In Australia, the government typically imposes a tax on profits from sales of property or investment called the Capital Gains Tax (CGT). A capital gain on such assets is the positive difference between what it cost you and what you receive when you dispose of it. On the contrary, capital losses are experienced when assets cost more than what you receive from it after its disposal. If you are an Australian resident, the tax will apply to your assets anywhere in the world; or if you are a foreign resident, it will apply to assets that are considered ‘taxable Australian property’ by the Australian Taxation Office (ATO). However, if the asset was acquired prior to the implementation of this tax scheme (20 September 1985), then the asset is excluded from CGT.
Where does the CGT apply?
When you acquire an applicable asset, you have to record every relevant transaction, event or circumstance that can affect its value. This also ensures you are not overpaying the amounts to the ATO. Make sure you establish the exact acquisition date of the asset because changing rules and ownership duration can affect the current calculation of your CGT. Thus, you will also need to establish the timing of a CGT event, as this is would be the point where you make a capital gain or loss. Examples of CGT events include selling or disposing of the applicable assets, or receiving capital gains distributed by a managed fund or other trusts. For particular CGT events, the law allows you to defer or roll over any capital gain made until another CGT event such as exchanging an asset for a replacement asset, then selling the replacement asset.
Where doesn’t the CGT apply?
For most personal assets such as your home, car, and most personal use assets, such as furniture, the CGT does not apply. Depreciating assets used solely for taxable purposes, such as business equipment or rental property fittings are also exempt from CGT.
So how does it affect my business?
The CGT is a component included in your income tax but is based on your assets; the other component being based on your employment or business operations. Capital losses cannot be claimed against income, but you can use it to reduce your capital gain the same income year. You can also carry forward any capital losses that exceed your capital gains and deduct it against capital gains in the future.
Getting your tax claims right can be a tricky and costly task with the number of ATO obligations and rules applied to Australian businesses. If you are not sure of whether you are paying the correct tax rate for your business situation, you can contact leading accounting firm in Melbourne for tax advice for businesses.