Understanding Capital Gains for Individual and Small businesses in FY23


  1. What is Capital Tax Gain?

Capital Gains Tax also known as CGT, is the tax applicable on your profits which is attained from selling assets including your personal belongings, properties or land. Under the Australian Law all businesses and individuals are liable to report the gain and loss they have acquired on their capital. While reporting capital gains and losses in the EOFY Tax returns, businesses need to understand how and what to include. CGT is included in the income tax as a separate tax profile.

Within your income tax, if you have a capital gain when you sell or exchange assets, you will be required to pay and would need to set aside funds to cover it. It is important to note that Capital Gains Tax is the tax that you will be paying on the profit that you have gained from selling or exchanging asset/s. The rate on which you will pay also depends on your individual income tax rate.

  1. How does it work?

One of the most common queries is to understand how Capital Gain Tax would be paid. The best way to understand is as follows,

If a person residing in Australia is buying a house and over time, the value increases, the tax which will be paid would be on the amount by which the value of house went up or down at the time of sale. In such a case where the value of the house declines from the original price leading to no profit, it will be noted as a capital loss and no tax will be applicable to be paid on it. In instances where you are exchanging the asset or if you are presenting it as a gift to someone, you will be liable to pay tax on it. Such an instance is called a CGT Event.

For Australian residents, the tax is only applicable when the tax return is being filed and not at the time of selling or exchanging the asset. Capital Gain is calculated on the sale of the contract and not on the date of settlement. For instance, if the contracts between two parties for the sale-purchase is dated 4th May 2023 and the settlement happens on 7th July, 2023 then the report on capital gain will be stated in the financial year ending 30th June, 2023. If Australian residents hold properties/assets beyond Australia, i.e., anywhere in the world, they will be liable to pay tax on their capital gains. This comes under Taxable Australian Property which includes all direct and indirect interests in real properties located within Australia.

  1. Understanding the Future Tax Liability

For any individual or business, it is vital to understand how the Future Tax Liability works, especially when you are selling an asset. When selling an asset, it is important to maintain a good financial position. You may even need to hire an accounting firm to keep yourselves on track regarding your obligations but most importantly, you will be able to identify if you are liable to pay or not. The capital gain or loss is noted as the difference for what you had paid for an asset to what you had sold it for. Staying organized is the key to manage your Capital gain Tax liability.

  1. Understanding your eligibility for discount

For all Australian residents filing an income tax return, you will be eligible for a 50% discount on your Capital gains if,

  1. You are an Australian resident.
  2. If you have owned the asset/s for at least 12 months.

For any asset that is owned for less than 12 months, the discount will not be applicable. Your Capital Gain will be provided with a discount when filing for your income tax return. The discount is available for individuals and trusts; however, companies are not applicable to avail this. One important aspect of receiving a discount is that the person buying the asset should also be an Australian resident. The reason why you are eligible for a discount is that long-term investments build up economy and contributes to stability. Thus, all long-term investments receive reduced tax rates.

  1. Exemptions for Small businesses

For any small business located in Australia, there are four options that can be opted for getting a discount on their capital gains. These are as follows,

  1. Any asset that has been owned and retained by the business for more than fifteen years is not liable for tax.
  2. Any small business may be applicable to receive a tax discount of 50% if the asset has been in active use by the business. This could also be further discounted if the asset is owned for more than 12 months.
  3. If the individual owning the business chooses to defer the payment from his capital gains into a retirement account and ask for a lifetime exemption, then the tax rate will be reduced to a limit of $500,000.
  4. In the scenario where an individual or a small business may end up deferring payment due to the nature of the business, they may not be applicable for incurring further costs on the capital gain.

Understanding Capital Gains Tax may be complicated and calculating the values may require professional help. For all residents in and beyond Australia, they can hire an accountant to better understand how to calculate and defer costs on Capital Gains Tax.

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