To put it simply, a capital gain or capital loss is the difference between the cost of purchasing an asset and the amount received upon disposal of it.
If a capital gain is made upon disposal of an asset, there is tax incurred. The capital gain contributes to an entity’s taxable income therefore the Capital Gains Tax (CGT) incurred forms part of the entity’s income tax liability.
If a capital loss is made, it cannot be claimed against taxable income, but it can be claimed against other capital gains made in the same year. If total capital losses exceed capital gains for a particular year, the capital loss can be carried forward and claimed against capital gains in future years.
CGT only applies for assets that were acquired on or after 21 September 1985. Any assets which were purchased before this date, or are specifically excluded, are not subject to CGT and are considered exempt.
A ‘CGT event’ occurs when an entity sells or provides an asset to another entity. This is the point when a capital gain or capital loss is made. The most common transactions that incur CGT involve selling assets that are used to produce income, in particular real estate and shares, but there are many other ‘CGT events’ where capital gains may result.
As CGT is incurred on assets used to produce income, most personal assets are exempt from CGT. These assets including people’s homes, cars, and various other personal-use assets, such as furniture. CGT also doesn’t apply to depreciating assets used solely for taxable purposes, such as business equipment or fittings in a rental property.
For most CGT events, the capital gain or capital loss is calculated by subtracting the costs incurred to acquire the asset (cost base) from the proceeds received upon disposal of it (capital proceeds). The amount required to be recorded in an entity’s tax return is the total of the capital gains for the year less any capital losses made and any CGT discounts or concessions the entity is entitled to.
The most common CGT concession is only available to individuals and small businesses and it enables a capital gain to be discounted by 50% if the asset is held for more than 12 months. There are also a number of other CGT concessions specifically available for small business only.
For all Australian residents, CGT applies to all assets held anywhere in the world.
Click here for more information from the ATO website on Capital Gains Tax.
Please contact Altitude Advisory for more information.