A tax loss is different from a capital loss. While a tax loss arises out of your income and deductions for the year (that is, current account transactions), a capital loss may occur, for example, when you dispose of a capital asset for less than its tax value.
A capital loss can only be offset against any capital gains in the same income year or carried forward to offset against future capital gains – it cannot be offset against income.
If you own an investment property, rental income is included in your assessable income for the year; outgoings on the property, such as interest and rates, as well as the decline in value of depreciating assets, such as fittings, may be included in your deductions.
However, any capital gain or loss you make on selling the property is treated separately and included in your total capital gain or loss for the year. Costs associated with acquiring or disposing of the property (such as legal fees, stamp duty and real estate agent’s commissions) are included in the cost base for determining your capital gain or loss, not in your income tax deductions.
If the sale of your investment property includes depreciating assets, the proceeds of these will give rise to income or deductions rather than being included in your capital gain or loss.
Gains and losses from selling shares are treated as capital gains and losses unless you are considered to be carrying on a business of share trading.
This means that unless you are carrying on a business of share trading, any costs associated with your share investment activity, such as interest on money borrowed to buy shares, are included in the cost base of the shares, not in your income tax deductions.
Regular business transactions give rise to income and deductions and, therefore, to taxable income or a tax loss for the income year. This includes gains or losses on the sale of depreciating assets, such as business equipment.
Gains or losses on the sale of a business or business premises are included in your total capital gain or loss for the year.
A capital gain or capital loss is the difference between what it cost you to get an asset and what you received when you disposed of it.
You pay tax on your capital gains. It forms part of your income tax and is not considered a separate tax, although it is generally referred to as capital gains tax (CGT).
If you make a capital loss, you cannot claim it against income but you can use it to reduce a capital gain in the same income year. If your capital losses exceed your capital gains or you make a capital loss in an income year you don’t have a capital gain, you can generally carry the loss forward and deduct it against capital gains in future years.
All assets you’ve acquired since tax on capital gains came into effect (on 20 September 1985) are subject to CGT unless specifically excluded.
Selling assets such as real estate or shares is the most common way you make a capital gain or capital loss. CGT also applies to intangible assets such as business goodwill.
Some of your main personal assets are exempt from CGT, including your home, car, and most personal use assets, such as furniture. CGT also doesn’t apply to depreciating assets used solely for taxable purposes, such as business equipment or fittings in a rental property.
If you’re an Australian resident, CGT applies to your assets anywhere in the world.
Acquiring and owning CGT assets
When you acquire a CGT asset, you need to start keeping records immediately because you might have to pay tax on it in the future. Your records will help ensure you don’t pay more tax than necessary. If you own the asset jointly with someone else, you’ll need to establish each owner’s share.
Selling an asset and other ‘CGT events’
When you sell an asset or give it to someone else it’s called a ‘CGT event’. This is the point at which you make a capital gain or capital loss. There are a number of other CGT events, for example, if a managed fund or other trust distributes a capital gain to you, it’s a CGT event.
Working out your capital gain or loss
For most CGT events, you work out your capital gain or capital loss by subtracting your ‘cost base’ (what it cost you to get the asset) from your ‘capital proceeds’ (what you received when you disposed of it). The amount you declare on your tax return is the total of your capital gains for the year, less any capital losses you incurred and any CGT discounts or concessions you’re entitled to.
CGT exemptions, rollovers and concessions
A number of assets are generally exempt from CGT, including your home and car, and depreciating assets used solely for taxable purposes. Individuals and small businesses can generally discount a capital gain by 50% if they hold the asset for more than one year. In certain circumstances a capital gain on a CGT event can be deferred, or ‘rolled over’, until another CGT event happens. There are a number of other CGT concessions specifically for small business.
Your home and other real estate
Most real estate is subject to CGT. This includes vacant land, business premises, rental properties, holiday houses and hobby farms. Your ‘main residence’ (family home) is generally exempt from CGT unless you rented it out for a time or it’s on more than two hectares of land.
Shares and units
You may have to pay tax on any capital gain you make on shares or units when a CGT event happens, such as when you sell them. A CGT event also occurs when you redeem units in a managed fund by switching them from one fund to another.