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Tax Planning Part 5: Navigating Capital Gains Tax

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Understanding Capital Gains Tax (CGT) is crucial for anyone involved in selling assets like real estate, stocks, or business shares. 

This fifth segment in our Tax Planning Series dives into the essentials of CGT, focusing on events that trigger it, how to calculate it, and strategies to minimise its impact.

What Triggers Capital Gains Tax?

Capital Gains Tax is applied when you sell an asset and make a profit from the sale. Key events that trigger CGT include:

  • Selling Property: Whether it's your investment property or your home, selling property can lead to a capital gain.
  • Selling Shares or Investments: Profits from selling shares, bonds, or other investments are subject to CGT.
  • Business Assets: Selling business assets or the business itself can also trigger CGT.
NOTE: Certain situations, such as the transfer of assets upon death or divorce, may have different CGT implications or exemptions.


How to Calculate Capital Gains Tax

Calculating CGT involves several steps:

1. Determine the Cost Base

This includes the purchase price of the asset plus any associated costs like legal fees, stamp duty, and improvements.

2. Calculate the Capital Gain

Subtract the cost base from the sale price. If the result is positive, you have a capital gain; if negative, a capital loss.

3. Apply Discounts and Exemptions

In Australia, individuals and trusts can often claim a 50% discount on capital gains if the asset was held for more than 12 months. Superannuation funds may receive a 33.3% discount, while companies do not receive any discount.

Example Calculation

Suppose you bought an investment property for $300,000 and sold it for $500,000. Your cost base includes $300,000 plus $20,000 in legal fees and improvements, totaling $320,000. 

Your capital gain is $500,000 - $320,000 = $180,000. If you held the property for over a year, you might be eligible for a 50% discount, reducing the taxable gain to $90,000.

Strategies to Minimise Capital Gains Tax

Here are effective strategies to reduce the CGT burden:

  • Utilise CGT Exemptions

Some assets are exempt from CGT, such as your primary residence, personal use assets like cars, and depreciating assets used in a business.

  • Offset Gains with Losses

You can offset capital gains with capital losses from other investments. If your losses exceed your gains, you can carry forward the loss to future years.

  • Timing the Sale

Timing can significantly impact your CGT liability. Consider selling assets in a low-income year to reduce the overall tax rate or spread sales over multiple years to stay in lower tax brackets.

  • Superannuation Contributions

Making superannuation contributions can reduce your taxable income, which may indirectly reduce the amount of CGT payable.

  • Family Trusts and Ownership Structures

Using family trusts or different ownership structures can provide flexibility in distributing income and gains, potentially lowering the overall tax burden.

Navigating Capital Gains Tax requires a strategic approach to minimise its impact on your financial health.

 Understanding what triggers CGT, how to calculate it, and employing smart strategies can save you significant amounts in taxes. 

For personalised advice, why not chat with one of our tax professionals? We can tailor strategies to fit your specific needs and make sure you're in line with all the relevant tax laws.

Don't miss out on the next parts of our tax planning series, where we'll keep sharing valuable insights and strategies to help you optimise your tax situation.

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Give us a call at 02 9411 5422, and let's get your tax planning on the right track!