- You must pay tax on any money you make off an investment;
- Subtract fees, stamp duty etc;
- The discount method, the indexation method are useful to know;
- If you've lost money, you can deduct gains from other sources.
If you’ve made gains in the stock market or are planning to sell your property for more than what you bought it for, don’t pop the champagne just yet.
You will have to pay some of your profits to the government through the capital gains tax.
Not sure what that is? Well, we’ll break it down for you.
What is a Capital Gain?
To answer this we first have to understand what capital is.
Capital is wealth, which can be money or other financial assets. It is either, owned by a person or organisation, or available for a purpose, such as starting a company or investing.
For example, you could say that Al’s Ice Cream raised a significant amount of capital when the company was founded.
Meaning that Al’s Ice Cream raised a lot of money to fund the company’s growth when it began.
Now a capital gain is when your asset (e.g. your investment property or shares) increases to a value that is higher than the price it was purchased and is then sold for a profit.
So if you bought a house for $1,000,000 and sold it five years later for $1,500,000 you have received a capital gain.
What is the Capital Gains Tax?
Once you have received a capital gain, you will need to report it to the Australian Tax Office where it will be taxed accordingly.
In most cases, your capital gain will be the difference between what you paid for the asset and what you’re selling it for. You then subtract any expenses you faced like legal fees, stamp duty, etc. The remaining amount is your capital gain (or loss).
There are however different circumstances that will affect your capital gain. The ATO has broken down three methods to calculate your capital gain epending on your situation:
- If you have held your assets for 12 months or more and you are not a company, you should use the discount method.
- If you acquired your assets before 11:45 am on the 21st of September 1999 and held them for 12 months or more, you should use the indexation method.
- If you have held the assets for less than 12 months, you should use the ‘other’ method.
Companies and individuals pay different rates on the capital gains tax. If you’re an individual, the rate paid is the same as your marginal income tax rate for that year. If you’re a company the rate will vary, if you are a small business, four concessions allow you to overlook or postpone some or all of a capital gain from an active asset used.
If you are an individual and you have held your capital asset for more than 12 months, you will receive a 50% discount. This means the taxable amount of your capital gain will be half what you actually gained. This is a good incentive to hang onto your investments for the long term, rather than selling for a short-term gain (or loss).
What if I suffer a capital loss?
If you experienced a capital loss, you could deduct the amount from your capital gains that you have made from other sources to reduce the amount of tax that is payable. If you haven’t made any other capital gains, you can carry over any capital losses to any future years and deduct it from gains you make later.
Before you start celebrating the major profits on your investment property or shares, remember to try and calculate how much you will owe in capital gains tax.
And if you are thinking of trying to hide it from the ATO, just remember, they are always watching.