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Capital Gains Tax: What is it? When do You Need to Pay it?

What is CGT? You need to check for capital gains tax before filing your income tax. Know exactly what it is, and other essential details about it, in this post.

Capital Gains Tax: What Is CGT? When Do You Need to Pay It?

When you hear the term ‘capital gains tax,’ do you still scratch your head and ask: What, exactly, is CGT? Don’t worry, you are not alone. But we don’t want you to stay in the dark about capital gains tax or CGT, either. So, without further ado, let’s talk about it in detail.

What is CGT?

Capital gains tax or CGT for short is a type of tax charged by the government on any profits you make when you sell a property or real estate, such as a house you own, or any other asset. This includes your share portfolio and similar investments, rental property, cryptocurrency, foreign currency, collectibles such as jewellery or rare coins, personal use assets like furniture, boats, household appliances and electrical goods. However, personal use assets and collectibles are only subject to CGT above a certain value.

As an Australian resident, when it comes to real estate property you own, you will only pay capital gains tax when you don’t live in it. If the only property you own is your main residence, CGT does not apply.

And, an important note to remember is that you pay CGT only on investments acquired (other than your residence) beginning 20 September 1985 – the date when CGT was first introduced in Australia. However, you also need to check if any such assets are excluded from capital gains tax aside from your family home. 

It is also important to note that assets acquired before 20 September 1985 can be subject to CGT if there are plans for substantial modifications to be done to them. Hence, it is critical to seek advice prior to significantly changing any such assets.

Capital gains tax is actually part of your income tax. The capital gain or profit you made from the sale of an asset is classified as part of your taxable income for the purpose of your tax return.

Capital gain and capital loss

Also, there is such a thing as a capital gain or loss. An example of a capital gain would be if you bought a property after 20 September 1985 at a purchase price of $150,000 and then sold it last year for $725,000.

Capital loss would result from you buying a car with a sale price of $25,000 in early 2019 and then selling it for $21,500 a few months later. In case of capital loss, you can deduct the amount from your capital gains (if any, from other sources) to reduce the amount of tax you need to pay.

However, if you haven’t made any capital gains during the applicable income year, any capital losses you made can be carried over to other income years – which may prove quite useful and fortuitous some other time.

Calculating your capital gain

How much CGT you’ll pay depends on the difference between the selling price and the original cost you paid to buy the asset, minus any related expenses you incurred to be able to purchase it, such as stamp duty and legal fees.

Companies and individuals pay different rates of CGT as exemplified below:

  • Individuals: The CGT is the same as the income tax rate for that financial year. If you made a profit and you’ve held an asset for more than 12 months (and don’t have any capital losses), you can apply the 50% discount to calculate your net capital gain, except when the indexation method applies (for assets acquired before 11.45 am on 21 September 1999 and held for 12 months or more before the relevant CGT event).
  • Businesses: The CGT rate for businesses is 30% tax without any discounts.
  • Self-Managed Super Funds: The CGT rate for SMSFs is 15%. However, a discount of 33.3% is available.

If you’re concerned about a particular property, you can get an approximation of CGT by taking a look at the checklist available on the Australian Taxation Office (ATO) website.

And to make lodging your tax return easier for you, including determining your capital gains tax, hire a professional accountant to take away the stress of doing this task.

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