Tax and Business Issues

Capital Gains Tax

Capital Gains Tax (CGT) applies to the disposal of capital assets, with only a few exceptions, the most significant ones being

  • Your principal place of residence
  • Assets acquired before 20 September 1985 (and as the years roll on, they will become rarer and rarer, particularly when you consider the number of people buying capital assets who weren’t even born then)
  • Collectibles costing less than $500
  • Personal use assets costing less than $10000
  • Almost any other asset may be subject to CGT where the asset is disposed of for more than its cost, or indexed cost if applicable

The capital gain is the difference between the net proceeds on sale and the cost base which will be either:

  • the original cost including purchase on-costs (for example, stamp duty, legals etc) and any subsequent capital or non-deductible costs incurred (for example, renovation and improvement costs), or
  • the original cost indexed for inflation from the date of purchase, with the indexation value frozen on 21 September 1999.

For individuals, there is a discount of 50% on the amount of the capital gain taxed (the original cost may also be indexed for inflation but indexation stopped in 1999 and the 50% discount is the usual reduction method adopted). The taxable capital gain is added to your income and taxed at your marginal rate for that year. Given the option, you would try to derive your capital gains in a year when you don’t have much other income.

Remembering that there is no time limit on liability for CGT, you need to be particularly careful with documentation.

If you buy some shares and reinvest the dividends make sure you keep all the buy notices and dividend reinvestment advices.

If you acquire a rental or vacant block of land in the country you need to keep the original purchase documents, and, on a continuing basis, details of any non-deductible expenses; improvements and so on.

Your accountant can keep a register for you; after sighting the original documentation the details are entered in a certified CGT Register. Ensure that everyone is clear on who is going to keep the records.

While your principal place of residence is exempt from CGT that only applies where the residence does not have any income producing character. So, if you were a studio artist or recording musician, and you had set up a studio or recording facility in your home, and that took up 12% of the floor area so you were claiming 12% of the interest, rates and insurance, then, if you sold the property, up to 12% of the capital could be subject to CGT.

Be aware that this CGT liability arises even if you have not claimed any deduction for interest, rates, or insurance (ownership costs).

If you incur a capital loss, that can only be offset against capital gains, although ordinary business losses can be offset against capital gains. If, for example, you have made a capital gain in a particular year, it may be worth looking to see if you have any other assets (such as shares) which are presently showing a potential loss. Maybe you could realize the loss and offset the capital gain.

For CGT purposes, the purchase and sale dates are the dates of the contract, not the date of settlement. If you are selling an investment property and the contract date is 8 June, with settlement on the 8 July, the capital gain will have been realized in the previous financial year, not the year of settlement.