Top 5 Facts About Capital Gains Tax

It is not the most fascinating topic but it is a huge consideration when you are looking at a new investment. With proper planning and advice, capital gains tax can be minimised when you sell an asset. Below I have outlined five important considerations that should be considered before the asset is even purchased.

Ownership matters!

The taxation of a capital gain differs depending on the owner of the asset and how long they have owned it. You should seek tax planning advice before making a purchase, as you will not be able to change owners later without triggering a Capital Gains Tax (CGT) event.

The net capital gain is worked out by deducting the purchase price from the sale price, and applying any applicable discounts. For an individual who has made a capital loss, they can use this loss to offset any current gains, or carry the loss forward into future financial years. For an individual who has held an asset for more than 12 months, they are eligible for a 50% discount on their taxable gain.

The net capital gain is then noted in the individual’s tax return and taxed at their marginal tax rate.

Often holding the asset in a spouse’s name is a common strategy I look at for my clients, where a spouse has a lower marginal tax rate or does not work. You may consider purchasing the asset in their name, so that at time of disposal the tax payable may be reduced than if it was in your name.

Superannuation advantages

Whether you’re in a retail/industry fund or a self managed super fund, the tax advantages of the superannuation environment can be more attractive than in your own name or a trust/company entity.

When a member is in accumulation phase (can still make contributions), the capital gains tax rate is 15%. If the asset has been held for more than 12 months, the fund will be entitled to a CGT discount and the tax rate is reduced to 10%.

Where a member in pension phase (drawing an income from their super), the capital gains tax rate is zero.  So for example, if you purchase a property while you are still working, the rental income will be taxed at 15% and when you sell the property when you have retired, there will be no capital gains tax payable by your super fund. This can be a much more tax effective strategy than accruing a property portfolio in your own name.

In both scenarios capital losses can also be carried forward into future years.

Small business concessions

There are fantastic CGT concessions available to small business owners when they are disposing of active business assets. When a small business owner meets the eligibility conditions (through a net asset value test and an active asset test), then they may be eligible to use one or more of the four concessions.

One of the best concessions is if the asset has been owned for at least 15 years and the taxpayer is retiring after age 55 – the owner may be able to disregard 100% of the capital gain. There are also concessions for additional discounting, retirement exemptions and super rollover benefits – you will need to seek advice from your professional adviser or accountant around these complex areas.

The taxpayer may also be eligible for the 50% general CGT discount if they are a sole trader, partner, trust beneficiary or an individual selling their shares in a company/units in a trust.

CGT Events

A capital gains tax event may not only just be triggered when choosing to sell an asset. Some other common CGT events include transfers with a change of beneficial ownership, when shares are cancelled in a failed or wound up company, or you receive a payment from a company other than a dividend.

If you have a self managed super fund, you will be aware of your duties as a trustee to follow the superannuation laws. However, if the Australian Tax Office deems your fund ‘non-complying’, there are a range of penalties and actions that the ATO can take. One of these actions is that the ATO can instruct the trustees to wind up the fund, which would result in a CGT event. In addition, the fund will lose its tax concessions and most if not all of the income of the fund will be taxed at 45%.

Beneficiary receipts

There are a few CGT concessions for beneficiaries of a Will:

• Death does not automatically result in a CGT event unless the asset is passing to a tax exempt entity (e.g. a charity) or a non-resident;
• The cost base of an asset passing to the estate will be that of the deceased (unless it was an asset purchased before 1985); and
• There are special exemptions that apply to the principal residence of the deceased.

For example, if your father leaves you the house that he lived in (for more than 6 years), this will not be a CGT event unless you sell the home. The cost base will be the market value at the date of death. When a beneficiary sells an inherited principal residence a further benefit allows for it to be sold without incurring CGT within two years of death.

Where an asset is to be sold, the amount of CGT payable can vary depending on whether it is sold by the estate or the ultimate beneficiary. Where there is more than one beneficiary, that tax will vary between the beneficiaries. This might make it difficult for an executor to produce an equitable outcome for all beneficiaries and this may encourage them to sell all of the assets in the estate.

Capital gains tax can be quite a complex area of investing and taxation planning and will require the advice from a team containing a great accountant, solicitor and financial adviser. Taxation planning is part of the comprehensive advice strategies provided by myself and Leapfrog Financial to our clients.

Any advice given is general only and has not taken into account your objectives, financial situation or needs. Because of this, before acting on any advice, you should consult a financial planner to consider how appropriate the advice is to your objectives, financial situation and needs.

Kathryn Fitch is a Certified Financial Planner with Leapfrog Financial. She specialises in SMSF's, gearing strategies and wealth protection. For more information please visit www.leapfrogfinancial.com.au or follow us on Twitter @LeapfrogFin.