What is Capital Gains Tax Australia?
Capital Gains Tax in Australia is a tax you pay on profits from selling assets, such as property, cryptocurrencies and shares. These could be assets that you have purchased or inherited.
How is Capital Gain Tax calculated in Australia?
Simply put, your capital gain or capital loss is the difference between what it cost you to acquire the asset (Cost Base) and what you received when you disposed of it (Capital Proceeds). That amount is the total current year Capital Gain.
This is where it gets confusing – To calculate the Net Capital Gain you must:
- Add up the current year capital gain from each asset sold over the financial year. Subtracting any current year capital losses.
- Apply any net capital losses from previous years that haven’t been claimed already
- Apply any Capital Gains discounts or small business capital gain concessions that you may be entitled to
How do you pay Capital Gains tax?
If you realise a capital gain, that amount is included as part of your personal income for tax purposes. While capital gains tax has its own name, it’s not a standalone tax.
That being said if you realise a capital loss. That loss is unable to be used to offset your personal income. You can generally carry the loss forward and deduct it against capital gains in future years.
If you’re an Australian resident for tax purposes, CGT applies to your assets worldwide.
How much is capital gains tax Australia?
The Net Capital Gain amount is added to your personal income which then forms part of your total taxable income. For example, if Adam has employment income of $80,000, unfranked dividend income of $5,000 and a net capital gain of $15,000 – his total taxable income for the year will be $100,000. The tax is then levied upon his TOTAL taxable income of $100k, which is taxed at his marginal rate which will be taxed at approximately 25%. Strategic tax planning is a shrewd way of potentially legally minimising your tax payable. Please contact us to discuss any tax planning.
Please note, we hear a lot of people say the tax that is levied on all capital gains is 50%. This is incorrect – not sure where that sentiment has come from. Possibly because there’s a 50% capital gain discount that people may confuse it with. We will explain more about the 50% discount below.
How to avoid capital gains tax Australia
You cannot avoid capital gains tax in Australia. The ATO has robust data matching systems that provide information that can be cross-checked against what you have lodged on your tax return. If they have been notified that you should have declared income – and didn’t – they will likely reach out. They use specialist software that integrates with certain organisations and industries like:
- Cryptocurrency platforms
- Overseas government agencies
- Share/stock brokers and share registries
- Online selling platforms (eBay, Amazon)
- Banks, financial institutions
- Motor vehicle registers
- Department of Foreign Affairs (residency and travel information)
- State Revenue Offices
While you cannot avoid capital gains tax, you may be able to access certain concessions. The most widely used concession is the 50% discount on CGT. If you are an Australian resident for tax purposes and have owned the asset for at least 12 months, you are able to apply a 50% discount.
For example, if Charlotte purchased an investment property on 1 of April 2017 for $500,000 and then sells it on 1 of April 2022 for $1,000,000. The current year capital gain is $500,000, after applying the 50% discount, the net capital gain that is added to her personal taxable income is $250,000. This 50% discount is available to individuals and trusts. There is no Capital Gains discount for companies and the discount for superfunds is 33.33%.
Capital Gains Australia for Australian Non-residents for Tax Purposes
If you are ceasing your Australian Tax Residency there is an opportunity to review whether or not you want to access the deemed capital gains event I1.
A capital gain or loss in this scenario is to be calculated based on the difference between:
- The market value of the asset at the time that the taxpayer becomes a non-resident, and
- The asset’s cost base
For example –Jeremy holds 1000 Telstra shares which he bought at 1/1/18 for $3.50 p/s (Cost base = $3,500), he ceases to be an Australian Tax resident as at 1/6/22 where the market price is $3 p/s (market value=$3,000). If he decides to deem the disposal as at this date, he would have a capital loss of $500, without ever having sold the shares.
On the flip side, there could be a capital gain, depending on the transaction.
Complications arise here because there was no actual sale of the asset – so if there is a gain, the taxpayer would have to pay the tax on this gain from their pocket.
Please note, once this choice has been made it applies to all of the taxpayer’s CGT assets, with the exception of the taxpayer’s assets which are “Taxable Australian Property”.
If you are currently a foreign resident for tax purposes, you are only subject to Australian capital gains tax on gains they make on assets that are ‘taxable Australian property’. Therefore, you can buy and sell Australian stocks without any Australian tax consequences.
For more details on this please visit this blog we wrote on capital gain complexities when becoming a non-resident.
Capital Gains Australia for temporary tax residents
As with foreign residents, temporary tax residents are only subject to Australian capital gains tax on gains they make on assets that are ‘taxable Australian property’.
Speak to us today
While calculating capitals gains tax may be somewhat straightforward, it is advised to be proactive if you know you will have a large capital gain in the current year. There are several tax planning strategies we can implement that may reduce your tax payable amount. Please do not hesitate to reach out to us with any questions