Selling an asset can be an exciting prospect, especially if it’s coming from an investor’s perspective. However, it’s important to note that how long you’ve held that particular asset can influence the rate of your Capital Gains Tax (CGT), so you need to freshen up your knowledge about it if you’ve only started to learn the ropes.
Any individual or business that sold an asset can be charged with a GCT, and while it’s definitely part of your responsibility, there may be situations where it can result in tax consequences. After all, a CGT is more of an event, so not all assets sold will automatically be applicable for a CGT.
What Exactly is a Capital Gains Tax in Australia?
Capital Gains Tax is one of the most effective methods for governments to generate income, since it’s based on the growth of an asset instead of the actual sale price. In Australia, that growth can be profits from shares or just the price of a particular currency or commodity.
CGT is charged at different levels based on whether it’s being charged in the same or in a different year, and whether the person is a resident or non-resident. The type of asset being sold will also affect the level of tax that you need to pay on your CGT.
How to Calculate Your CGT
The Discount Method
The Discount Method is the simplest way to calculate the CGT of any asset. This is the method to use if you are selling a single asset that would normally be treated as a capital gains asset.
Selling your tax assets in less than a year involves paying the full capital gains tax. However, you can gain a whopping 50 percent discount for the tax assets held beyond 12 months. Keep in mind that you still have to apply the capital losses before getting the discount!
The first step is to calculate the cost of the asset and the second is to calculate the gain on the disposal of that particular asset. Let’s say that you bought a parcel of land for $20,000 and four years later, you sold it for $100,000. Your capital gain would be $80,000. Because you owned the land for more than 12 months, the 50% discount will apply. Therefore you only pay tax on $40,000 as net capital gain.
Who can Use the Discount Method?
If you are an Australian resident, and if you have owned the asset for 12 months, then you can apply the discount method. However, you have to consider that your ownership should have happened before the CGT event.
Determining the CGT Event:
- The CGT event happens when there is no contract of sale once you sell the asset;
- The CGT event happens on the date of the contract when selling the asset, such as how property sales typically function;
- The CGT event happens when you get compensation, or have discovered when your assets are lost in some way or form;
There are also other factors to consider, such as when the CGT discount cannot be applicable. In this case, you cannot use the CGT discount if you’re a foreign or temporary resident after 8 May 2012, or if you rented out a property in less than 12 months of owning the property.
The Bottom Line: Knowing Your Capital Gains Tax in Australia
Knowing your capital gains tax in Australia can definitely help if you’re planning to sell an asset in the near future. It’s crucial to note that the rates of tax that you pay can vary based on the type of assets you are selling.
In some cases, it can also be decided based on the time that you have held the assets, so it’s important to keep your ear to the ground on the latest developments.
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