Summary
If you have a managed fund, sold an investment property or sold shares in Australia anytime over the past three decades, you would have had to declare capital gains on your tax return in the financial year that you sold your assets.
Content
If you have a managed fund, sold an investment property or sold shares in Australia anytime over the past three decades, you would have had to declare capital gains on your tax return in the financial year that you sold your assets.
There are over 50 events that are described in Australian income tax legislation as ‘CGT events’, but there are only a handful of common ones. These include the aforementioned income from a managed fund (which often includes capital gains and other types of income), sale of shares and sale of an investment property.
Updates to legislation over the years has made capital gains tax relatively easier to deal with. However, there are a few major points investors should know about when they calculate the capital gains and losses incurred on the sale of their investments.
The Discount Method
The discount method of calculating capital gains came into place in September 1999, and acts as another option to the far more complex Indexation method that had been in place since 1985. If investors had held their investment for 12 months or more prior to selling it, they would be able to discount their total capital gains by 50 per cent (33.3 per cent for SMSFs).
As an example, an investor held shares for two years before selling them and making a $10,000 capital gain. The investor would only have to declare $5,000 on their tax return as they held their shares for longer than 12 months.
Capital Losses
Although the discount method can be applied on a capital gain, it cannot be used on a capital loss under any circumstances. Investors who incurred a capital loss on a sale of their assets must declare the full loss on their tax return.
A benefit of making a capital loss on an investment is that it can be offset against any capital gains one might make on other investments in the same or future years. This helps decrease the amount of one’s taxable income, which could put a person in a more favourable taxable position.
As another example, if the above investor made the $10,000 capital gain but had also carried forward a $12,000 capital loss from a prior year, no capital gain would have to be declared as their loss is larger than their gain. Instead, they would carry forward a $2,000 capital loss into future years ($12,000 loss – $10,000 gain).
An investor cannot use the discount method when offsetting a capital gain against a loss: they must offset the full gain against the loss. Any gain left over (ie. If the gain is larger than the loss) can then be discounted if the investment was held for over 12 months.
Sources
https://www.ato.gov.au/general/capital-gains-tax/
https://www.ato.gov.au/General/capital-gains-tax/working-out-your-capital-gain-or-loss/