Capital Gains Tax
When is Capital Gains Tax applicable?
Capital Gains Tax can be a rude shock if you are unaware of where it applies and the ramifications it can have for you.
Capital Gains Tax is normally only applicable if the capital gain or loss is made within the parameters of what equates to a typical Capital Gains Tax event.
Capital Gains Tax (CGT) events define whether a particular type of transaction or event may result in either a capital gain or becomes a capital loss. Many Capital Gains Tax events will involve the purchase and disposal of a Capital Gains Tax asset, yet there are also some other Capital Gains Tax (CGT) events that will relate to the receipt of a capital item (capital proceeds).
It’s important to be aware whether Capital Gains Tax applies to any transaction you may be considering, as receive a real surprise when tax time comes around.
First you need to know which type of Capital Gains Tax event applies in your situation. This will affect how the Capital Gains Tax can affect you because it determines how you calculate your capital gain or capital loss.
There is a large range of different Capital Gains Tax events. Some will take place regularly and have an affect on a lot of people, while others are very rare and will only affect a small number of people.
The most common Capital Gains Tax (CGT) event takes place when you dispose of an asset to another person – for example, if you sell the item or give it away, including to a relative the disposal could mean that you are liable to pay Capital Gains Tax.
Here are some examples of when a Capital Gains Tax event happens:
• an asset you own is lost or destroyed (the destruction may be voluntary or involuntary)
• shares you own are cancelled, surrendered or redeemed
• you enter into an agreement not to work in a particular industry for a set period of time
• a trustee makes a non-assessable payment to you from a managed fund or other unit trust
• a company makes a payment (not a dividend) to you as a shareholder
• a liquidator or administrator declares that shares or financial instruments you own are worthless
• you receive an amount from a local council for disruption to your business assets by roadworks
• you stop being an Australian resident
• you enter into a conservation covenant, or
• you dispose of a depreciating asset that you used for private purposes.
Source:ATO
As an example, if you owned a particular asset and you sold the item to a company that you are the director of even though you may feel that you still own the item it has changed ownership into another entity. Once the item has been deemed to have been disposed of then Capital Gains Tax calculations may become applicable. So whenever you are changing ownership of anything be aware that the transaction may have some Capital Gains Tax consequences.
In addition, it is important to be aware that if an Australian resident makes a capital gain or capital loss anywhere in the world and if it is deemed to fall into the category of a possible Capital Gains Tax (CGT) event for any of their assets then Capital Gains Tax calculations will also be applicable.
Alternatively, a foreign resident should also be aware that the Capital Gains Tax can also be applicable to a capital gain or capital loss only if a Capital Gains Tax event happens to a Capital Gains Tax asset that is deemed to be considered a ‘taxable Australian property.’
The are 2 main ways that a transaction can be exempt from Capital Gains Tax.
The fist is on the basis that the capital gain or capital loss was made on an asset that was acquired prior to the Capital Gains Tax legislation. That is if it is before 20 September 1985 (pre-Capital Gains Tax).
There are other exemptions from Capital Gains Tax, but the other popular exemption from Capital Gains Tax applies if the asset being sold is deemed to be a person’s principal place of residence.
As a rule, there is no Capital Gains Tax applicable on the sale of someone’s home, so long as the property is deemed to be the person’s principal place of residence. The ATO has specific guidelines that they use to determine whether the sale of a particular property is subject to Capital Gains Tax or not?
Do you need to pay Capital Gains Tax?
To work out whether you have to pay tax on your capital gains, you need to know:
• whether a Capital Gains Tax event has happened
• the time of the Capital Gains Tax event
• how to calculate the capital gain or capital loss
• whether there is any exemption or rollover that allows you to reduce or disregard the capital gain or capital loss
• how to apply any capital losses
• whether the Capital Gains Tax discount applies, and
• whether you are entitled to any of the Capital Gains Tax concessions for small business.
Source:ATO
Finally, it’s important to always take into consideration the ramifications that Capital Gains Tax can have on the disposal of any item.
Capital Gains Tax