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Capital gains tax 101: a Melbourne tax accountant explains

Published On: February 8, 2019Categories: Accounting

When it comes to business accounting, there are three main taxes you’ll need to contend with:

  • Company tax (income)
  • Goods and Services Tax
  • Capital Gains Tax (CGT)

While most are familiar with the first two, not everyone has to deal with the third very often. As a result, capital gains tax isn’t quite as well understood as the other two.

In place since 1985, capital gains tax is an important part of you tax obligation.

To make sure you’re getting your tax obligations right, a Melbourne tax accountant explains how it’s crucial for you to understand what capital gains tax is!

Introducing capital gains tax

Every business has assets: inventory, vehicles, tools, office furniture… the list goes on.

In the eyes of the ATO however, not all of these types of assets are made equal!

Business vehicles. Machinery. Furniture. Buildings and land.

What do all of these assets have in common?

  1. Each was bought for business purposes
  2. None are intended for sale (meaning car dealerships don’t qualify)
  3. You’ll be hanging onto them for a long time
  4. They’re all big purchases

Most importantly, they’re all capital assets.

According to the ATO, capital assets are “assets that have a longer life”.

While capital assets aren’t purchased with the intent to sell them, sometimes it can’t be avoided. Perhaps you don’t need a piece of equipment anymore, or perhaps you’ve fallen on hard times and need to shed weight.

On top of paying GST, you’ll also have to pay an additional tax on these sales: capital gains tax.

Capital gains and losses

Just like any other sale, you can make a profit on this sale, or a loss – capital gains and capital losses, respectively.

There are three main methods, with each one applying in different circumstances. In particular, depreciating assets have their own methods – not to mention, certain assets are excluded completely.

If you’re unsure which one applies to your unique circumstances, a Melbourne tax accountant can help.

Capital gains are included in your assessable income – you’ll need to report them on your income tax return (side note: CGT is not a separate tax – rather it’s a subset of income tax).

When the time comes to report your tax obligation, you’ll be required to provide your net capital gain (or loss) for the year, not individual gains or losses.

Any capital losses can be used to offset your capital gains, reducing your tax obligation.

And if you make a net capital loss?

Unfortunately, in these cases you can’t claim a deduction from a net capital loss.

Luckily, you aren’t completely out of options – what you can do is carry it forward and deduct it from future capital gains in future years!

An tax accountant using calculator to calculate.

It isn’t just businesses either

While businesses may be the ones who deal with capital gains tax, they aren’t alone.

Individuals may need to pay CGT too – you just mightn’t have even realised since most of the assets large enough to fall under the “capital” label are exempt from CGT.

  • Your home and furniture
  • Cars and other personal use vehicles
  • Collectibles (acquired for less than $500)
  • Pre-CGT assets (pre-1985)
  • Superannuation rights and interest
  • Insurance payouts

For other large purchases however, it may be something you have to contend with.

For example, personal use assets like furniture and appliances worth more than $10,000 may incur CGT.

Another way in which ordinary people come into contact with capital gains tax is through financial instruments – in particular, the sale of shares or parts of your fund.

Need help with your tax obligations?

Call a Melbourne tax accountant!

While the ATO has made strides to simplify your tax obligations, many parts of the tax system are still dense and difficult to understand.

Case in point, capital gains tax: we’ve barely scratched the surface of all the rules, exemptions and more.

It can be hard to figure out exactly how much you owe completely on your own. Luckily, you don’t need to do it alone!

Bruce Edmunds & Associates help with all matters accounting. Our team of experienced Melbourne tax accountants are experienced in business tax returns and personal tax alike – we’ll help you figure out what you owe.

Give us a call today on (03) 9589 5488, or click here to book an appointment.

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