Business Guide to Capital Gains Tax

What is Capital Gains Tax?

Capital Gains Tax (CGT) is the tax you pay on profits from selling or disposing of an asset, such as property, shares, a business, or a range of other possessions. When these assets are sold, a CGT event occurs at which point you make either a capital gain or loss. These gains and losses are then reported in an income tax return and form part of the assessable income. If you’re an Australian resident, CGT applies to both assets held in Australia and anywhere in the world.

Founder and Managing Director of Sentrika, Darryl Dyson, believes there are many CGT strategies you can apply to mitigate, reduce, or offset your liability depending on your situation. “One example could be that if you are operating through a trust, you may be eligible for a 50% CGT discount if you've held an asset for greater than twelve months,” he says.

“If you are operating a business for ten years and have built it up to a point where it's a saleable asset, then decide that you no longer want to operate the business, if that business is hypothetically sold for $1million, then the gain could reduce to $500,000 after applying the general discount, which is a big consideration for many small businesses,” says Darryl.

What assets are exempt from Capital Gains Tax?

 There are many circumstances where CGT assets can have exemptions. Some of the most common areas are:

•  Your main residence (your home)
• Granny flat arrangements
• Cars and motorcycles

CGT also doesn’t apply to depreciated assets used solely for taxable purposes, such as business equipment or fittings in a rental property.

For the full list of assets and to check if they are subject to CGT, exempt, or pre-date CGT, read more at Australian Taxation Office (ATO).

Companies vs. Trusts.

There are pros and cons for both structures which is why it’s highly recommended to seek professional advice to help you navigate through the process depending on your circumstance.

“Often, it’s a case of weighing up your options and deciding what's going to be the most beneficial outcome. This could be having to distribute profit from the trust and potentially pay tax at a higher rate and applying the general discount on exit when the business sells,” explains Darryl.

“With a trust, it's not a tax-paying entity, so whatever the profit, it must be 100% distributed between the beneficiaries which is then included in their total taxable income. This can lead to some undesirable tax consequences if you have a highly profitable business,” advises Darryl.

Operating through a company has the benefit of a fixed tax rate and is not subject to marginal tax rates like beneficiaries of trusts, however companies are not eligible for the general discount on capital gains which may lead to a higher tax obligation if the business sells.

At Sentrika, the team is highly motivated to get the best possible return for your business, and Darryl advises that there needs to be a strategy in place to make sure there is an optimal result.

“Our rule of thumb is if the business is going to be highly profitable, we tend to steer towards a corporate structure due to its various advantages. When it comes time to sell the business, part of the strategy might be to structure the business sale as a share disposal as opposed to the business asset being purchased. This way we can access those CGT discounts previously mentioned,” suggests Darryl.
 

Can I offset capital gains with losses?

You can offset your capital gains with allowable capital losses to reduce your CGT outcome, however, a capital loss cannot be applied to ordinary income.  If you don’t have a capital gain to offset the loss in a particular tax year, your net capital losses may be carried forward to offset future capital gains.
 

Calculating Capital Gains Tax.

When Calculating CGT as an individual or beneficiary of a trust, there is no specific rate of tax applied, rather the net capital gains are added to a taxpayer’s other income and tax is levied at their marginal tax rate. Companies are taxed at a fixed rate this applies to ordinary income as well as any capital gains.

For most people, calculating CGT can be a complicated process, which is why it's so important to have specialists on your side. The team at Sentrika can help you with the necessary advice and recommendations on how to structure your finances for the long term.

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