Capital Gains Tax Minimisation

Capital Gains Tax is levied from various sections of the Income tax legislation. As the name implies it is levied on the gain made on the sale of a capital asset. Hence the value that is taxable as the gain is the difference between the Sales Price and the cost of an asset. With the above calculation in mind it is important to retain records to support the cost of an asset, even though it may have been bought say 20 years previously. In fact records regarding the cost of an asset need to be retained for 5 years after it is sold, which obviously means that the records may need to be kept for many years.

Pre Capital Gains Tax Assets

Usually an asset acquired prior to the introduction of Capital Gains Tax on 19th September 1985, is exempt from tax on its sale. However this is not always the case, e.g. if the asset has been substantially improved. Hence to minimise Capital Gains tax with pre 19th September 1985 assets it is important to know the triggers that may turn the asset into a taxable asset.

Ordinary Calculation of a Taxable Capital Gain

There are two concessions that provide a reduction to the value of any Capital Gain made:

  1. An increase to the cost to allow for Inflation, hence decreasing the Gain by the amount of this increase. Note that the increase is only up to 30th September 1999, or
  2. A 50% exemption of the gain.

You are permitted to apply whichever of the above provides you with the greatest reduction in Capital Gain, and the most commonly utilised exemption is the 50% exemption. Therefore to minimise Capital gains tax it is important to know when this exemption can be applied.

Exemptions with Business Assets

If you are selling a business asset it is important to understand some further concessions that apply to the sale of these types of assets, which are four fold as follows:

  1. A 50% Active Asset exemption. This enables a further 50% exemption to the gain, in addition to the 50% exemption mentioned above, should it be available. Hence the gain can be reduced to 25% of its original value.
  2. Replacement Active asset rollover. This enables you to defer any Capital Gains Tax to the point in which the asset bought as a replacement is sold.
  3. Retirement exemption. By transferring a Capital Gain into a Superannuation Fund or paying it to a person over the age of 55, this component of a capital gain can be exempt from tax.
  4. 15 year active exemption. If a business asset is owned for 15 years or more, and other conditions are met e.g. the seller is over the age of 55 and retiring, then the entire capital gain is tax free.

With the four concessions above, some are able to be utilised together in respect to the asset e.g. applying the 50% Active Asset exemption to reduce the gain to 25% of its value, and then utilising the retirement exemption to pay the remaining 25% into a Superannuation Fund, hence having the entire gain exempt from tax.

There are however numerous conditions and technical requirements to access the concessions above, which differ depending on the type of entity that is selling the asset. To enable access to these concessions it is therefore important to obtain professional advice so that the concessions are successfully obtained.

The team at Bentleys are well versed in these concessions, hence are able to assist you in minimising the capital gains tax outcome on the sale of a business asset. 

 

Family Home sales

The sale of the family home (known in tax law as the principle place of residence or PPR) is generally exempt from Capital Gains Tax. However care should be exercised where the following exists:

  1. The PPR has been partly used to earn an income e.g. rental of a part of the property or use of part of it in a business.
  2. The PPR has ceased to be used as a residence and either is rented out or just left vacant.
  3. The Property was rented out and then became the PPR of the owner.
  4. The Property has an amount of land curtilage above a relevant threshold.

There are various rules associated with the above scenarios that can create a Capital Gains Tax liability to some degree and provide extensions to the exemption if certain time frames are abided by.

Capital Gains Tax and Death

Most people would be aware that there is no longer a death duty applied anywhere in Australia, however some describe Capital Gains Tax as a form of death duty. This is because that upon a person’s passing Capital Gains Tax will usually become payable, in one of two ways:

  1. From an immediate sale of a Capital Gains Tax Asset to an external third party.
  2. From a sale by the beneficiary of an estate some time in the future to an external third party.

The amount of Capital Gains Tax payable in both instances will be determined by the date of purchase of the asset by the deceased, and then either the cost to the deceased or the market value at date of death if it was bought pre 19th September 1985.

There are also special rules associated with the sale of the personal Residence of the deceased, where Capital Gains Tax can be imposed depending on what happened to the property after the deceased’s passing.

 

Capital Gains Tax is one of the most complex areas of Income Tax law, and can cause tax to be paid in instances where you might not consider it applicable. The team at Bentleys are consistently undergoing training to ensure we understand the complex Capital Gains Tax law and provide advice to our clients so that only the correct amount of tax is paid.