What is Capital Gains Tax?
A capital gain or capital loss on an asset is the difference between what it cost you and what you receive when you dispose of it.
You pay tax on your capital gains. It forms part of your income tax and is not considered a separate tax – though it's referred to as capital gains tax (CGT).
If you make a capital loss, you can't claim it against income but you can use it to reduce a capital gain in the same income year. And if your capital losses exceed your capital gains in an income year, you can generally carry the loss forward and deduct it against capital gains in future years.
All assets you’ve acquired since tax on capital gains started (on 20 September 1985) are subject to CGT unless specifically excluded.
Most personal assets are exempt from CGT, including your home, car, and most 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.
If you’re an Australian resident, CGT applies to your assets anywhere in the world. Foreign residents make a capital gain or capital loss if a CGT event happens to an asset that is 'taxable Australian property'.
What is a Capital Gains Tax Asset?
Many CGT assets are easily recognisable, for example, land, shares in a company, and units in a unit trust. Other CGT assets are not so well understood, for example, contractual rights, options, foreign currency and goodwill. All assets are subject to the CGT rules unless they are specifically excluded.
CGT assets fall into one of three categories:
personal use assets
Collectables include the following items that you use or keep mainly for the personal use or enjoyment of yourself or your associates:
paintings, sculptures, drawings, engravings or photographs, reproductions of these items or property of a similar description or use
coins or medallions
rare folios, manuscripts or books
postage stamps or first day covers
A collectable is also:
an interest in any of the items listed above
a debt that arises from any of those items
an option or right to acquire any of those items.
Personal Use Assets
A personal use asset is:
a CGT asset, other than a collectable, that you use or keep mainly for the personal use or enjoyment of yourself or your associates
an option or a right to acquire a personal use asset
a debt resulting from a CGT event involving a CGT asset kept mainly for your personal use and enjoyment
a debt resulting from you doing something other than gaining or producing your assessable income or carrying on a business.
Personal use assets may include such items as boats, furniture, electrical goods and household items. Land and buildings are not personal use assets. Any capital loss you make from a personal use asset is disregarded.
If a CGT event happened to a personal use asset, you disregard any capital gain you make if you acquired the asset for $10,000 or less. If you disposed of a number of personal use assets individually that would usually be sold as a set, you get the exemption only if you acquired the set for $10,000 or less.
Assets that are not collectables or personal use assets include:
shares in a company
rights and options
units in a unit trust
your home (see Exemptions)
any major capital improvement made to certain land or pre-CGT assets
Acquiring and Owning CGT Assets
When you acquire a capital gains tax (CGT) asset, you need to start keeping records of every transaction, event or circumstance that may be relevant to working out whether you've made a capital gain or capital loss.
Your records will help you work out your capital gain or capital loss correctly and ensure you don’t pay more CGT than necessary.
You need to establish exactly when you acquired your CGT asset because:
CGT doesn't apply if you owned it before CGT started on 20 September 1985 (though major improvements to a property since may be subject to CGT)
the rules about how you work out the cost base have changed over time
how long you have had it may affect how you work out your capital gain.
Generally, the time you acquire a CGT asset (your acquisition date) is when you become its owner, most commonly because you have bought it or received it as a gift or it was transferred to you.
If you believe you have had a Capital Gains event in the 2015-2016 Financial Year please book in to see our Tax Investment Specialist Belinda on 07 5502 6673