
Step 6: Add the Net Gain to Your Assessable Income
Finally, the net capital gain is added to your assessable income for the financial year. This amount will be taxed at your marginal income tax rate.
CGT Discount Explained
The CGT discount is a valuable tool for investors seeking to manage their tax liabilities. If you’ve held the asset for at least 12 months, you are entitled to a 50% CGT discount.
This discount applies to individuals, trusts, and superannuation funds (SMSFs), but not companies, which are taxed at the full applicable corporate tax rate.
Capital Gains Tax on Different Asset Types
CGT doesn’t apply uniformly across all asset types, so it’s essential to understand how CGT works for different investments:
- Real Estate: If you sell an investment property, CGT applies. However, your primary residence may be exempt from CGT under the main residence exemption, provided certain conditions are met.
- Shares and Managed Funds: CGT applies to the sale of shares and managed funds. The 50% CGT discount also applies if you’ve held the shares for over 12 months.
- Cryptocurrencies and Digital Assets: Cryptocurrencies like Bitcoin are considered assets and are subject to CGT. When you sell or trade crypto, the capital gain must be calculated.
Tips for Managing Your CGT Exposure
To manage your potential CGT liability, consider these strategies:
- Hold Assets for Longer: Holding an asset for more than 12 months allows you to access the CGT discount, which reduces your taxable capital gain by 50%.
- Time Your Sale: Consider selling assets in a year when you’re in a lower tax bracket to minimise how much capital gains tax you pay.
- Offset Capital Losses: If you have capital losses, use them to offset gains and reduce your CGT liability.
- Seek Professional Advice: For complex investments or large assets, seek advice from a tax professional to ensure you’re taking full advantage of the available exemptions and discounts.
Common Mistakes and Misunderstandings
While CGT is straightforward, people often make mistakes:
- Forgetting to Include All Costs: Always account for all associated costs when calculating your cost base, as overlooking even small amounts can affect the capital gain.
- Misapplying the CGT Discount: Ensure you meet the 12-month holding period requirement to qualify for the 50% CGT discount.
- Not Reporting Digital Assets: Remember that cryptocurrencies are subject to CGT, and failing to report them can lead to penalties.
Capital gains tax doesn’t need to be a complex topic. By following the steps outlined above, you can easily calculate how to figure capital gains tax on your assets. Remember to keep detailed records, consider the CGT discount, and consult a tax professional if you’re in doubt.
With the right approach, you’ll have a clearer understanding of how to calculate capital gains tax and be better prepared for your next asset sale.
As an income-only fund strategy that pays monthly distributions, the Rixon Income Fund does not have scope for capital appreciation. Investors only pay tax on the income earned, with no tax liability incurred upon sale of their units. Contact rixon.capital today to learn how their income-only fund strategy operates.
