This week we caught up with expert tax accountant Peter Moltoni to discuss the Capital Gains Tax (‘CGT’). Knowing the ins and outs of this law and more importantly, knowing to how to properly claim it, can be very difficult. Today we hope to shed some light on the CGT for our client base.
Q: When was the Capital Gains Tax introduced and what is it?
A: The Australian Capital Gains Tax (CGT) was introduced in September 1985. The difference between what you paid for an asset for and what you’ve sold it for determines the capital gains. It essentially covers anything you can think of that has value that’s not subject to income tax.
Effectively it operates in a similar way as a death duty operates in other countries.
“A capital gain or capital loss is the difference between what it cost you to get an asset and what you received when you disposed of it.” – Australian Taxation Office
Q: So how exactly does the Capital Gains Tax affect me?
A: Let’s talk about exemptions. Currently your main residence is not subject to capital gains tax and the provision states that if you need to move out of your house because you’ve been transferred for work or something similar you can actually rent out the property for a period of six years and sell it without being held liable for the CGT.
Beyond that, the rate of CGT depends on your marginal tax rate and how long you’ve held the property.
Capital Gains tax is mostly paid by Australian residents. Generally if you’re a non-resident you won’t collect a capital gain unless the asset is land or shares in a company that is “land rich”.
Q: What issues do people run into with Capital Gains Tax?
A: People typically have issues with record keeping and determining what the cost base for the asset is. In terms of property people often forget to include the cost of stamp duties, legal fees, settlement agent fees, selling agents fees and in some cases the finance cost. If they can’t claim finance cost then the finance cost will also be included in the cost base of the assets. (Note, if the property is rented out the finance costs will generally be deductible and won’t be included in the capital gains tax calculation).
Q: Are there any other issues with real estate?
A: Confusion can occur with the date a property is considered sold for CGT. Sometimes when a sale occurs, particularly within real estate, people think the date they settle on the sale of the property is when it is considered ‘sold’ for CGT. That is not correct.
The asset is considered ‘sold’ when you enter into the contract or when special conditions are met (such as finance approval or building inspections). This can quickly become very complicated or convoluted and can cause confusion as to which year the CGT tax needed to be filed.
Q: Why might someone need to hire an accountant to sort out their Capital Gains Tax?
A: Many times when you’re dealing with a Capital gain matter in relation to any asset there is confusion as to which financial year it must be filed under. The main issue with Capital gain is not understanding when the capital gain arises. For instance if you’re settling on a claim for damages in a court case there are often capital gains arising from that. The other big issue is matrimonial disputes. There are certain roll overs and exemptions you can get with Capital Gains tax depending on where the asset is, who owns it, and what happens to it, however, in most cases people going through matrimonial disputes completely forget about capital gains tax. Then a few years or a few months later someone realises there’s a huge tax bill to be paid and no resources to pay it with.
Q: How do you know if you’ve missed Capital Gains while filing your taxes?
A: Sometimes when people do their own tax return or are ill advised they are unaware that they’ve incorrectly filed the return. The ATO currently collects a multitude of data from many sources including the Department of Land and Housing WA, share registry providers, stockbrokers, banks, the Department of Motor Vehicles, and several others. Eventually as they compare data the error is flagged and you wind up receiving a letter from the ATO asking why you didn’t include the capital gain and letting you know that you may owe and there may also be penalties and interest payable. Penalties start from 25% of the tax and go up from there.
Capital Gains can be a very difficult issue and the risks associated with incorrect filing are high. At M Squared we have knowledge of taxation and accounting that equates to over 50 years of experience. Contact us today if you are uncertain about your taxable assets or need clarity on your current taxation situation.