When selling assets and investments, ‘Capital Gains Tax’ or ‘CGT’ can seem like a daunting term. However, it’s one of those things that becomes less intimidating the more you get to know about it. Here we share what it is and how you can minimise your Capital Gains Tax liability.
What is Capital Gains Tax?
At its core, Capital Gains Tax is the tax you pay when you sell an asset that’s appreciated in value. This asset can be anything from an investment property, shares, or even collectible items. The important thing to remember is that your main residence (where you live) is typically exempt from this tax, thanks to the ‘main residence exemption’.
How Capital Gains Tax works
Here’s how Capital Gains Tax generally works: When you sell an asset for more than what you paid for it there is a ‘capital gain’, this ‘capital gain’ gets added to your total income for the financial year when the sale occurred. Contrary to what most people believe, it’s not a separate tax but an additional component of your income tax. Essentially, the net capital gains form part of your taxable income in the tax return for the relevant income year.
The 50% Capital Gains Tax discount
One of the great aspects of Capital Gains Tax in Australia is the 50% discount. If you’ve owned an asset for more than a year before selling it, you’re eligible for a 50% discount on the capital gain. So, if you sell a property and make a gain of $100,000, after applying the discount you’d only need to declare $50,000 in your income tax return!
Managing capital losses
Life isn’t always about gains though. Sometimes, you might sell an asset for less than what you paid for it which would resulting in a ‘capital loss’. This loss can be used to reduce any capital gain you made in the same financial year. If your capital losses exceed your capital gains or you make a net capital loss, you can carry the loss forward and deduct it from capital gains in future years. Its important to note that the capital loss much come before the capital gain, unless it occurred in the same financial year.
Navigating Capital Gains Tax: helpful tips
Below are few tips to help you navigate the world of Capital Gains Tax.
1. Keep good records
Good record keeping is critical. Maintain records of purchase and sale contracts, receipts for relevant expenses, and documentation of any improvements made to an asset.
2. Time your sales wisely
If possible, try to hold onto assets for more than a year. This way, you can take advantage of the 50% CGT discount (discussed above) and you will reduce the capital gain payable.
3. Seek professional advice
Taxes can be complex, and CGT is no exception. A tax professional can help you to understand your obligations and the best strategies to minimise your tax liability for your specific financial situation.
Overcoming the complexity: Capital Gains Tax made easier
While Capital Gains Tax may initially appear complicated, with a little understanding and careful planning, it becomes much more manageable. It’s important not to let the concept of CGT discourage you from selling assets or investing. Instead, ensure that you are well-informed about the tax implications of your investments, allowing you to proactively manage your tax liability and maximize your financial gains. By keeping yourself informed and seeking professional advice when needed, you can confidently navigate the world of CGT and make the most of your investment opportunities.