How Can I Avoid Paying Capital Gains Tax in Australia?
Avoid problems and penalties by understanding how capital gains are taxed, what is exempt, and what happens if you fail to pay capital gains tax on time.
If there is one thing most people have in common, it’s a desire to save on their taxes. Unfortunately, the Australian tax code can be confusing, especially when it comes to capital gains tax. This tax can sneak up on you if you aren’t prepared for it, resulting in an unexpected bill at the end of the tax year. Luckily, exemptions offer a way to offset capital gains if you know how to use them to your advantage. Let’s look closer at how capital gains tax can affect Australians and foreign residents and what you can do to reduce your taxable income.
What Is the Capital Gains Tax in Australia?
Introduced in September of 1985, the capital gains tax or CGT works much like income tax. When you dispose of an asset, you can do so at a loss or make money based on the asset’s original value or purchase price.
If you made money, also known as realizing a capital gain for tax purposes, this profit becomes a portion of your income for the year that you have to pay tax on. In other words, the capital gains tax is more like an additional tax on an individual’s income than a separate tax. You may want to reserve a portion of your realized gains to account for the capital gains tax owed in the year of your increased income tax assessment.
The capital gains tax applies to:
• Business, investment, or gifted real estate
• Major capital improvements
• Businesses
• Investment shares, including stocks and bonds
• Collectibles
• Personal use assets
• Cryptocurrency
When you dispose of a taxable resource, taxes are incurred in the year you see a profit. On the other hand, if you report a capital loss, you can’t apply that loss to reduce your assessable income or marginal tax rate. However, you may be able to reduce your net capital gain by using capital losses to offset your total capital gains. Likewise, don’t forget to deduct capital costs.
As you can see, determining how your asset sale affects your taxable income can be complex. A tax professional can help you calculate your short- and long-term capital gains or losses and understand your income tax rate.
How Do I Avoid Paying Capital Gains Tax in Australia?
There is no surefire way to get out of paying for realized capital gains. Even if you give away assets or sell them for below market value to a friend or family member, one of you can expect to owe the Australian taxation office some money.
Luckily, you may not owe the government every time you see a capital gain, and the amount you owe may decrease the longer you hold onto the asset. For example, holding investment property for over 12 months can result in a 50% reduction in taxable gain.
Like most aspects of the Australian tax code, the capital gain tax has some legal exemptions. For example, you can exclude the disposal of your primary residence when calculating the CGT. Other exemptions that may work in your favour include:
• Personal effects, such as furniture or a car
• Any asset acquired before September 1985
• Depreciating assets such as business equipment or rental property fixtures
• Any assets held in superannuation funds until you retire
It’s best to consult with a tax expert regarding capital gain exemptions before filing.
Why Should You Care About the Australian Capital Gains Tax?
Ultimately, everyone has to pay taxes, but understanding how to offset capital gains could mean paying less. By making your capital asset portfolio work for you without subjecting sales or transfers to capital gains tax provisions, you can realize greater retention of your capital gains. Of course, tax advice is helpful along the way, so it is best to wait until you talk to your advisor before making any changes with your investment property or capital assets.
Don’t forget the impact capital gains can have on your heirs or beneficiaries. Without the correct ownership structures in place, inheritors of property incur substantial CGT liabilities when they sell an inherited property.
When Are Taxes Due for a Sale of Property or Shares?
You pay capital gains tax in the same year that the asset sold. For instance, if you sell investment properties, the date of the sale and price you agree to determine your cost base, even if you don’t see net capital gains until the following year.
It may seem straightforward, but juggling capital losses and taxable capital gain may get confusing when you have multiple transactions taking place in a similar time frame. Working with an expert you trust can help you calculate capital gains tax to avoid penalties down the road.
What If I Don’t Pay my Taxes on Time?
Any time you fail to file a tax return on time, you risk facing penalties. Interest may also accrue, increasing the amount due. It would be a shame to lose your property investment and any subsequent capital gain to penalties because you missed a tax deadline.
What Happens to Me if I Don’t Pay My Taxes on Time?
The Australian Tax Office (ATO) will work with you to establish a repayment plan on any outstanding capital gains taxes. It’s in your best interest to reach out to them or respond to their communication. The longer you wait to settle taxes on capital gains realized, the more penalties may accrue.
If the ATO doesn’t hear from you, they may refer your debt to a collection agency. Ongoing failure to pay your taxes can also lead to legal action, seizure of assets, and even bankruptcy proceedings.
Get Help From the Property Tax Experts in Australia!
At House of Wealth Property Tax Experts, we understand the current capital gains tax policy and how to best help you retain your net gain, regardless of your regular income. Our goal is to help you reduce your CGT exposure and see the greatest benefits of your investment strategies. Contact us today to schedule a free consultation.
This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.