The distinction between capital gain and capital loss can be seen at the disposing of an asset. You may sell your property for an amount of money which is higher or lower than your investment. When this action actually costs you money, because the reselling price is lower than the initial one, you suffer a capital loss. On the other hand, when you receive more compared to your initial investment, the difference of money is called capital gain.
But what about the capital gain tax? The extra earnings represent taxable income. This means that there is a tax applicable to almost each capital gain, with some specific exceptions.
CGT was introduced on 20 September 1985, and anything you have bought since then may become a taxable income unless the assets are specifically excluded. If you have an Australian residence, CGT is applicable to all your assets around the world. So if you thought that investing in foreign countries may give you a break from this tax, you are wrong. Foreign residents are affected by CGT only when it comes to their Australian proprieties.
What are the exceptions?
As it was already mentioned, capital gains tax is not applicable to every asset you own, as there are also several exceptions.
- First and foremost, your main residence or home is one of these. However, there are some strict rules regarding how you came to own it and if it has brought you an income. For example, if you have rented a part of your house, let’s say a room or two, a portion of CGT will apply to you.
- Your car or vehicle is also another exception of the capital gain tax.
- Personal use assets, such as furniture, boats, electrical goods or household items, can also be an exemption, but only if they do not exceed $10,000. However, land or shares in a company is not considered a personal use asset.
- If you own collectable pieces, such as sculptures, paintings, antiques, jewellery, coins, etc., you will be pleased to find out that they may also bring you untaxable income, but only if they meet a few criteria.
- Capital gain tax does not apply to depreciating assets, which are used solely for taxable purposes. In this category, we may include fittings in a property you rent or business equipment. But if you used depreciating assets for a purpose which is non-taxable, you may have to pay CGT.
How to reduce the capital gain tax?
When it comes to CGT, there are a few ways of reducing it. The most popular one is selling an asset after you have owned it for more than one year. In this situation, you will receive a 50% CGT discount, which will definitely count a lot for your income.
A capital loss can also reduce CGT as it offsets a capital gain. If your asset is depreciating and you end up reselling it for a lower price, you will pay a lower tax, of course.
If you need some help with your capital gain taxes, the best option is to discuss with your accountant before making any move. This way, you will receive professional advice in order to optimise your incomes without getting into trouble.