Many Australians invest during the year as a way to safeguard their future and supplement their salary. Investments could be in the form of shares, cryptocurrency, or assets such as rental property. As you buy and sell these investments, you will generate income or losses. Any income generated or lost from this process will trigger what’s known as a CGT (Capital Gains Tax) event.
When it comes time to lodge your tax return, you’ll need to report all gains or losses incurred through the disposed of assets during that financial year.
What Do We Mean By Asset Disposal?
In general, asset disposal occurs when you are no longer the owner of an asset. Selling an investment is the most common form of asset disposal. However, it can also occur if you lose an asset, or have it stolen or destroyed. This would trigger a CGT event when you receive compensation for the loss, when the loss was discovered, or when the destruction occurred.
Example: CGT Event Triggered By Asset Destruction
Harry’s rental property was destroyed by fire in June 2021. He received compensation through an insurance policy in October 2021. The CGT event happened in October 2021 when he received the compensation.
Pro Tax Tip: Another CGT event can be triggered when transferring one asset to another, or swapping it for a different CGT asset. If you think you might have triggered a CGT event but are a little confused about the matter, contact your nearest ITP branch today. One of our friendly accountants can help you understand the situation. We can also help you take the appropriate action on your tax return.
How Do You Calculate Capital Gains and Losses?
To work out a capital gain or loss, calculate the original cost of the asset plus all the costs associated with acquiring, holding, and disposing of the asset. These extra expenses may include interest on loans, stamp duty, legal fees, and transfer costs. Once you have your total, deduct it from the selling price.
It’s important to note that you don’t include any costs for which you have already claimed a tax deduction. If you own the asset for at least 12 months and you’re an Australian resident for taxation purposes, you may be eligible to reduce your capital gain by 50%.
You’ll need to report the capital gain or loss in the income year when the CGT event occurred based on the contract date.
Example: Determining When a Capital Gain Tax Event Occurred
John entered into a contract to sell land he owned in June 2021. The contract was settled in October 2021. John made a capital gain in the 2020-21 income year (the year he entered into the contract) and not in the 2021-22 income year (the year the settlement took place).
What Do You Pay Capital Gains Tax On?
When you sell an asset for more than it cost you, you make a capital gain. When you sell an asset for less than it cost you, you make a capital loss.
You’ll need to pay income tax on the net capital gain. This equates to:
- Your total capital gains
- minus any capital losses
- minus any discount you are entitled to on your gains.
Example: Calculating CGT for a Single Asset
Rhi buys an investment property for $500,000 and sells it 5 years later for $600,000. She has no other capital gains or losses.
Rhi works out her capital gain as follows:
- The capital proceeds from the CGT event are $600,000;
- The cost base is $530,000, comprising the purchase costs of $500,000 + $15,000 stamp duty + $1,200 conveyancing fees and sale costs of $1,300 + $12,500 agent commission;
- Rhi’s capital gain on the investment property is $600,000 − $530,000 = $70,000;
- Rhi can use the CGT discount to reduce her capital gain because she is an Australian resident who owned the asset for at least 12 months: $70,000 × 50% = $35,000;
- Rhi reports a net capital gain of $35,000 in her income tax return. She will pay tax on this gain at her marginal income tax rate.
The capital gain for the property happens on the date of the sale contract, not the date of settlement. For example, if she exchanged contracts on 4 June 2023 and settled on 6 July 2023, Rhi would need to report her capital gain in her income tax return for the financial year ending 30 June 2023.
Example: Calculating CGT for Multiple Assets
Rhi decided to invest some of the profits from the sale of her investment property. She bought 1,000 shares at $10 each for a total of $10,000, including stamp duty and brokerage costs. Sometime later, she decided to sell the shares (at a loss) for $5,500. There were no brokerage costs on the sale of the shares.
Rhi would need to work out her capital gain as follows:
- The capital proceeds from the sale of the shares are $5,500;
- The reduced cost base is $10,000. This includes stamp duty and brokerage, which are costs Rhi incurred when acquiring the assets;
- Rhi’s capital loss on the shares is: $5,500 − $10,000 = −$4,500;
- Rhi also had a capital gain of $70,000 on her investment property (see previous example);
- $70,000 (gains) − $4,500 (losses) = $65,500;
- Rhi can use the CGT discount to reduce the remaining capital gain on her investment property: $65,500 × 50% = $32,750
- In this case, Rhi would report a net capital gain of $32,750 in her income tax return. She will pay tax on this gain at her marginal income tax rate.
Working out capital gains or losses, on a CGT event and when you need to report it can be complex. This is what ITP’s registered tax agents are here for. Your ITP tax accountant can take all the complexity out of calculating CGT events, allowing you to maximise your losses, minimise your gains, and reduce your overall tax burden. Use our easy online booking system to schedule an appointment, or phone 1800 367 487 today to chat with a friendly Capital Gains Tax professional.