Capital Gains Tax Explained

Capital gains and capital losses can be complicated to work out.

Broadly speaking, you can have a capital gain or capital loss when a capital gains tax (CGT) event occurs – for example, you dispose of an asset.

There are more than 50 CGT events but the most common include selling an asset, giving an asset away, or when an asset is lost or destroyed.

Examples of assets that may attract capital gains tax include:
a real estate such as vacant land, a rental property or holiday home
a shares in a company, and
a units in a unit trust or managed investment fund.

Your capital gain will generally be the difference between the cost of the asset and what you sell it for.

If you have held the asset for at least 12 months, you can reduce your capital gain on the asset by 50% after applying any capital losses.

If overall you have made a net capital gain for the financial year, you may have to pay tax. If overall you have made a net capital loss, it may reduce capital gains in future years – but it can’t be deducted from your other income.

If you purchase or inherit an asset, receive an asset as part of a divorce or as a gift, or make improvements to a property, you may be liable for capital gains tax when you sell or dispose of it. You also make a capital gain when you receive a distribution of a capital gain from a managed fund or trust.

What records should I keep?
You should keep all records of purchases or acquisitions of assets that may be subject to capital gains tax and records relating to their sale or disposal. Incomplete records could mean paying more tax than necessary when disposing of an asset.

Records should show:

a the nature of the act, transaction, event or circumstance and how it resulted in a capital gain or capital loss
a the date it occurred, and
a the parties involved.

You should also keep records used in working out the amount of the capital gain or capital loss. These may include:

a receipts of a purchase or transfer
a details of interest on money borrowed relating to the asset
a records of agent, accountant, legal and advertising costs
a receipts for insurance costs
a receipts for rates, land tax and stamp duty
a any market valuations
a receipts for the cost of maintenance, repairs or modifications
a accounts showing brokerage on shares, and
a records from the previous owner – for example, for certain assets you inherited.

Helpful publications available from the Tax Office at no charge include the Guide to capital gains tax 2006, the Personal investors guide to capital gains tax 2006 and the Guide to capital gains tax concessions for small business.

They are available at www.ato.gov.au or by calling the Tax Office on 1300 720 092.

D Maynard
CEO My Tax Zone

Copyright 2014. My Tax Zone.