Australia has a comprehensive system for the taxation of capital gains. Capital gains resulting from the disposal of assets, including land, business assets and intangible assets are generally subject to CGT. Capital gains can also result from many transactions that do not involve the disposal of an asset, including certain trust distributions and the granting of options. CGT is not a separate tax, and capital gains are subject to tax at the entity’s relevant tax rate e.g., 25% or 30% for companies.
Individuals & CGT
Australian tax residents are taxable on capital gains from worldwide sources (subject to the provisions of any Double Tax Agreement
(DTA) that may apply). Exemptions are available from CGT and for example, a taxpayer’s main residence is generally not subject to CGT on disposal. Gains in relation to CGT assets that have been held for 12 months or longer receive a 50% CGT discount and the taxable amount of the gain will generally be reduced by 50%. The net amount of a capital gain after applying any applicable concessions and exemptions will be included in a taxpayer’s assessable income for tax purposes. A taxpayer will pay tax on a net capital gain at their marginal rate of tax.
A taxpayer can also incur a capital loss if the disposal of an asset results in a loss for the taxpayer. A capital loss can only be offset against other capital gains made in the current year or future years and cannot offset income from other sources, such as employment income.
Individuals who are temporary residents or foreign residents are generally only subject to CGT on disposals of taxable Australian property (TAP) which includes (but is not limited to) direct holding in taxable Australian real property, certain indirect Australian real property investment, and CGT assets used in carrying on a businesses through a permanent establishment in Australia. The 50% CGT discount is not available for assets that are held by temporary residents or foreign residents in relation to assets acquired after 8 May 2012. Prior to this date, a portion of the discount percentage may be available. Foreign residents of Australia do not have access of the main residence CGT exemption on the disposal of their main residence.
From 1 July 2016, purchasers of Australian property may need to withhold 12.5% from the sale proceeds on the disposals of certain assets by foreign residents. Foreign resident taxpayers can claim the amount withheld as a refundable tax offset on lodgement of their income tax return. Assets subject to these rules include Australian real property, lease premiums relating to Australian real property, mining, quarrying or prospecting rights and interests in Australian entities whose assets mainly consist of the above assets. Residential properties with a value of less than $750,000 are not subject to these rules.
The Government recently announced that they propose to increase the withholding tax rate to 15% and reduce the withholding threshold to nil – these proposals have not yet been legislated.
Companies & CGT
Companies pay tax on capital gains at either 25% of 30% depending on whether the company is a base rate entity or not. Foreign resident companies are generally only subject to CGT on disposals of TAP. Companies are not eligible for the 50% CGT discount. If a company incurs a capital loss on the disposal of an asset, the capital loss can only be offset against other capital gains made in the current year or future years and cannot offset income from other sources, such as business trading income. To offset the capital loss in the future year, the company is required to pass additional tests.
Trusts & CGT
Trusts are flow through entities and if a Trust makes a capital gain, it can be distributed to its beneficiaries. Individuals who receive capital gains distributed by a Trust are eligible for the 50% CGT discount if the asset being disposed was held for more than 12 months. If a Trust incurs a capital loss on the disposal of an asset, the capital loss can only be offset against other capital gains made in the current year or future years and cannot offset income from other sources, such as business trading income. To offset the capital loss in the future year, the Trust is required to pass additional tests.
If you require further information,
contact your Moore Australia advisor.