Now everyone has at one point this year uttered the word Capital Gains or at least heard of it whether on the news, over a chat of coffee or with client, but what actually is it?
A little background, Capital Gains(CGT) is a tax on essentially that; on the increase value from once you brought the asset to when you dispose of it. Gains are not recognised until the asset is sold, whether the asset is sold in the short term(less than 12 months) or long term so more than a year is also important. Common assets excluded from CGT are but are not limited to:
Introduced in 1985, it has grown from being a relatively niche idea to being on everyone’s lips. Mums, dads, sole traders you name it. The importance of CGT is highlighted by the growth of the tax; taking in $5 million in 1987-88 to now accounting for 3% of Federal Government’s revenue or $11.5B in the 2015-16 Budget. The reason this tax was created was to encourage investment in the economy and entrepreneurship as long term capital gains are usually taxed at a lower rate than regular income.
The big thing to note is that for start up businesses from July 1st this year will not have to pay CGT if they sell their stake in the company at a future date for a profit! Why is that important I hear you ask? Let’s say, you open up a local fruit shop down the street, it means it will be easier to raise the capital or funds needed to get your business off to a winning start. This is why the tax was created in the first place.
The calculation of CGT depends mainly on whether you hold the asset this case being the fruit shop for less or more than 12 months. For more than 12 months after September 1999, simply any gain is first discounted by 50% for individuals or by 33.35% for super funds. You might also be entitled to CGT discounts and small business CGT concessions which we can gladly assist in. Also there might be hidden capital losses that we can locate to offset against any capital gains that have tax applied to it, essentially money you can save.
A new update to note is in relation to property which has been a big talking point for the government. Revaluation of property is now based off its fair value or current market value rather than on historical cost to give a more true and fair test of the tax. Another hot topic of debate has been a suggestion to increase capital gains tax across the board on the back of the growth in property markets. This is one thing everyone should keep an eye out for.