Capital Gains Tax
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 when you either pay for it or receive the money, but the date of the contract. This means if the date on the sale note or contract note to sell an asset is signed in one tax year, and settlement takes place in the following year, the capital gain occurred in the earlier tax year.
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 your home
The exception to the rule of a house retaining the CGT exemption if it is rented is when the owners shift out, do not choose another property as their principal residence, and rent the property for no more than six years. If the property is not rented there is no time limit, and the six years can be extended under certain conditions.
Capital gains tax regulations are extremely complicated, and if you need assistance in minimising the tax paid on a property used as both a principal residence and to run a business, or any other property sale, contact us.
Capital gains and death
When a person dies 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.
The proceeds of a deceased’s superannuation when paid to their dependants are not taxable. A dependant for superannuation purposes includes a person’s spouse or any of their dependant children or other people that they have an interdependency relationship with. In most cases this will mean children under 18, or those that are under 25 and are financially dependent on the deceased person, will be classed as a dependant.
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.
There are tax planning strategies that can be used to minimise the tax payable on deceased estates, for information about these strategies contact us.
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.
Warning for small business owners
In recognition of small business owners often earning less income than their employees while they build the value of their business, generous small business capital gains tax concessions were introduced.
To be eligible for these concessions business must either have an aggregate turnover of r less than $2 million a year in income, or the aggregate net assets of the business owners in less than $6 million. The best CGT concession is available to business owners that have been operating for 15 years or more.
The other small business CGT concessions includes:
- 50% active asset discount,
- The $500,000 retirement exemption benefit, and
- CGT rollover relief.
