What is a Capital Gains Taxable Asset?
The capital gains tax (CGT) law commenced on 20 September 1985 and applies to CGT assets acquired after that date. Most people understand that assets such as real estate, shares in companies or units in unit trusts are CGT assets. However, the CGT net is cast over a broad range of assets such as the goodwill of a business, contractual rights, foreign currency, collectables costing over $500 such as jewellery or artwork, and personal use assets costing over $10,000 such as a boat.
A common belief is that a person’s home is CGT exempt but this may not be the case if the home has been rented or used in a business such as a veterinary surgeon who might conduct a veterinary business from a specially allocated part of the home. A home office usually does not taint the CGT exempt nature of a home provided tax deductions have not been claimed for rates or mortgage interest.
Special rules apply to homes that are inherited from a deceased person. In some cases, the deceased person’s main residence exemption can apply to a person who inherits the home and that person uses the home as their main residence. If a deceased person occupied a home for the total period of their ownership, any capital gain made on the sale of the home will be CGT free if the home is sold within two years of the person’s death and the date of settlement (‘completion’) of the contract (not the date of exchange (‘signing’) of the contract). Remember that a person can only have one main residence at a time, so a ‘weekender’ generally cannot be CGT exempt.
Cars are exempt from CGT as are insurance payouts arising from death or injury. However, insurance proceeds paid for lost income are taxable.
A capital gain made from the sale of business goodwill or other CGT assets used in a business may be CGT exempt under the small business CGT concessions. A small business for the purpose of these concessions is generally a business with an annual turnover of less than $2 million or CGT assets of no more than $6 million.
A myriad of tests must be satisfied to qualify for the small business CGT concessions, but eligibility is not impossible. The key to satisfying the tests is to properly structure a business when the business commences. Advice should be sought from your Nexia advisor before changing the structure of a business; for example, changes to shareholdings or unit holdings can render a taxpayer ineligible for these valuable concessions.
Lastly, the term ‘capital gains tax’ is a misnomer. No special tax exists to tax capital gains. Instead, capital gains are calculated and are then included in a person’s or entity’s taxable income to which normal income tax rates apply. Note that the determination of the assessable capital gain will be subject to concessions such as the 50% discount for assets held longer 12 months or the small business 50% reduction.
