What is capital gains tax and how can you lessen it?

What is capital gains tax and how can you lessen it?

When you sell an asset, as you often would as part of a business sale, it is usually subject to capital gains tax (CGT). This is a tax that's reported on income tax returns. Generally, the more capital you gain from an asset, the higher the CGT.

Reporting CGT can be straightforward in some instances, but complex in others. Say you buy a property for $500,000. You own it for six months, then sell it for $600,000. On your income tax return, you'd report that you made a capital gain of $100,000. Assuming there are no other capital gains or losses on the property, you would then pay tax on the $100,000 you earned. However, many variables can factor into these calculations.

The 50% CGT discount

You may be eligible for a 50% discount on your CGT if two specific conditions are met:

  • You have owned the asset for a minimum of one year from the day after you made the acquisition. In other words, the exact day of acquisition is excluded, and the timer begins the next day.
  • You are a resident of Australia and pay taxes in Australia.

These criteria need to be met before the "CGT event" occurs, which is the moment you gain or lose capital.

To determine the day the CGT event happens requires factoring in whether there was a contract involved. If there was no contract, the CGT event happens at the time of sale. If a contract applies, the day of settlement listed on the contract is the time of the CGT event.

A special circumstance may apply if the asset is lost or destroyed. The CGT event would be when you first receive compensation or insurance for the asset. If you do not receive either, the CGT event occurs when the asset is first discovered to have been lost or destroyed.

Previous ownership may count toward the 12-month ownership period

If any of the following circumstances apply, you can count previous ownership before you acquired the asset toward the 12-month ownership period:

  • A deceased estate applies if the asset was acquired by the deceased on or after 20 September 1985.
  • A joint ownership applies and the relationship breaks down. If, for example, you owned an asset with your spouse, that counts toward your own ownership period.
  • If the asset was a rollover replacement for another asset that was destroyed, lost, or compulsorily acquired. This only applies if the ownership period of the replacement asset and the original asset was at least one year.

Working with CGT can quickly become complicated because of all the possible factors that can go into calculating it, and it can be difficult to understand which discounts and exemptions apply to you. The tax professionals at WMC Accounting are here to make the process simple. Contact us today for help with CGT.

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