CGT made easy
EVEN though Capital Gains Tax has been with us for over a quarter of a century, there is still much confusion about the way it works.
If you have to pay tax, CGT is the best one to pay because it is not triggered until the asset is sold and, provided you have kept it for over a year, you pay tax on just 50% of the net profit.
This means that the maximum rate of CGT for the highest income tax payer in the land is just 23.25% for assets that have been held for over a year.
There is no set rate of CGT. In the year the asset is disposed of, the net proceeds are simply added to your taxable income with a resulting increase in the amount of tax you have to pay.
Obviously if you can lower your income in the year of sale you may pay less CGT because you will be in a lower tax bracket. This is why it is often a good strategy to make a tax deductible contribution to super if you are in a position to do it.
Keep in mind that the relevant date is the date the sales contract is signed and not the date of settlement. If you signed a contract to sell a house on June 15th 2011 and received the proceeds on July 30th 2011, you would pay CGT for the financial year ending June 2011.
As always, make sure you talk to your accountant before signing any documents. It is too late to re-write history once the deed is done.
Noel Whittaker is a director of Whittaker Macnaught Pty Ltd. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. His email is firstname.lastname@example.org