As you near the end of the financial year, Capital Gains Tax (CGT) is a term that you might hear which may affect your tax return. Let’s breakdown the concept and see when and how it may affect you.

What is CGT?

Basically, most but not all the shares, property, or other assets you buy are subject to the CGT rules. In most cases, if you buy for one price and sell them for another price, the difference between the amounts is your capital gain or capital loss.

If you receive more for your CGT assets than you paid for them, you'll have made a capital gain and you may need to pay Capital Gains Tax on it.

Not all assets are subject to CGT – here is a list of assets and exemptions on the ATO website.

For all the in’s and out’s of CGT have a look at the ATO website.

How much CGT will I pay?

If you sold assets during the year, such as property or shares, you need to work out your capital gain or loss for each asset.

When you sell an asset for:

• more than it cost you – you have a capital gain

• less than it cost you – you have a capital loss.

You pay tax on your net capital gains. This is:

• your total capital gains

• less any capital losses

• less any discount you are entitled to on your gains.

There is a capital gains tax (CGT) discount of 50% for Australian individuals who own an asset for 12 months or more. This means you pay tax on only half the net capital gain on that asset.

The amount of Capital Gains Tax you’ll pay depends on factors including how long you’ve owned the asset, what your marginal tax rate is, and whether you’ve also made any capital losses.

Your marginal tax rate is important because your capital gain will be added to your assessable income in your tax return for that financial year.

The length of time you’ve held your asset is relevant because if you’ve held them for over 12 months, certain taxpayers, such as individuals, can usually get a 50% discount on their capital gain.

What is a CGT event?

When you dispose of an asset that is subject to capital gains tax (CGT), it is called a CGT event. This is the point at which you make a capital gain or loss.

Common disposals that will trigger a CGT event include:

• selling an asset

• trading, exchanging or swapping assets

• loss or destruction of an asset or creating contractual or other rights (this is known as an involuntary disposal).

The type of CGT event that applies to your situation may affect:

• the time when the CGT event happens

• how to calculate your capital gain or loss.

Other CGT events could include when a managed fund in which you own units distributes a capital gain to you.

You can find out more about CGT events on the ATO website.

What happens if I make a capital loss?

You’d make a capital loss on your CGT assets if you sold them for less than you paid for them.

If you make a capital loss, you can only use it to reduce a capital gain (i.e. you cannot apply a capital loss to reduce the tax you pay on other types of assessable income).

If your capital losses are greater than your capital gains, or if you make a capital loss in a financial year in which you don’t make a capital gain, you can generally carry the capital loss forward and deduct it against any capital gains you make in future years.

What happens if I inherit assets?

A CGT event is generally only triggered when you sell inherited assets, but not all inherited assets are subject to CGT.

If the person who passed away bought the assets after CGT was introduced on 20 September 1985, then the person inheriting the assets will need to determine the cost base. Depending on the asset, the cost base could be:

• The existing cost base of the deceased person who originally bought the assets; or

• The market value of the assets at the time of death

If, however, the person who passed away acquired the assets before 20 September 1985, then the person inheriting them is said to have acquired the asset at the time of death. In most cases, the cost base will then be the market value of the assets at that time.

For more information on inherited assets and CGT, visit the ATO website.

Let us help keep your accounts on track and stay on top of any Capital Gains Tax enquiries you may have. Contact us for pricing and a chat.