Capital Gains Tax (aka. CGT) is like a dirty word for most Australian investors, and when spoken of it’s often with a tinge of abhorrence, if not worse. Even everyday people who aren’t investors themselves seem to know it’s not a good thing. But what exactly is it and why do people shiver in their shoes when it’s mentioned?
What is Capital Gains Tax?
Let’s go straight to the source, according to the ATO, Capital Gains Tax is “the difference between what it [an asset] cost you and what you receive when you dispose of it.”
Okay, so now in plain English so the rest of us can understand: If you make a profit from your investment, then that profit is subject to be taxed.
That seems harmless enough, so why do investors loath CGT? Because a capital gain gets tacked onto your income; which increases your income, which increases your tax payable on your income. And nobody likes paying more tax, right? Right. Especially when that capital gain potentially pops your income into a higher tax bracket.
Let’s use a basic example: You work in the city earning $75,000 per year. A few years ago, you bought an investment property for $350,000. You got excited by the fact it’s raised in value, and want to cash in. You sell it today for $400,000. Your Capital Gain is $50,000 ($400,000 sales price minus $350,000 purchase price). Now your personal income is considered to be $125,000 by the ATO, which jumps you into a higher tax bracket – which means more tax you have to pay.
Now imagine what sort of income tax you’d pay if you had multiple profitable sales happening throughout the year, like some professional property investors do. Scary isn’t it?
Is there an opposite? Yes, but don’t get too excited.
Yes, there is rival to the CGT, but it’s not quite as lovable as you may think: The Capital Loss. So when we reverse the situation from above, and you make a loss on your investment, the ATO doesn’t let you reduce your income by that amount, so you can pay less tax. Nope, that’s not how they roll. You can only use a Capital Loss to apply against a future Capital Gain. Funny how the CGT rule doesn’t go both ways, eh?
How can you win then?
Don’t get me wrong, they’re not all bad at the ATO. They don’t apply the CGT to most personal assets like your own home or car. And if you have a solid and experienced team (like mine) behind you, there are many ways to minimise the tax you’ll have to pay. How so? Through exemptions and concessions. There’s a whole variety of discounts that can be applied, depending on your specific situation, which can lower that CGT amount, therefore lowing your tax bill.
For example, small business owners may be able to walk away from the sale of their business – tax free – if certain conditions are met, which (as I’m sure you’re aware) is massive in terms of tax savings.
But to learn more about the nitty-gritty of CGT exemptions and concessions, it’s best you have a read through this article and then speak to me or one of my team.
We can help you.
This is what me and my team of experts do every day: minimise your tax while helping you maximise your profits. We applaud you for playing the money game and getting into investments to further advance your wealth – but unless you know all the rules of this game – you need my team to help you win it. Pick up the phone and let’s have a chat on 1300 135 918 or email me here.