CGT, or Capital Gains Tax, is the tax you pay on the profit you make from selling an asset. In most cases, your Capital Gain will be the difference between what you paid when you purchased the asset and what you received when you sold it; although there are exceptions, including if you purchased the asset before CGT was introduced (September 20, 1985). In that situation, you won’t pay any CGT.
While you may not like losing a fair portion of profit when you sell a large asset (like an investment property), the point of CGT is to ensure that income generated through the buying and selling of assets is taxed much like your regular income is. For example, without CGT, someone who regularly bought, renovated and sold houses for a profit would pay no tax at all (although they would most likely be classified as running a renovation business and taxed accordingly).
If you consider some of the main exemptions and concessions for CGT, it becomes clear that the ATO is more interested in taxing people looking to profit from frequent asset sales rather than mums and dads who happen to be in position to sell an asset for a profit occasionally.
Common exemptions include: the sale of your main residence (although you may have to pay either full or partial CGT in certain circumstances, including if you have used the home to earn a profit – often rental income); the sale of your car (as long as it is less than one tonne and carries a maximum of less than nine passengers), and the sale of personal use items that were acquired for less than $10,000 (things like jewellery and some collectibles fall into this category).
There are quite a few other exemptions from CGT, including gambling wins (and losses!) as well as prizes (such as the lottery). There is also currently a concession available for individuals and small businesses who hold an asset for more than 12 months. In this situation, you are only required to pay tax on 50% of the Capital Gain. Again, it is clear that the focus of the ATO here is to ensure full taxation of people making frequent purchases and sales, while reducing the tax burden on those holding assets for a prolonged period.
When calculating the tax rate applied to Capital Gains for individuals, the marginal tax rates for individuals are used, with Capital Gains (after exemptions and concessions and minus any Capital Losses – which can only be offset against Capital Gains and not regular income) being added to your other taxable income to determine your overall income for tax purposes.
In addition to the more widely available exemptions and concessions discussed, there are also concessions available for small businesses, which we will discuss in a future article.
By Jennifer Lowe
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