Like all things with tax, most people don’t worry about needing to understand it until it impacts them. However, what most people don’t realise is that many aspects of tax already do impact them and if they can understand it better they can most likely get a better result when it comes to tax time.
So… Capital Gains Tax… you’ve probably heard of it, right? But you also probably have no idea what it means and don’t know that most of us will have to pay it at some point in our lives, right? Let’s talk about it, so you can have a better understanding, and learn how you can get the best tax results when capital gains tax does affect you!
What the hell is Capital Gains Tax?!
Alright, alright… we know you’re dying to know what this mysterious tax word is!
A capital gain or capital loss is to do with your assets! Ahhhh! And it is the difference between what it costs you and what you receive when you dispose of it. AND capital gains tax is what you pay when you receive more for your asset than what you bought it for.
So, in general terms, the profit you make on selling an asset, the Australian Government requires you to declare it as income which you then pay tax on! Starting to make a bit more sense now?
What transactions can generate a capital gain?
Now we’ve got you a little more interested! Capital gains are related to many different assets, such as:
Real estate
Investment property
Shares
Sale of business
Business building
Expensive business plant
Managed fund investments
Business goodwill
Starting to realise how capital gains tax could affect you down the track?
Are there any exceptions to capital gains tax?
Of course, like any tax, there will be exemptions! For starters, if your capital gains are also assessable under another tax law like personal income, capital gains tax will take the last place in this instance. Furthermore, areas that have their own tax regimes such as the sale of depreciating assets and trading stock will be taxed under their own laws instead of capital gains tax. And finally, your personal home is also exempt from the capital gains tax, as long as it is your primary place of residence!
How is capital gains tax calculated?
Now, this is where things can get a little tricky! There are 3 different methods to calculating your capital gains tax and these can depend on a number of different variants; how long you’ve owned it, if it’s owned by a super fund, if it was purchased before capital gain tax laws were implemented, if your main residence is used for business purposes, and a few other factors.
Due to its complexity, we recommend seeking advice from your accountant when it comes to capital gains tax, and we HIGHLY recommend you seek their advice BEFORE you sell your asset.
Timing your sale
Timing is everything when it comes to your taxable income! If you’re planning to sell an asset it’s important to factor in that you may be required to pay capital gains tax. A meeting with your accountant will help to establish when a good time for the sale of your asset will be, if it’s best to hold off until the next financial year or if you should push to sell before the EOFY.
Tax Planning
We have discussed tax planning previously in another blog and capital gains tax is another important factor to consider when you do your tax planning with your accountant. Remember to raise the point with your accountant if you’re planning to or thinking about selling an asset, so they can help you make the best decision based on your taxable income, ensuring you can get the best tax result possible.
Using a Self Managed Super Fund to purchase your assets (general information only)
The ability to borrow money to buy investments through a self-managed super fund has become increasingly popular in recent years. People have always been able to buy investments with their self managed super funds, but the new ability to borrow with your self managed super fund has led to the increased interest.
Setting up a self-managed super fund is not just for the sole reason of buying property/assets and avoiding/reducing capital gains tax liability. An SMSF allows you to have more control over your super and future finances, and can work well as a long term investment strategy. However, SMSF have a unique ownership structure which can provide a couple of tax benefits:
If you sell property once you’ve retired you pay no capital gains tax
There’s a 33% discount available in one of the many calculation methods
How to stay ahead
Understanding and keeping up to date with all the different tax laws and tips can be overwhelming, it’s like a full-time job! Actually, you know what, it is! That’s what accountants are for. We have spent years in the industry and continue to update our knowledge in the new tax laws so we can get the best tax outcomes for our clients and help them best manage their finances.
If you have invested in assets, are considering selling assets, or need help managing your finances, get in touch with our knowledgeable team today to discuss your finances. We look forward to helping you grow and manage your finances so they work for you and you don’t work for them!
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