Facts about capital gains tax
Any gain or profit made on assets and investments, except for the family home and cars, purchased after September 19, 1985 are subject to capital gains tax. Gains made on assets and investments owned for less than 12 months are taxed at the applicable tax rate of the owner.
Gains made on assets and investments owned for 12 months or more are discounted by 50 percent. As a result when an asset has been owned for more than 12 months income tax is paid on only half of the gain made at the applicable marginal tax rate of the owner.
As a general rule investment assets are best owned by individuals as opposed to companies. This is because a company does not receive the 50% general discount on a capital gain but instead pays tax on the whole gain.
When is an asset purchased or sold?
The relevant date for purchasing or selling an asset is not the date settlement takes place and you either pay for it or receive the money, but the date of the contract. This means where a sale note to sell a property is signed in one tax year, and settlement takes place in the following year, the relevant date for capital gains tax purposes is the earlier tax year.
Capital gains and your home
For a property to qualify for the CGT exemption it must have been a home for the whole time it is owned, with one exception it cannot have been used to produce assessable income. In addition the exemption applies to a maximum land area of 2 hectares. This last condition means that where a home is on more than 2 hectares the gain made on the extra land will incur capital gains tax when sold.
There is also a situation where a house on less than 2 hectares can result in capital gains tax being paid. This can occur where the original block purchased is sub-divided. Where the original home is retained and the vacant block sold capital gains tax will in most cases be payable. If instead a new home is built and moved into, and the original home is sold, there should be no capital gains tax paid.
The exception to the rule of a house retaining the CGT exemption if it is rented is when you have to move for work or other reasons and the family home is rented. To be still eligible for the exemption another house cannot be nominated as being a principle residence and a person cannot be absent for more than six years.
Trap for home owning small business owners
Small business owners can find they have an unexpected capital gains tax bill when they use part of their home for business purposes. For a house to qualify as a place of business various conditions must be met such as a separate entrance. By meeting these conditions a portion of interest costs and rates for the home can be claimed as a tax deduction. This comes at the cost of the portion of the house used for business purposes becomes liable for capital gains tax.
Capital gains and death
When a person dies the tax payable on their assets differs depending on what the asset is and when it was purchased. Certain assets, such as a person’s home and their superannuation, receive special tax treatment. Where assets were purchased by the deceased prior to September 20, 1985 a portion of the capital gain will be tax-free.
The proceeds of a deceased’s superannuation when paid to their dependants are not taxable. A dependent for superannuation purposes includes a person’s spouse or any of their children or other people that they have an interdependency relationship with. In most cases this will mean where children are under 18 they will be classed as a dependent.
For all other assets their tax treatment will depend on when they were purchased. It does not matter whether the assets are sold by the executor, or directly inherited by a beneficiary, any gain made on the sale could be assessable for CGT purposes.
If the executor of the estate is selling the assets the relevant purchase date, to decide how much tax will be payable, is the date the deceased purchased the asset. Any assets purchased pre September 20, 1985 will be tax-free, while anything purchased after then will have the capital gain taxed.
Assets owned by the deceased for more than 12 months will have tax paid on half of the gain. Assets owned for less than 12 months will have tax paid on the full gain. If the asset was owned for more than 12 months the capital gain will be discounted by 50%.
When the ownership of assets is passed directly to a beneficiary the capital gains tax treatment also differs depending on when they were purchased. Assets purchased by the deceased pre September 20, 1985 are taken to have been purchased by the beneficiary at their market value at the date of the death of the deceased.
If the deceased purchased the asset after September 20, 1985 the cost for the person inheriting the asset for CGT purposes will be the same as the person who died and originally bought it.
If you are thinking of selling an asset, investment or a business it is important to get advice from an accountant that specialises in this area, such as TaxBiz Australia, to make sure you pay no more income tax than you have to.
If you’re going to be selling a business or a taxable asset, and you want to make sure that you are maximising your tax benefits and minimising tax, contact us.