Advantage of Timing The Sale of CGT Assets

At a time of the year when we are all focusing on getting our affairs in order and ready for tax time, for those of us who are that organised, we don’t always consider the timing of capital gains tax (CGT) events.

If you have recently purchased or sold ‘capital gain’ assets, which includes shares held on capital account and real property then you would be interested to know that the timing of this sale is important because it can affect which financial year the capital gain/loss is brought to account (i.e. the year you pay tax on it), as well as the 50% CGT discount for property held for more than 12 months.  Simply by understanding the timing of the CGT event, can save considerable tax in certain circumstances.

To be clear, all assets acquired since CGT started on 20 September 1985 as subject to CGT unless they are specifically excluded. Below is a list of assets that CGT applies to and assets that are specifically exempt from CGT:

CGT AppliesCGT Exempt
  • Real Estate
  • Shares, Units and similar investments
  • Leases, goodwill, licences, foreign currency, contractual rights, and major capital improvements made to land or pre-CGT assets
  • Collectables and personal use assess above a certain value (there are restrictions on using any capital losses from these items).
  • Main residence
  • A car or motorcycle (excluding collectables)
  • Depreciating assets used solely for taxable purposes, such as business equipment of fittings in a rental property
  • Any asset acquired before 20 September 1985.

The constant changes to ATO rules and regulation means people often get confused and lose track of what the current rules are.

General Rules For Timing of Sales and Purchases

Generally, the timing of the ‘GCT event’ associated with the purchase or sale of an asset is based on contract date as opposed to the settlement date.

This can easily catch unsuspecting taxpayers out because they may sell a CGT asset, planning for settlement to be after when they think they will have held it for greater than 12 months, but because the ‘timing’ of the event is actually based on contract date, they end up having to pay tax on double the amount of capital gain than necessary if they would have correctly understood the ‘timing’ rules.

Other Timing Considerations

Where there is no contract, the CGT event is likely to apply when you cease being the assets’ owner. If a CGT asset is lost or destroyed, the CGT event happens when you first receive compensation for the loss or destruction. If you don’t receive any compensation, the CGT event happens when the loss is discovered or the destruction occurred.

In the case of deceased estates, a beneficiary or legal personal representative is taken to have acquired the asset on the date of death of the deceased.  In this instance, CGT is not payable when you acquire the asset, but depending on several factors it may apply if you later dispose of the asset (note there may be a two year CGT exemption on selling the main residence of the deceased).

Crystallising Losses

A strategy which can be useful for offsetting already recognised capital gains in the current year, is to review other holdings to determine if there are any capital losses which can be crystallised (i.e. recognised on the sale of the asset), prior to the end of the financial year.  Recognising such losses may help to reduce the capital gains, saving tax.  A word of caution here for arrangements where such sales occur prior to 30 June and then the taxpayer buys the same asset back straight after 30 June.  The ATO consider this type of sale and buy-back arrangement as risky and may consider it in relation to their anti-avoidance rules.

In summary, Capital Gains Tax (CGT) is a complicated area, with many important rules regarding timing, exclusions and discounts.  We strongly recommend people speak to their accountants or advisors before entering into contracts so as to fully understand the associated capital gain implications and timing of any tax payable.

If you would like any assistance in this area please don’t hesitate to speak with one of our specialists today! Get in touch with us at Advivo.