Like going to the dentist, some things in life simply can’t be avoided. However, understanding our tax obligations, and the ways to easily manage them and minimise their impact, makes them a lot less painful. Here’s a brief overview of the capital gains tax (or CGT).
A capital gain, or capital loss, is basically the difference between the amount paid for an asset, such as real estate or shares, and the amount it sold for. CGT is the levy payable on the capital gain made on the sale of the asset.
Most real estate is subject to CGT, including vacant land, business premises, rental properties, holiday houses and hobby farms, as are leases, goodwill, licences, foreign currency, contractual rights and other assets.
Your main residence, however, unless it’s been used to earn rent or run a business, or is on more than two hectares of land, is generally exempt from CGT, as are assets purchased before 20 September 1985.
While the tax might feel a bit like a sore tooth, it’s actually not a separate tax, but part of your income tax, the capital gain added to your assessable income and tax paid accordingly. Given CGT is not withheld, or payable on a PAYG basis, it’s a good idea to calculate one’s anticipated tax requirements in advance and be prepared.
There are three methods for calculating a capital gain: the CGT Discount Method; the Indexation Method; and what the ATO rather unimaginatively calls the Other Method. Once eligibility requirements, such as the length of time an asset’s been held, have been met, one then simply chooses the method that gives the best result – or the smallest capital gain.
Choosing the best method for your situation can significantly reduce the amount of CGT payable. So does keeping receipts of all expenses incurred during the purchase, maintenance, improvement or sale of the asset, which add to one’s ‘cost base’. The higher one’s provable cost base, the lower the capital gain.
The Australian Taxation Office website has further user-friendly information to help you manage and minimise your CGT. There’s also a very handy CGT record keeping tool, which allows you to record and save all relevant details, making it easier at tax time too.
As always, staff at any one of our 10 Noel Jones offices are on hand to help with any property-related queries too.