If you’re planning on selling an asset in the near future, you may be required to pay capital gains tax. Learning what you owe can be quite a shock if you aren't expecting it. Paying capital gains tax (CGT) can put a significant dent in your financial plans — but only if you haven’t planned for it.
In this CGT guide, we’ll explain which tax events the tax applies to, and which events are exempted from CGT.
With this knowledge, you’ll be to design a clear financial roadmap to a safe and comfortable future. And if you need further personal advice, Liston Newton’s tax experts are always at your call.
What is Capital Gains Tax?
If you sell an asset for more than you paid to own it, you’ve made a capital gain. The Australian Taxation Office regards your net capital gains as part of your yearly assessable income and places a tax on it: the Capital Gains Tax.
To be clear, CGT is considered part of your income tax. It’s not a separate tax charged in addition.
That sale that netted you a gain is known as a Capital Gains Tax event, or a CGT trigger. But not all sales are triggers. Knowing which gains require you to pay CGT and which don’t can protect your wealth and keep you safe from an ATO audit.
CGT events: the gains you will likely be taxed on
The ATO is quite clear on the types of sales that will likely trigger a CGT event. Here, we’ve briefly summarised those events.
We should make clear that there are nuances to each of these events that we won’t cover here. If you feel one of these events might apply to you, give us a call so that we can talk you through the specifics of your sale.
Shares and stocks
Selling your shares and stocks will trigger a CGT event.
Property that you own and use for investment purposesm business purposes or holiday homes are most likely subject to CGT. Your main residence is exempt from CGT (see further details below).
Personal use assets
Personal use assets are quite literally that — assets you own for your own use, such as household furniture, boats, electronics and luxury goods. Cryptocurrency can be considered a personal asset if you primarily use it to pay for personal items.
The sale of your personal use asset will only incur CGT if you paid over $10,000 for the asset.
The ATO ignores capital losses on personal use assets, meaning you cannot offset other capital gains with the capital loss of a particular personal use asset.
Intangible assets include leases and contractual agreements. Though intangible, they still have monetary value to be gained.
This can be quite a complicated category, as the owner of an intangible asset can make capital gains from it without selling it. For example, you may make gains by granting temporary rights to your asset. The ATO may consider this a CGT event.
You can make capital gains (or capital losses) via the currency exchange rate by buying or selling currency at the right time. The ATO considers these gains to be a CGT event.
Bear in mind that the ATO considers literal cash and foreign assets such as rental properties for the CGT tax.
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CGT exemptions, concessions and minimisation opportunities
The ATO is, fortunately, also clear on which kinds of capital gains are exempt from the CGT tax, and which ones may be eligible for concessions.
Let’s take a look.
The 20th September 1985 boundary
Any assets you’ve purchased before this boundary are exempt from CGT.
However, modifications made to increase the value of your assets after that boundary are subject to CGT. For example, you may have bought a home before the 1985 boundary but may have made significant renovations to it since then.
Your main residence
The sale of your principal residence is usually exempt from CGT, though it may not be in certain circumstances.
You will have to pay CGT on your principal residence if:
- It is also your business premises
- It is on over 2 hectares of land
- You are not a citizen or permanent resident of Australia
Granny flat arrangements
The granny flat arrangement is when an individual sells assets in exchange for property or care. The arrangement gets its name because it’s commonly used to allow individuals to create granny flats on their relatives' property, where they can live out their sunset years.
CGT exemptions apply to these situations, but they are nuanced for the individual seeking accommodation and the individual selling the right to a portion of their property.
You will not be charged CGT on the sale of your primary personal vehicles, like your car or motorbike.
Collectables are unique objects of high value, such as antiques, rare and historically significant items and jewellery.
The sale of collectables is not subject to CGT if they were bought for under $500. CGT will also be voided if you bought under $500 worth of shares in a collectable before 16 December 1995, or at any point when the market value of the collectable was under $500.
The CGT rules you need to know
The following rules are critical knowledge for all individuals and small business owners.
The 6-year rule for investment properties
The 6-year rule allows you to minimise the CGT you pay on the sale of your principal place of residence for 6 years after moving out of it.
There are several criteria you must meet to benefit from this rule. For example, the residence being sold cannot be an investment property or a rental property — it must be your main home.
If you’d like to learn more about it, let our financial experts help you understand the 6-year exemption rule on property investment.
CGT concessions for small businesses
If you are a small business owner, there are four CGT concessions you may be able to take advantage of.
1. The 15-year exemption
You may not have to pay CGT on assets you have owned as part of your small business if:
- Have owned that asset for 15 years or more
- You are 55 years or older, or indefinitely incapacitated
2. The 50% active asset reduction
As long as you meet certain criteria, you can limit the CGT you have to pay on selling a business asset to 50%.
3. The small business retirement exemption
This exemption was designed to allow small business owners to better prepare for retirement. You will be exempt from paying CGT through the retirement exemption as long as your lifetime net capital gains sit below $500,000.
However, there are restrictions that apply depending on your age, and the gains kept through this exemption must contribute towards your super fund.
4. The small business rollover concession
Through this concession, you can avoid paying CGT during the year of event occurs by replacing the sold asset or improving another existing asset. To be eligible for this concession, you must replace/improve your assets within one year before the event or two years after it.
The CGT discount
By holding onto an asset for at least 12 months, you can reduce the CGT owed on its sale by 50%. This only holds if you are an individual taxpayer. For superannuation funds, the CGT discount is 33.3%.
Discover which CGT concessions apply to you at Liston Newton
While it’s certainly possible to apply for CGT concessions on your own, it is often a demanding process. Though you can apply for as many concessions as you feel apply to you, there are strict criteria that you must meet to be eligible. In some cases, you must apply for concessions in a particular order to fully benefit from them.