COVID-19 truly has impacted all aspects of human life since early 2020. However, there are some positive changes that have come as a result of it as well. One of these include the rapid rise in the ‘retail investor’. This new term refers to novice investors who invest in their own time outside of their everyday work hours. Outside of their superannuation, recent studies show that 49% of all Australians own shares as of March 2021 with 13% of all Australians having invested for the first time ever since COVID-19 began.
However aside from learning how to invest in Cryptocurrency, Stocks, Bonds, Real Estate or other options, investors also need to learn about the Tax implications.
Well, with the Financial Year 20-21 having drawn to a close, in this article we will be covering ‘Capital Gains Tax’. We will be covering:
What is a Capital Gain or Capital Loss?
We need to first understand the concept of Capital Gain or Capital Loss before we can talk about Capital Gains Tax. Capital Gain/Loss is an economic concept that refers to the profit earned or loss incurred on the sale of an asset as the difference in value over the period of time. Capital Gain or Loss can arise on the sale of any of tangible assets such as business, property, shares, investments, etc.
Capital Gain is when you have a profit according to the equation above and vice-versa, a Capital Loss is when you make a loss. Your Net Capital Gain is your Total Capital Gains minus:
- Your Total Capital Losses for the year; and
- Any Unapplied Net Capital Losses (from earlier years); and
- Any CGT discounts and small business concessions to which you may be entitled.
What is Capital Gains Tax?
Capital Gains Tax or CGT is paid as part of your Income Tax through your Tax Return on the Net Capital Gain made by an investor. This is important because your total taxable income for the year will be all other sources of income plus your net Capital Gains. So, you will have to include any Capital Gains you made during the Financial Year at the time of filing your income tax return and deduct any Capital Losses from that gain.
Note: This figure is oversimplified as other factors may also apply. For example, costs incurred when selling an asset may be deductible from the Capital Gain you make as well.
Unfortunately though, whilst Capital Losses can reduce your Net Capital Gain in the Tax Return, they cannot be claimed against other sources of income such as salary or business income. For example:
- Sarah has bought and sold 2 shares over the previous financial year. She held as an investment and made a profit of $300 on Stock A and a loss of $100 on Stock B. She can deduct the $100 Capital Loss from her Capital Gain of $300. As her salary from her day job is $70,000 p.a., she will be paying tax on a total income of $70,200.
- Bob has bought and sold 2 shares over the previous financial year and had a total loss of $300 on both stocks. He did not have any other Capital Gains for that year, therefore, he is not eligible to deduct that $300 from his other sources of income. As his salary from his day job is $70,000 p.a., he will be paying tax on a total income of $70,000. The Capital Loss of $300 may be carried forward to the next financial year however we will cover that a bit later in this article.
Understanding your CGT implications is a 3 step process:
When does Capital Gains Tax apply?
An easy way to understand when CGT is applicable is when you make a capital gain or a capital loss on the sale of an asset. All assets you have purchased or inherited since 20 Sep 1985 (when CGT started) are subject to Capital Gains Tax unless specifically excluded. You may check out the ATO’s extensive list here however in general, exemptions include Capital Gains or Losses for:
- Your main residence;
- Your personal vehicle;
- Personal use items bought for less than $10,000; and
- Winnings or losses from gabling, a game or a competition with prizes;
- Pre-CGT Assets (any asets bought or inherited before 20 Sep 1985).
In the next section, we will discuss how much Capital Gains Tax you have to pay and also later on about how can you reduce the amount of Capital Gains Tax liability in Australia.
When was the Capital Gains Tax incurred?
The timing of when a CGT event occured is important because that determines which Financial Year you report the Capital Gain or Loss in. Usually, a Capital Gain or Loss is incurred (the ‘CGT Event’) when you enter into the contract of disposal (sale). For example, when you sign the contract to sell a house (as opposed to the settlement date). If there is no contract, the CGT event is generally when you stop being the asset’s owner.
In some circumstances, you may be eligible to “roll-over” a Capital Gain or Loss from a CGT event until another CGT event occurs. These are usually quite complex cases so contact us to find out more!