Key Points
- Capital gains tax (CGT) is to be paid on the profit made by selling assets like property, shares, cryptocurrency.
- Profit made on selling your principal place of residence is generally exempt from CGT.
- In case of non-payment of CGT, the ATO can apply hefty penalties.
is the tax levied on the profits generated from selling assets. If you have a capital gain (profit) when you sell an asset, it will increase the tax you must pay.
This tax is settled through your income tax return, typically filed after the end of the Australian financial year on 30 June.
Australian tax residents who have sold capital assets like property or shares must report any profit or loss from these sales in their current income tax return to avoid penalties.
Even though CGT has a separate name, it is part of your income tax.
Australian tax residents are obligated to declare both capital gains and losses within their income tax return and subsequently fulfil the associated tax obligations.
The ATO controls all taxation and revenue collection aspects in Australia.
Most people engage tax accountants for lodging their annual tax returns.
Manoj Gupta is a Melbourne-based chartered accountant. He explains CGT and how it applies.
"Capital gains tax is a tax levied by the government on the profits that we make on the sale of any assets… those assets can be property, shares, nowadays cryptocurrency or any other assets. It would include the assets in a foreign country as well," he says.
To ensure you meet your tax obligations and accurately determine the tax owed, it's essential to calculate the capital gain or capital loss for each asset you dispose of unless an exemption applies.
Close up of female accountant or banker making calculations. Savings, finances and economy concept Source: Moment RF / Prapass Pulsub/Getty Images
"Let's say Noori buys some shares for $5000, she owns the shares for six months and sells them for $5500. Assuming she has no other capital gains or losses, Noori would have to declare a capital gain of $500 in her tax return and pay tax on this gain at her individual income tax rate," Mr Loh says.
CGT exemptions
While gained from most real estate sales, it's important to note that some real estate transactions are entirely exempt from CGT.
Mr Gupta explains.
"In general, the principal place of residence is exempt from capital gains tax. If an individual bought a property and from the date of acquisition, they're living in that property and sold it while living in it, regardless of the capital gain amount, that amount is exempt from capital gains tax," he says.
In many cases, you can also get a discount on the CGT payable by you.
When you dispose of an asset, you can reduce your capital gain tax liability by 50 per cent if you have owned the asset for at least 12 months and are an Australian tax resident.
This is called the CGT discount, which means that you will be required to pay CGT only half the profit you've made from the sale.
Wooden cubes with word 'Tax' on australian dollars Source: iStockphoto / alfexe/Getty Images
Penalties for tax evasion
Although Australian tax residents must report capital gains and pay taxes during the financial year, some individuals try to evade these obligations, leading to potential penalties.
Mr Loh explains how the ATO monitors suspicious financial activities and unreported capital gains tax.
"To ensure people are doing the right thing, we receive income data and other data from a range of organisations such as banks, state revenue offices, land title offices, insurance companies, share registries," he says.
If you aren’t sure if you need to pay capital gains tax or have made a mistake with your lodgement, it’s really important you reach out to us at the ATO or speak to a registered tax agent.Tim Loh
for evading capital gains tax, just like any other tax, are calculated based on the tax shortfall and individual behaviour.
The ATO determines such behaviour as failure to take reasonable care, recklessness and intentional disregard. The percentage of penalty charged is different for each type of behaviour.
Additionally, the ATO may also charge interest on the tax shortfall.
Mr Loh says that the penalty could range from 25 to 100 per cent of the tax shortfall on a case-by-case basis.
"If you are engaging in tax evasion, the penalties can be significant depending upon the type of behaviour you're engaging in. If you've made an honest mistake, the penalties aren't going to be significant. But if you're deliberately gaming the system and avoiding your obligations, there are significant penalties," he says.
Deliberate and repeat offenders may also face criminal prosecution.
Australia is primarily a cashless economy.
However, some tax residents may conduct their financial transactions in cash, enabling them to underreport their taxable income and potentially evade taxes.
But this is extremely rare when selling CGT assets like property or shares
"In Australia, it is very unlikely that anything could happen in cash because [majority of] transactions would happen as bank transactions rather than cash transactions," Mr Gupta explains.
Appealing tax penalties
Tax residents can appeal if they believe they've been wrongly penalised.
If the ATO is satisfied with the appeal, it can be reduced or waived in certain circumstances.
"Typically, you need to object to your tax assessment or your tax return and go through the process to appeal against your penalty or tax liability at hand," Mr Loh says.
Mr Loh emphasises that adhering to all tax obligations, including CGT, is crucial because it plays a vital role in supporting our society.
When you don’t pay your taxes, each one of us suffers. It means our schools and hospitals don’t get enough funding which means fewer teachers, doctors and nurses for the Australian community.Tim Loh
Capital loss
Contrary to the common perception that it is payable only when a profit is earned, sometimes it may be expected even when there is a loss.
This is called capital loss.
happy African couple outside home with sold sign giving thumbs up Source: iStockphoto / michaeljung/Getty Images
"We had an investment property in Tassie (Tasmania). We bought it for $420,000 and we lived in it for a couple of years before moving up to Brisbane. We rented it out for a few years, after which we wanted to sell it. It had gone down to $380,000 from $420,000. When we lodged our returns for that year, the ATO came back and said, 'you have a capital gain'," he recalls.
This scenario arises when expenses are claimed for an investment property, leading property owners to believe they are incurring a loss, while the ATO may consider this a profit.
Mr. Subramanya details how this unfolded.
"On paper we were claiming deductions for the investment property like depreciation, maintenance of the property, [and] the rates, which had pushed the price in the books down to $355,000. So, they were saying there was now a capital gain of $25,000 on which we had to pay tax of $3000-$4000," he says.
A tax return must be lodged for every income year from 1 July to 30 June. If you need to complete a tax return, lodge it or engage with a tax agent by 31 October.
