• Stella Jansen

Calculating Your CGT: Discount Method


Unless you have a background in accounting or are a natural mathematician, you will most certainly want assistance in calculating your capital gains tax (CGT). That is most likely how you came upon this post! We at Accountants360 make tax simpler to grasp. We do this through our blog as well as the financial accounting services we offer. Today, we'll explain what capital gains tax is and how the discount technique works.


What exactly is Capital Gains Tax?

The most common layman's definition of a capital gain or loss is "the difference between what you bought for an asset (say, a vehicle or house) and the amount you sold it for." This includes any incidental fees associated with the acquisition and selling. CGT is essentially the 'levy' or amount you pay on the capital gain realized on the sale of your asset.


What Is the Capital Gains Tax?

CGT is applicable to a variety of assets that can be purchased. These are some examples:

Property

Shares

Leases

Goodwill

Licences

Foreign currency

Contractual rights and


Property shares, leases, goodwill licenses, foreign currency contracts, and personal use assets bought for more than $10,000.


What Happens If You Make a Capital Gain?

Assume you recently sold your automobile and realized a financial gain. These earnings are then added to your total taxable income. This implies that the gain may raise the amount of tax you must pay when you file your tax return. If, on the other hand, you incur a capital loss, you can use it to offset a capital gain in the same fiscal year. If your losses exceed your profits, or if your loss occurs during a fiscal year in which you did not achieve a capital gain, you can deduct it against future capital gains.


How Do I Work Out Capital Gains Tax?

When determining your capital gains tax, keep in mind that there are two options.

The indexation technique

The technique of discount

Method of CGT Discount


Some conditions must be satisfied for an asset to qualify for the CGT discount method.

You are a permanent resident of Australia.

You are a person, a trust, or a conforming super fund.

You have held your property for at least 12 months prior to the 'CGT occurrence.' The CGT event occurs when you make a capital gain or loss.


Compliant super funds are eligible for a capital gain reduction of 33.33 percent. Australian citizens who have held the asset for at least 12 months are eligible for a 50% tax reduction.


What exactly is a CGT Event?

The CGT event occurs when you make a capital gain or loss. If there is no contract in place when you sell an asset, the CGT event occurs at the moment of sale. If you have a contract for sale, the CGT event occurs on the contract's date. This is significant for property transactions since the CGT event happened on the date of the contract, not at the time of settlement.


What if the asset is lost, stolen, or damaged?

If the asset is lost or damaged, such as a car being stolen, the CGT event occurs when you get insurance coverage. If no compensation was provided, the CGT event occurred when the loss occurred or was discovered.


How to Apply the Discount Method to Calculate CGT

We appreciate that the Australian taxes system is a difficult issue to grasp at first glance.

We'll use an example to help paint a picture:


You achieved a $100,000 capital gain on the sale of a property that you had held for more than a year. You sold the property after September 21, 1999. This means you'd only be adding $50,000 to your taxed income.


The Method for Calculating CGT

Before calculating your CGT, you must deduct any capital losses (from other assets) from your capital gains before applying the 50% reduction.


If you fullfil the discount conditions, you can cut the asset's remaining capital gain by half.

This sum is now ready to be reported on your income tax return.


You can receive an additional 10% discount if you are an Australian who provides affordable rental homes to those earning low to moderate income. As a result, owners of these rental properties might receive up to a 60% discount.


Exclusions from the CGT reduction

Some exclusions may prevent you from receiving the CGT reduction.

  • In the previous 12 months, your house has been rented or utilized for business.

  • You are a foreign resident.

  • You select the indexation technique.

  • To claim the discount, your income asset is transformed to a capital asset.

  • Your CGT event resulted in the creation of a new asset/capital gain.

  • You have sold shares or trust interests in non-publicly traded corporations or trust

Should I Use the Indexation Method or the Discount Method?

If you have owned the asset since before 21 September 1999, you can use the indexation method instead of using the CGT discount. The bulk of situations, however, profit more from the discount strategy.


Which method is better?

One of the most often questions we get is which technique is best for calculating capital gains tax. It might be tough to know which approach to use. However, if we can instil some confidence and comfort, there is rarely a better alternative than the other.


The answer is that the best strategy for you is determined by your circumstances. This covers the sort of asset you possess, how long you've owned it, and previous inflation rates. The sort of CGT strategy you can employ to lower your tax is influenced by these considerations. Depending on your circumstances, you may not be able to pick which method to utilize but understanding the differences can assist you in meeting your future tax requirements.


Do You Need Help with Your Taxes?

We hope that after reading this article, calculating your capital gains tax is a simple procedure. Remember that there is no right or wrong way to calculate your CGT. Which approach is best capable of decreasing your tax bill relies on your specific position and assets?


If you find yourself in need of assistance, calling a tax specialist such as Accountants360 will make calculating your CGT the simplest it has ever been. Visit Accountants360 to get in touch with a friendly team of specialists and learn more about our services now. If you are a small business or an individual looking to learn more about lowering your tax payments or bookkeeping strategies, our blog is the place to go to get the greatest money-saving ideas and methods.

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