Basically, you buy an asset for one price and sell it for another price, the difference between the amounts is your ‘Capital Gain’, or if you didn’t make any profit, that’s a ‘Capital Loss’.
Ye olde history of taxes
Taxes have been in the world for hundreds and hundreds of years. If we travel way back in the Middle Ages, it had a spasmodic history, mainly because it was usually associated with some sort of national emergency.
The oldest types of direct taxation were either to pay off invaders or to fund a war so you could go off and invade some other country.
In these ancient times, a city or region would march off and launch an attack on a neighbouring area, and if the battle went well for them and they overthrew the locals, they would make them pay so the attack would stop. This payment was often referred to as a tribute. The imposers of these taxes were the leaders of the times, either the government or a good old bloodthirsty royal family.
After a while, the leaders realised that it might be a good idea to continue the tax even after the extinction of its original purpose. Normally, this would be under the heading of defending the kingdom.
Today’s tax is money we have to pay to the government. The government then uses the money it gets from taxes to pay for lots of things to keep the nation moving. Taxes are not only used to pay for people who work for the government but also for our military, police, hospitals, schools, and education and to build roads and bridges.
Taxes for all occasions
There certainly are no shortages of taxes; we have a tax on our wages, an income tax, a pay-as-you-go tax, a payroll tax, a sales tax, a property tax, an import tax, an alcohol tax, a tobacco tax, and a petroleum products tax. There are consumption taxes, a Goods and Services tax, a Fringe benefits tax, a Medicare tax, a superannuation tax, a luxury car tax, and there are taxes that aren’t called taxes, so we call them duties.
The reason why we invest in the first place is to make some money in the future. When you sell property, shares, or a business and receive more for your asset than you paid for it, congratulations you’ve made money, but you’ve also made a ‘capital gain,’ and you may need to pay ‘Capital Gains Tax’.
This sale triggers what is referred to as a ‘Capital Gains Tax Event’.
How much Capital Gains Tax will I pay?
The amount of Capital Gains Tax you’ll pay depends on factors including how long you’ve owned the asset, what your marginal tax rate is, and whether you’ve also made any capital losses.
Your marginal tax rate is important because your capital gain will be added to your total income in that financial year’s tax return.
The length of time you’ve held your asset is relevant because if you’ve held the asset for over 12 months, certain taxpayers can generally get a 50% discount on their capital gains tax.
What if I make a loss?
Although this isn’t ideal, if you’ve sold your assets for less than you paid for it, you’ve made a capital loss. But, the good news is if you make a capital loss, you can potentially use it to reduce a capital gain in the same financial year.
If you have a capital gain, it will increase the tax you need to pay. The tip here is to get your lovely accountant to help you work out how much tax you will owe and set aside those funds to cover it.
Are there exemptions?
There are a few assets that are exempt such as your home. However, CGT may apply if you rented out part or all of it, if you claimed part of it for business, or it’s on more than 2 hectares of land.
Still got questions?
As part of you being a clever investor, decisions around subjects like this are part of your plan that will need to be reviewed over the years. For your own personal questions and decisions around CGT, you’ll need to direct your questions to your accountant and financial advisor.
Knowledge is Power
Owun is the Senior Education Specialist at the Blue Wealth Property Academy and hosts The Clever Investor podcast. He has worked in finance and property for well over 20 years and is known for being able to explain the complex world of wealth creation easily.