A frequently neglected fact of wealth management and taxation planning, capital gains and its associated tax is seen by many to be confusing, convoluted, and needlessly technical. The truth of the matter is that, for a diverse range of reasons, it often is. Commonly occurring with shares and land sales, understanding the misconceptions around capital gains tax can help you personally plan for the future.
Capital gains tax is simply the tax incurred from the profit of a capital asset, which is, broadly, any item that you own for investment or personal purposes. Stocks, bonds, real estate, collectible cards, and cryptocurrency are all prime examples of capital assets, and are taxed accordingly with the guidelines for capital gains tax. This is a broad category, and includes, on a fundamental level, just about everything you own. Thankfully, the ATO has a ‘personal use assets’ rule, which denotes that any personal item other than collectibles, with a value of less than ten thousand dollars, is disregarded for capital gains tax purposes. Essentially, this means the ATO won’t be chasing you down for the capital gains portion for the sale of your old computer. Collectibles are a little more complicated, but essentially, if it is less than five hundred dollars and holds a market value less than that amount, you can disregard capital gains tax.
With the above in mind, this leaves us with, broadly, two main categories for a capital gains tax (CGT) event; shares and real estate. Shares, equities, and options have systems for establishing CGT events on acquisition of new shares through company schemes, restructuring, and other company proceedings which change the volume or amount of shares available to a person, but generally follow the structure that the sale price minus the cost base is the taxable amount, with relevant reductions as necessary.
This leaves real estate, which is the largest capital gain category with numerous exemptions and exceptions. Usually, your main residence is exempt from a CGT event if you are an Australian resident. To establish that it is a main residence, the ATO will assess based on whether or not you live in the residence, receive mail to the residence, and that the residence has not been used to produce assessable income. If the ATO is satisfied with this, the capital gain is wholly disregarded. The length of time a property is held does not disqualify a CGT event by itself and requires these tests to still be met.
This addresses a common myth belief many people have when it comes to avoiding CGT on their property – that moving back into a previous rental property will remove any tax payable. Given that the residence was used to produce income previously, a full exemption will generally not apply, except in limited circumstances, and a series of evaluations based on market value will need to be undertaken to establish if any of the CGT can be waived from the sale.
Furthermore, if you operated a business from the home main residence, you need to be aware that when the property, or part thereof, is used for an income producing purpose, this waivers the full main residence exemption. If part of your home is used for business income producing purposes, this portion of the property will attract capital gains tax when eventually sold.
Lastly, not declaring a main residence whilst owning two houses. The ATO, as mentioned above, will employ a series of tests to establish a main residence, and you will ultimately have one. Attempting to avoid this legally is impossible, as an individual will have an electoral location. Although misconstruing other information may make it appear that you could claim one or the other, in reality this is a fast-track to the audit line.
Capital gains tax is a complicated event, which should be carefully considered and planned for appropriately. Losses can offset gains, and there are many pitfalls along the way. If you think you may have had a CGT event previously, or are planning for an upcoming one, don’t hesitate to reach out to MJJ Accounting & Business Solutions to plan appropriately.