A capital gain is a difference between
what was paid for an asset
and what it sold for
(with an allowance for costs of purchase and sale)
Introduced in 1985, Capital Gains Tax was part of a move to broaden the base of taxation in Australia. Previously, the income derived from the profitable sale of shares or a property investment was tax-free.
The situation was inequitable as some people were able to make an income and pay no tax at all.
Broadening the base of taxation involves collecting tax from a more extensive range of sources in the hope of raising more tax revenue (on previously exempt sources of income) and from more people.
The rationale behind the reform was that it was fair and equitable to make everyone pay a share of the tax revenue needed to support the government’s activities, including the public goods that all Australian’s benefit from regardless of their employment or income source. It also would make possible a reduction in the burden on PAYG income taxpayers, who constitute the majority of taxpayers.
CGT is not a separate tax – it is part of the income tax regime and is treated as such.
If you buy and sell an asset within 12 months, of 100% the gain (adjusted for inflation and costs) is added to your assessable income and tax is levied at your top your marginal rate.
However, as an individual, (company structures receive no discount and pay 30% CGT) if you have owned the asset for more than 12 months and then sell it and make a capital gain, you are entitled to a 50% discount on the amount on which the tax will be levied.
As part of the income tax system, the timing of any sale of assets is best done on the advice of your accountant. Choosing to sell an asset in a financial year in which your income is lower may assist in minimizing your CGT obligation.
Should you make a capital loss on the sale of an asset, the loss can’t be offset against your regular income but can be carried forward indefinitely to be used to reduce any future capital gain.
With property or other assets purchased in an SMSF, the tax rate is 15%, and the CGT discount is 33.3% (rather than 50% for individuals), but if you sell the property once you’ve retired (after 60), you will not be obliged to pay CGT at all.
Personal assets such as the family home, car, furniture etc. are exempt from capital gains tax.
The tax is an imposition on alternative forms of producing an income.
Remember that time in the market is most important when it relates to property investment. Given the significant entry and exit costs associated with a property, coming in and out of the market is a misguided and costly approach to what should be a long term strategy.
CGT is deferred until the sale of the property, and so property investors should never plan to pay tax on more than 50% of the capital gain. Timing becomes relevant when choosing when to sell – once again expert, and professional advice is imperative to take advantage of techniques to minimize your tax obligations legally.
Any tax will impose economic costs by influencing the decisions people and businesses make about how they work, save, invest and employ.
CGT is no exception. It may influence decisions to invest, which in turn may have broader implications for the economy, employment and growth. (remember the multiplier effect of housing construction!)
The government needs to tread a thin line between raising ample revenue, distributing the responsibility equitably across the community and the disincentive effects of tax liability. Any disincentive to invest or employ or spend will negatively affect tax revenues – think of payroll tax, income tax, GST, increased welfare payments etc.
In 1950 Australia’s tax law consisted of 1080 pages, today it exceeds 14000 pages!
Complex tax laws impose high compliance costs – time and money the community spends dealing with tax matters. The measure of a good tax is that it is simple, able to be complied with, fair and is as low as possible to avoid disincentives.
The Australian Treasury is encouraging community discussion about the need for ongoing reform and adaptation of the tax system to meet the challenges of a changing Australia.