Many savvy investors seek to return a capital gain on their investment.
According to the Australian Tax Office, a capital gain or capital loss is the difference between what an asset initially cost you and what you receive when you sell or dispose of it.
When capital gains tax is applied to the capital gain, it provides the Federal Government with its share of the profit. The reasoning behind this is, as long as the asset is not exempt from capital gains tax, any profit you make on its sale is classed as personal income. As you pay tax on your capital gains, it forms part of your income tax, so it’s not considered a separate tax.
Understanding and calculating capital gains tax can play an important role in making an investment decision. With that in mind, we’re detailing when you will and won’t incur capital gains tax and how the tax is calculated.
Capital gains tax exemptions: when you will and won’t incur the tax
Most personal assets are exempt from capital gains tax, including your car, furniture and your Principal Place of Residence (PPOR) also known as your home.
The tax is not applied to depreciating assets used solely for taxable purposes, including fittings in a rental property or business equipment.
When it comes to major capital gains tax exemptions, these include:
- Any asset acquired before 20 September 1985, when the tax was first introduced
- Any asset already taxed under another type of tax, such as trading stock or assets that have depreciated
- Your home or Principal Place of Residence unless it has been used as your Principal Place of Business. For your home to be considered your main residence, typically, the following criteria will apply:
- The property must have a dwelling on it (you’re not entitled to the exemption for a vacant block)
- You live in it
- Your personal belongings are in it
- You receive your mail at this address
- This is your address on the electoral roll
- Utilities are connected, such as gas, electricity and phone.
While rental properties typically attract capital gains tax when sold, if you choose to rent out your PPOR, you may be eligible for a tax break as long as you meet certain requirements. A skilled tax accountant will be able to provide you with the right details for your situation.
How to calculate capital gains tax
While not always straightforward, working out how to calculate capital gains tax can be useful when analysing your investment strategy.
As a general guide, capital gains tax can be calculated in three ways with all methods charged at your marginal tax rate. You may choose the method that gives you the smallest capital gain, as long as you meet the conditions as set out by the ATO.
- CGT Discount Method: If you own an asset for more than a year, as an individual, as a partner in a partnership, or as a trust, you can reduce your capital gain by 50% (or by 33.3% for complying superannuation funds).To calculate your capital gain using this method, you subtract the cost base (the amount you purchased your asset for) from the capital proceeds, deduct any capital losses, then reduce by the relevant discount percentage.
- Indexation Method: If you acquired the asset before 11:45am on 21 September 1999 and had it for 12 months or more before disposal, you may increase the cost base by applying an indexation factor based on the consumer price index (CPI) up to September 1999.
To calculate your capital gain using this method, apply the relevant indexation factor, then subtract the indexed cost base from the capital proceeds.
- Other Method: If you own an asset for less than a year, you will pay the full rate of capital gains tax on any capital gain you make. To calculate your capital gain using this method, subtract the cost base from the capital proceeds.
Remember, having a taxation accountant on your side is the best way to calculate capital gains tax rates and learn exactly what you will pay tax on. The ATO also provides plenty of information to help you calculate your capital gain or loss.
If you’re selling property, it’s worth noting that the capital gains tax event is usually the date of the contract, not the date when you settle. Why is the timing of the capital gains tax event important? The timing of your capital gain or loss will tell you in which financial year you will need to report, which may affect your tax liability.
Capital gains tax and alternative investments
Managed investment trusts
When investing in a managed investment trust, similar to the Trilogy Industrial Property Trust, investors may benefit from the way in which their managed trust distributes tax through the trust structure. If your managed trust has investments in capital assets, your fund may be eligible to treat particular assets on ‘capital account’, where otherwise they would be treated as ‘revenue account’ holdings.
Doing this allows eligible investors to access the general capital gains tax discount at 50%, potentially providing a substantially reduced tax liability on capital gains earned and distributed through the managed trust.
Self-managed Super funds and shares
If you want to learn more about capital gains tax and your self-managed super fund (SMSF), or the impacts of capital gains tax on share market investing, the ATO provides a wealth of in-depth information, with helpful calculators available.
Understanding and calculating capital gains tax can play an important role in making an investment decision.
If you’re looking for more on the benefits of investing in a managed property trust, check out 6 things you need to know about Unlisted Property Trusts or explore our investment offerings.
The material on this website is intended only to provide a summary and general overview on matters of interest. Trilogy does not provide tax advice, and readers should note that the above should not be relied on as it is intended to provide background information only. Trilogy is only licensed to provide general financial product advice on its own products and does not consider your objectives, financial situation or needs when providing any information or advice. You should consider whether the advice is suitable for you and your personal circumstances and we recommend that you seek personal financial product advice on your objectives, financial situation or needs and obtain and read the relevant product disclosure statement before making any investment decision.