Since its introduction in 1985, the capital gains tax (CGT) has been a constant thorn in the side of anyone taking out a home loan for an investment property. Suddenly, the profit you made from selling your home wasn’t untouchable – a part of it had to be handed over to the tax man.
Despite its high-profile status, many Australians don’t know all that much about the CGT. Given that its 20th anniversary is coming up this year, we thought we’d outline some of the most important, useful and interesting things you should know about it. Who knows – they might inspire a few property investment strategies.
1. It doesn’t just apply to property
Because the CGT is so often discussed in relation to property, there’s a misconception that it’s purely to do with selling a home. In fact, CGT applies to any asset that you’ve sold for a higher price than you bought it for. This list includes everything from shares, land and units in a managed fund, to intangible things like business goodwill and contractual rights.
2. It’s not a separate tax
Because it’s so often referred to by its own particular name and rules, you might have gotten the impression that the CGT is its own tax. In fact, it’s simply a part of the regular income tax. This is because any of the profit you make from investing is treated as part of your income, making it easier to simply pay it through your annual income tax return.
3. You can reduce your CGT through capital loss
Not every investment is going to be profitable. Whether it’s a house, stock or another type of asset, you could end up selling it for less than what you initially paid for it, leaving you needing to dip into your savings account. According to the latest CoreLogic RP Data Pain and Gain report, 8.6 per cent of all home sales in December 2014 recorded a loss. While you cannot claim a capital loss against your income, you can deduct it from any capital gains in the same year or, even carry it forward to subsequent ones.
4. Your family home doesn’t count
Anyone who’s worried they’ll end up paying a big slice of the re-sale profit from their family home can take this opportunity to breath a hearty sigh of relief. Your ‘main residence’ – or home – is exempt from the CGT. However, there are strict rules around this – if you’ve only lived in it for part of the time, you might only get a partial exemption, for example. You also mustn’t have run a business out of it, among other requirements.
5. Neither do a lot of other assets
In fact, quite a few different items aren’t counted under the CGT. Have you ever used a credit card to buy art, jewellery, stamps and antiques and other collectables for your own or others’ enjoyment? If they’re under a certain value, those are exempt. The same goes for your car, and any asset you acquired before September 20 1985 – including a property.
6. You can get a discount
Whether you’re a regular Aussie worker or a small business owner, it’s possible to get a discount on the amount of CGT you pay. Generally, if you’ve held the asset you’re selling for more than a year, you need only pay 50 per cent of the CGT you would normally pay. Small businesses have a number of extra concessions that can be useful. Take the 15-year exemption for example – if you’re 55 years or older, are retiring and selling a business asset you’ve owned for 15 years, you’ll pay no CGT on the profit.