Capital Gains Tax is a tax charged on any capital gain arising from the sale of any asset acquired after the 19th of August, 1985.
You are liable for Capital Gains Tax if your capital gain exceeds your capital loss in any financial year. Any capital gain must be reflected in your tax return for that year.
You do not pay capital gains tax on your principal place of residence. However, any investment properties are subject to the Capital Gains Tax when sold.
One big misconception with Capital Gains Tax is that it is paid at the top marginal tax rate. This is incorrect. Any capital gain made is added to your other income to give you your taxable income and then taxed at your marginal rate which may not necessarily be the top tax rate.
Another misconception is that in the event a loss is made, that loss can help reduce your taxable income as a negatively geared property would. This is also incorrect. A capital loss can only be offset against a capital gain.
When determining a capital gain or loss it is important to keep all documentation relating to the purchase or sale of the property and all expenses associated with the purchase or sale as these may form part of your cost base reducing any capital gain.
The two important points to note in calculating a capital gain are as follows:
1. The date of acquisition and sale is that on the purchase and sale contract not the date of settlement.
2. In order to be eligible for the 50% discount method you must own the property for a full year excluding the purchase and sale dates and it must not be in a company name, it must belong to either an individual, a complying superannuation entity or a trust.
In the example above the property is only owned for 363 days as the date of purchase and sale must be excluded.