Introduction to Capital Gains Tax
Capital Gains tax for those who are unaware of it?
This tax is quite different from the other taxes that you pay to. Capital Gains Tax is applicable on the profits that you make from selling a capital asset. Things that fall under the category of a capital asset are shares, real estate, etc.
In financial terms, when you sell something a capital asset for a price which is higher than the price you actually paid to buy it, this is called a capital gain.
And in this case, you have to pay the tax from the profit that you made. And this tax is not payable at the moment when you have made a profit instead, you will pay the capital gains tax as usual at the end of the fiscal year along with your regular taxes.
So, it is your responsibility to have some money at the time of paying the taxes in the year when you had some capital gains.
Ways to calculate your capital loss/gain?
Whether it be a capital loss or a capital gain, it occurs when you sell a capital asset. There is gain when you sell it a price higher than you paid for it.
And, there is a loss when you sell it at a price that is lower than the price you paid for it. You can understand it more clearly by the following example:
Person A bought a property for $700,000 and he sold it for $900,000 after some time then, he is in profit. i.e. $900,000 – $700,000 = $200,000. As per the rule, he has to declare a capital gain in the year of occurrence of this event.
In the same way, if someone sells a property at a price that is lower than they actually paid for, it is a situation of capital loss.
For example, if someone bought a property for a price of $500,000 and sold it for $400,000, he is under a loss of $100,000. You can understand it mathematically by the following equation:
$400,000 – $500,000 = -$100,000.
Just like the earlier case, this person has to declare the capital loss in his tax return of the same year.
If you had more than one capital gain in the same year, you can add them up to calculate the net capital gain. In the same way, if you had some capital gain and also suffered a capital loss in the same year, you have to subtract the capital loss from the capital gain to get the net capital gain/loss amount.
But, we recommend you avoid doing these things on your own because these things are quite complex and you should take advice from some experts in calculating these things.
How much do you have to pay for a capital gain?
There is no fixed capital gains tax rate. Instead, you have to add the total amount of capital gains into your income for that fiscal year.
And the ATO will calculate your total payable amount. You can understand it from this simple example. If you have got an income of $70,000 and a capital gain of $30,000 for the year 2020, your total earnings would be $70,000 + $30,000 = $100,000.
Things that are exempted from Capital Gains tax:
This law was introduced on 20 September 1985. So, as per the law, the defined assets which are acquired after this date are eligible for Capital Gains tax. But here is a list of items that are not included in the category:
- The assets that you have acquired before September 20, 1985.
- All the depreciating assets that are used for tax purposes.
- The main residence of an individual.
- Car and motorcycles.
Selling these items in a fiscal year doesn’t have anything to do with Capital Gains tax. And the items listed below are eligible for Capital Gains tax:
- Capital improvements made to the land.
- Assets of personal use and the collectibles having a price that is above a certain value.
- Shares and other investments like it.
- Secondary residence and other investment properties.
Discounts on capital gains:
In case you have acquired an asset for more than 12 months, you will have some discount on the capital gains amount. This is a method where you first calculate the capital gain and then you will have a discount of 50%.
If you fulfill these criteria, you can increase the base cost (the price that you paid for this asset) with the help of the indexing method.
From then on, you will use the indexed cost instead of the base cost of that asset. And all those who have not kept the asset for at least 12 years are not eligible for this scheme.
What about capital loss?
In the year when you have suffered just a capital loss, your total payable tax amount will not decrease. But this loss will be incorporated in the next year when you will have some capital gain.
Best ways to calculate your capital gains tax?
It is quite a complex task to calculate capital gains tax on your own. You should do it the way that gives you maximum benefits.
We highly recommend you to consult a registered accountant for calculating your capital gains tax Australia.