How do I calculate Capital Gains Tax?
How do I calculate capital gains tax in Australia? The good news is — it’s probably not as difficult as you think. Though many factors influence your tax calculations, most can be easily checked off in a relatively simple calculation. Alternatively, you can use a tool such as MiGain.io, which will help you calculate your Capital Gains Tax liability and allow you to print a report to send to your tax advisor. Because there can be several factors at play around your exact liability, you should always get professional advice before submitting your tax returns.
In this article, we aim to give you a brief understanding of what Capital Gains Tax (CGT) is and point you to some other helpful resources to understand how this tax impacts your investments. But as we mentioned earlier, it’s always best to get professional help when finalising tax returns, as the professionals will offer additional advice on minimising your tax payment.
What is Capital Gains Tax and how do I calculate it?
Capital Gains Tax is a Federal Government tax levied against certain assets and based on the capital gain of that asset when you owned it. If you sell a capital asset (such as an investment property or shares), you will make either a capital gain or loss (I.e., you either made money or lost money). These profits and losses need to be reported to the ATO in your yearly tax return, and if you have made a profit, you will pay tax on the amount that is profit. The profit is calculated by taking the amount you sold the asset for, then deducting the amount you paid for the asset and any costs related to the sale of that asset. So, for a property, the agent’s commission would reduce the amount of profit and, therefore, the tax you would pay on the sale of that property.
If you have several different transactions and some make a profit while others make a loss, then the amount of tax you are liable for can be a little more complex to work out. Fortunately, tools such as MiGain.io take all this into account and consider the related expenses to give you a report showing your overall potential tax liability. You can hand that report to your accountant, who can then look at the other factors influencing the amount of capital gains tax you need to pay.
The rate of CGT varies and is tied to your personal tax rate, but there is a 25% discount applied to the rate once you have held the asset for longer than 12 months. This is why tools such as MiGain.io will show you the share parcel to sell that ensures you pay the least tax possible. For example, if I bought BHP shares in 2018, 2019 and 2020 and then want to sell some of them in 2020, MiGain shows you that selling the older/earlier purchased shares (from 2018) will allow you to claim the 25% CGT discount and so the CGT report will suggest you sell these shares first, saving you tax.
Common Mistakes when calculating Capital Gains Tax
One thing that isn’t always understood is that your tax becomes liable when you make a contract to settle for the sale of your asset, not when you receive the money. So if, for example, you sign a contract to sell an investment property in June 2021, then your tax liability will fall in the 20/21 tax year, not the 21/22 tax year, even if you don’t receive the money until later in 2021 — after June. This concept can sometimes confuse people when working out what to report in their tax returns.
It’s also worth noting that some assets and events are exempt from capital gains tax. Check out the ATO’s full list of capital gains tax assets and exemptions for more information.
Helpful Resources
Other than using MiGain to help with your CGT calculations, you can also use the ATO’s calculator to help you work out what your tax liability is likely to be. The ATO calculator is available here:
https://www.ato.gov.au/General/capital-gains-tax/working-out-your-capital-gain-or-loss/
The ATO articles will show you how to work out CGT for each asset you have sold and then work out your net liability for a given tax year. Note that the figure you work out at this point can also be influenced by a number of factors, such as whether the assets were held in a trust or whether the asset holder was a resident for tax purposes. Factors such as residency are usually challenging to take into account with a calculator like Migain, so if you have any complications, it’s worth getting some professional advice from your accountant.
Also, if you have property investments, have a read of this resource on how to minimise capital gains tax when selling a property.
https://www.realestate.com.au/advice/how-to-avoid-capital-gains-tax-when-selling-property/
In summary, don’t be afraid of Capital Gains Tax: the calculations are relatively simple for most of us, and there are tools out there to help you determine your liability and also help you minimise how much CGT you pay (by modifying a sell parcel of shares, for example). So read the material, use the calculators available, and, if required, get professional advice.
Disclaimer: This post is not a financial advisor and the above information is for general information purposes only. It does not constitute financial or taxation advice or a recommendation for a particular financial product and should not be construed or relied on as such. Please check with your advisor or your accountant to check how this information relates to your specific circumstances.
