About capital gains tax
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What is capital gains tax?
Capital gains tax (CGT) is not a separate tax but the amount of income tax that you pay on any capital gain that you make.
You must include the net capital gain that you make in an income year in your assessable income for that year. There is no separate tax on capital gains, rather, the 'capital gains tax' forms part of your income tax, because you include your capital gain on your tax return.
Consequently you are taxed on your net capital gain at the normal marginal tax rate that applies to your taxable income.
Your net capital gain is the difference between your total capital gains for the year and your total capital losses (from your business and other assets), less any relevant CGT discount or concessions.
You make a capital gain or capital loss when certain events or transactions happen. These are called CGT events. Most CGT events involve a CGT asset.
Some CGT events, such as the disposal of a CGT asset, happen often and affect many different taxpayers. Other CGT events are rare and affect only a few taxpayers, for example, those concerned directly with capital proceeds and not involving a CGT asset.
The most common CGT assets are:
- land and buildings
- shares in a company
- units in a unit trust.
Less well-known CGT assets include:
- contractual rights
- foreign currency
Capital gains and losses
In general, you make a capital gain if you receive an amount from a CGT event (such as the disposal of a CGT asset) that is more than your total costs associated with that event. You make a capital loss if you receive an amount from a CGT event that is less than the total costs associated with that event.
In some cases, you are taken to have received the market value of the CGT asset even if you received a different amount or nothing at all, for example, when you give an asset away.
This rule is especially relevant to family succession transactions, for example, where you gift (give) the family farm or other business assets to your children.
You can use a capital loss only to reduce a capital gain, not to reduce other income. You can generally carry forward any unused capital losses to a later income year and apply them against capital gains in that year.
Generally, you can disregard any capital gain or loss made on an asset you acquired before 20 September 1985.
Special rules apply to depreciating assets. A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used. Examples of depreciating assets include the plant and equipment you use in your business.
Under the uniform capital allowances system that has applied since 1 July 2001, any gain or loss from a depreciating asset is included in your assessable income, or is deductible as a balancing adjustment, to the extent the asset was used for a taxable purpose, for example, to produce assessable income. The small business CGT concessions do not apply to gains you make on depreciating assets that are included in your income under the uniform capital allowances system.
You make a capital gain or capital loss from a depreciating asset to the extent you have used the depreciating asset for a non-taxable purpose, for example, for private purposes (CGT event K7). Any capital gain you make in this way does not qualify for the small business concessions because it reflects the non-business use of the asset.
However, as depreciating assets are still CGT assets, they must be included in the maximum net asset value test. A depreciating asset may also be an active asset and may be chosen as a replacement asset under the small business rollover.