Introduction
Australia’s taxation system encompasses the taxation of capital gains. Typically, capital gains arising from the sale of assets like land, business assets, and intangible assets fall under the purview of Capital Gains Tax (CGT). It’s important to note that capital gains can also arise from various transactions that don’t involve asset disposal, such as specific trust distributions and the issuance of options. CGT is not a standalone tax; instead, capital gains are taxed at the applicable tax rate for the entity, such as 25% or 30% for companies.
Individuals & CGT
Australian tax residents are required to pay taxes on capital gains from worldwide sources, with some exemptions. For instance, the sale of a taxpayer’s primary residence is typically not subject to Capital Gains Tax (CGT). When CGT assets are held for at least 12 months, a 50% CGT discount is applied, reducing the taxable gain by half. After applying any relevant concessions and exemptions, the net capital gain is included in the taxpayer’s taxable income and taxed at their marginal tax rate.
Capital losses can offset capital gains within the same year or in future years but cannot be used to offset income from other sources, such as employment.
Temporary residents and foreign residents are generally only subject to CGT on the disposal of taxable Australian property (TAP), which includes direct holdings in Australian real property, certain indirect real property investments, and CGT assets used in Australian business through a permanent establishment. The 50% CGT discount is not available for assets acquired by temporary or foreign residents after May 8, 2012.
Capital losses can offset capital gains within the same year or in future years but cannot be used to offset income from other sources, such as employment
Temporary residents and foreign residents are generally only subject to CGT on the disposal of taxable Australian property (TAP), which includes direct holdings in Australian real property, certain indirect real property investments, and CGT assets used in Australian business through a permanent establishment. The 50% CGT discount is not available for assets acquired by temporary or foreign residents after May 8, 2012.
Since July 1, 2016, purchasers of Australian property may need to withhold 12.5% from the sale proceeds when selling certain assets to foreign residents. Foreign resident taxpayers can later claim this withheld amount as a refundable tax offset when filing their income tax return. Assets subject to these rules include Australian real property, lease premiums for Australian real property, mining or prospecting rights, and interests in Australian entities primarily consisting of these assets. Residential properties valued at less than $750,000 are exempt from these rules.
Companies & CGT
Companies are liable to pay tax on capital gains, with rates of either 25% or 30%, depending on their status as a base rate entity. Foreign resident companies are generally only subject to Capital Gains Tax (CGT) when they dispose of taxable Australian property (TAP). Companies, unlike individuals, do not qualify for the 50% CGT discount. If a company experiences a capital loss from an asset sale, this loss can only be used to offset other capital gains in the same or future fiscal years, and it cannot be used to offset income from other sources, such as revenue from business operations. To utilise the capital loss in a future year, the company must meet specific criteria.
Trusts & CGT
Trusts are pass-through entities, and if a Trust generates a capital gain, it can distribute this gain to its beneficiaries. Individuals who receive capital gains distributed by a Trust can qualify for the 50% CGT discount if the asset was held for more than 12 months. However, if a Trust experiences a capital loss from an asset sale, this loss can only be used to offset other capital gains in the same or future fiscal years, and it cannot be used to offset income from other sources, such as income derived from business activities. To utilise the capital loss in a future year, the Trust must meet specific criteria.
