A Capital Gain/(Loss) is an increase/(decrease) in the value of an asset from purchase to sale.
For example: If you bought shares for $1,000 and sold them for $2,000 then you would have a capital gain of $1,000.
Also, if you bought shares for $1,000 and sold them for $500 then you would have a capital loss of $500.
Capital Gains are included as income in your tax return and taxed at your marginal tax rate.
So the expression capital gains ‘tax’ is actually incorrect – there is no separate capital gains tax but you pay income tax on capital gains.
How to calculate a capital gain/loss
Cost Base – this is the cost of the asset (for capital gains purposes). For shares this includes the Cost of the shares and also the brokerage charged.
Proceeds – this is what you received for the sale of the asset. This would usually be cash but could be other assets. For shares your proceeds would have the brokerage taken out.
PROCEEDS LESS COST BASE EQUALS CAPITAL GAIN/LOSS
Working out your net capital gain
Capital Gains discount – If you hold an asset for more than 1 year – you are eligible for a 50% discount.
I.e. In the first example above you would make $1,000 cash but would only be taxed on $500 in your tax return.
Capital Losses – If you make a capital loss it can only be offset against other capital gains (either in the same or future years). Capital Losses are applied BEFORE the 50% discount is applied (which sucks as I will show you).
So lets assume example 2 happened either in a previous year or in the same year.
So Example 1 you have a gain of $1,000
Then you apply the losses in Example 2 of $500
You have net capital gains of $500.
Then you apply the 50% discount and reduce the gain by $250
Net $250 capital gain.
But if you applied the discount before the losses you would have no capital gain ($1,000 gain x 50% = $500 – $500 losses = $0).
That is Capital Gains in a nutshell. But read on for the more complex stuff.
Further Resources & Info
Short Version -http://www.ato.gov.au/individuals/content.asp?doc=/content/00191827.htm – Personal Investors guide to Capital Gains 2008/2009
Long Version – http://www.ato.gov.au/individuals/content.asp?doc=/content/00191831.htm – Capital Gains Guide 2009
http://www.ato.gov.au/corporate/content.asp?doc=/content/47389.htm Capital Gains Tax Checklist
http://www.ato.gov.au/individuals/content.asp?doc=/content/43142.htm – Main Residence Exemption the effect of using your home to produce income
More Complex stuff that you might want to know
The capital gains rules are catch-all provisions. So if something isn’t income it is probably a capital gain.
The CGT rules started in 1985 so assets acquired before this (pre CGT assets) are not taxed as capital gains (though if received through an estate cost base/date will reset to date of death).
|Included in Capital Gains||Not Included in Capital Gains|
|Shares*||Home – Principal place of residence (special rules to apportion if you have rented out your house or claimed business)|
|Investment Property*||Motor Vehicles (including vintage or antiques)|
|Managed Funds||Collectibles acquired for $500 or less|
|Businesses||Personal Use Assets (parents lend you money to buy a house)|
* It is possible to have a Share Trading Business (where shares are treated as your inventory/stock).
It is also possible to have a Property Business (say if you are developing) where your property is stock.
Trying to shortcut the Capital Gains system
“I know – I’ll sell my $500k property to my son for $1” – Very very bad idea.
Market value substitution of proceeds applies. So you would be taxed as if you had received $500k and (even worse) your son would only get a cost base of $1 (and would have massive capital gains when he sells).
“I’ll give you shares instead of cash” – Proceeds can be other assets besides cash.