Capital Gains Tax

What You Need to Know about
Capital Gains Tax

Capital Gains Tax could probably be rated as the least understood area of tax. Also, it is an area that the Tax Office has just employed additional staff to police.

So what is a capital gain? How is a capital gain taxed? What is exempt from this tax?

A capital gain can be said to comprise a profit that may not be income according to ordinary concepts. The most common capital gains are those that arise out of share dealings and investment property sales and disposals.

Legislation imposing capital gains tax has applied to assets acquired and disposed of since 19 September 1985. Gains as calculated under this part constitute assessable income and must be included in the calculation of taxable income.

In summary, CGT is a tax on the realisation of an asset acquired after September 19, 1985, where the realisation of the asset was not undertaken in the ordinary course of business.

Any gain from an ordinary business transaction is assessable under ordinary income and not under the CGT provisions. Not all assets are subject to CGT and provisions exist to defer the tax in some circumstances.

How Does Capital Gains Tax Work? You need to consider the following questions;

  1. Did a CGT event happen in the income year?
  2. Did the CGT event involve a CGT asset or was there a capital receipt?
  3. Does an exemption or concession apply to the CGT event?
  4. Has a capital gain or capital loss been made from the CGT event?
  5. How do you calculate the gain or loss?
  6. Is rollover relief available to the taxpayer to defer the capital gain?
In summary
  • A gain will arise when the sale price is greater than the cost.
  • A loss will accrue when the sale price is less than the cost.
  • First compare the sale price with the cost – if it is higher then there may be a capital gain. If the asset has been held for more than 12 months, the gain is discounted.
  • If the sale price is less than the cost, a capital loss will arise. The loss is never discounted.
  • The sole or principal residence does not give rise to a capital gain or loss unless the property is used for income producing purposes.

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