When you sell an asset, whether as part of your business or in a personal capacity, it’s very easy to forget that there will probably be tax consequences writes Mark Chapman, director of tax communications at H&R Block Australia.
Maybe you’ve sold some shares or an investment property. Maybe your business has sold an office building or a valuable piece of plant. Maybe you’re looking at a life change and after building up your business, you’d like to sell it and do something else
These are just a few examples of the sort of transactions which can generate a capital gain. Typically, the gain is calculated based on the difference between the money you make from selling an asset or investment and the price that you paid for it (less some costs).
The investments or assets that you sell could be property (for example, a building or block of land) but can also be shares in another company, units in a trust or a managed investment fund. An asset can also be intangible, such as contractual rights that the business has or even the goodwill of the business.
In addition, apart from selling assets, including land or buildings, Capital Gains Tax (CGT) can also be an issue if selling a part of the business, buying out a partner, making extensions to a factory or warehouse, altering your business structure (say by creating a trust and transferring the business assets into it) or receiving compensation for lost or destroyed assets.
There are always exceptions of course, and with CGT the principal exception is if the gain relates to the disposal of your family home. Provided the house you’re selling is your main residence – basically the house you live in on a daily basis – no CGT will arise when it’s sold.
How does CGT work?
CGT is triggered by a CGT 'event'. Typically, this happens when you sell an asset but can also happen if the asset is given away, if it's destroyed or lost, or you stop being an Australian resident.
CGT operates by taxing any increase in value from the time the asset was acquired or created. The capital gain is taxed in the year the asset is sold.
The amounts that are subject to tax vary but the resulting capital gain is included with your income and taxed at whatever marginal rate you would then pay. The amount that is added into your assessable income is known as the 'net capital gain'.
This is worked out by taking the money you make from selling the asset and subtracting your 'cost base'. This includes the price you paid, any costs incurred in buying and then selling it, and certain other incidental costs.
This amount is the gross capital gain. Next, take away any eligible capital losses. Finally, apply any applicable 'discount' factor (where the asset has been held for at least 12 months, you may be able to reduce the gain by 50%) to give the net gain.
Sometimes the tax law will require that the proceeds and cost base of the asset are not what was actually paid and/or received, but rather, the market value of the asset at that time. This is typically to prevent people from minimising their tax by, say, selling the asset to a relative for a low price.
And what if you make a loss?
It is possible to make a 'capital loss' if the money you realise from selling an investment is less than what you paid.
Unfortunately, the ATO won't let you deduct capital losses from your income. What you can do is to offset your capital losses against capital gains made in the same year, so that you pay less tax on the gains, and then 'carry forward' any remaining capital losses to be deducted against future capital gains.
Records
You must keep good records. Keep all receipts and any details of financial transactions, insurance and valuations, records of repairs and so on, and especially records of sale or disposal.
Incomplete records could lead to you paying more tax than is necessary. Make sure you record the nature of the asset and related transactions, how the asset resulted in a capital gain or loss, the dates involved and the persons or other businesses involved.
You must keep records of every transaction, event or circumstance that may be relevant to working out whether you've made a capital gain or loss from a CGT event, including:
- records of the date you acquired an asset and the cost of that asset;
- records of the date you disposed of an asset and any proceeds you received when you disposed of it;
- details of expenses incurred when you purchased or disposed of an asset;
- details of improvements you made to an asset;
- details of interest on money you borrowed relating to the asset; and
- records to establish whether you've claimed an income tax deduction for an item of expenditure.
Example of records
- Receipts of purchase or transfer including any stamp duty paid;
- Purchase contract;
- Sale contract;
- Records of agent costs and commissions, accountant, legal and advertising costs;
- Receipts for insurance costs, rates and land taxes;
- Records of any market valuations at the time of purchase, sale or transfer;
- Receipts for building costs associated with maintenance, repairs, renovation and modifications including structural improvements;
- Accounts showing brokerage fees on shares.