The strategy To work out whether I need to pay capital gains tax.
How do I do that?
With the Tax Office stepping up its checks on the sale of shares and investment property, it's becoming less likely that you can conveniently "forget" about CGT. Have you sold any asset in the past year and made a profit? If you have, then you may have to declare the gain in your tax return.
Doesn't CGT just apply to investments?
Not necessarily. CGT can also apply to things like collectables, personal use assets and even goodwill and contractual obligations. The main CGT exemptions are for the family home (except where it's used to produce an income), personal use assets such as boats and furniture that were bought for $10,000 or less, and collectables bought for $500 or less.
Assets acquired before CGT was introduced in September 1985 are also CGT exempt.
How is CGT calculated?
You work out the cost base of the asset by adding to the original purchase price incidental costs in acquiring and realising it, plus any capital costs incurred in improving it or preserving or defending your ownership rights.
Incidental costs include things such as brokerage or real estate agents' commissions, stamp duty, advertising costs and legal fees. The cost base is then deducted from the sale price of the asset to arrive at your net capital gain. If you owned the asset for more than 12 months, half this gain must be added to your income in your tax return. If you owned the assets for less than 12 months, the full gain must be included.
What if the cost base is higher than the price I got when I sold?
You have made a capital loss. This can be used to offset capital gains on other assets, but unfortunately it can't be offset against other income. Note that some costs - such as non-capital costs - can't be included in the cost base for determining capital losses. Capital losses from collectables can only be used to offset gains on other collectables, and losses made on personal use assets must be disregarded.
When do I need to declare a capital gain? It has to be included in your tax return in the financial year the gain was realised. For tax purposes, the gain is realised when you enter into a contract to sell the asset. So if you signed a contract to sell an investment property in June, you have to declare it in your 2003-4 tax returns, even though the property may not be settled yet.
What if I inherit something?
If the asset was bought by them before September 20, 1985, you are deemed to have purchased the asset at the date of death. Its value then becomes your cost base for CGT. If the asset was bought after this date, you effectively inherit the cost base of the person who left it to you. You need to get the necessary documentation from the estate. When you inherit someone's home, there's no CGT if you dispose of it within two years or if it was the main residence of the spouse of the person who was deceased or someone else who had a right to live there under the will. Otherwise you're deemed to have acquired it at market value at the date of death.
How are things like bonus shares and dividend reinvestment plans treated?
Shares or managed fund units bought through reinvestment plans are treated as separate assets for CGT - so you need to keep records of all reinvestments. With bonus shares, providing none of the bonus share was assessable as a dividend, you're generally deemed to have bought the bonus shares at the same time you bought the original shares and your cost base must be adjusted accordingly. The ATO has released an updated guide to CGT at www.ato.gov.au. Phone 1300 720 092.
