Chances are, as a medical professional, you will incur a Capital Gains Tax (CGT) at some stage throughout your working life. Whether it is selling an old property to purchase a new one, or realising some returns from investments to put the cash to better use, this will generally be something that will apply to you at some point in time.
What is CGT?
Capital Gains Tax (CGT) is paid on profit earned when a CGT event occurs.
There are many types of CGT events, but the most common ones are the sale of a CGT asset, such as property, shares or units held in companies as investments.
CGT is a type of income tax, so it ties in with the preparation of your tax return each year. The capital gain is added to your income for that year, meaning you pay tax at your marginal rate.
Some assets are exempt from CGT with the most common examples being the family home and vehicles such as cars or motorcycles.
It also excludes assets where other tax rules may apply, such as equipment which is depreciated (or claimed over several years), or assets purchased before 20 September 1985 (before CGT came into effect).
How is CGT calculated?
A capital gain is broadly calculated as:
Consideration less (-) cost base = total capital gain / loss
Consideration is generally what you receive for the sale of the asset, but it can sometimes change depending on the CGT event or whether there are related parties, such as family members, involved.
The cost base is typically what you have paid to purchase the asset. Again, this can change in certain circumstances such as where there is a period of private use (which can be exempt) or whether related parties are involved as well.
For example, if you sold your rental property for $900,000 but you purchased it for $600,000 a few years earlier, then your capital gain would be $300,000. However, if instead this property was rented to your auntie and uncle, and the property was actually worth $1m but you sold it to them at a discounted price, we would need to use $1m as your consideration and the actual capital gain would be $400,000.
Further, for the sale of an asset, generally if you have held that asset for more than 12 months, you are eligible to reduce your capital gain by 50%, known as the CGT Discount.
Ideally, we would always make money on our investments. However, in the real world, this does not always happen. If your cost base is higher than your consideration, then you will have lost money on your investment. This is called a capital loss. You do not pay tax on a capital loss, but you are not able to claim it as a tax deduction either.
Instead, you can use it to reduce any other capital gains which occurred in the same tax year. If you do not have any other capital gains, or you have already reduced your capital gains to zero and still have losses left over, then your capital losses carry over to the following tax years until they can be utilised.
Is CGT all about timing?
Indeed, another important aspect to consider is the timing of the CGT event. The timing with regards to the sale of an asset is when the contract is signed, not when the transfer of property takes place.
For example, if you sell an investment property and sign the contract on the 1 June 2021 and you have a 90-day settlement, the sale is considered to have occurred on the 1 June for CGT purposes and would need to be factored into your 2020/21 tax return.
This distinction is important when planning for CGT events as you can time events so that losses offset against gains or you can push gains into later financial years, giving you time to save for the tax bill.
Getting personal advice on CGT goes a long way
The CGT regime is quite complex, so it is important to get personal advice from a tax professional before making plans to sell your assets. DPM’s team of tax experts can guide you based on your individual circumstances and financial position to find appropriate solutions to improve your tax position.
The more you plan, the higher your chances are of reducing or delaying the eventual tax liability, or even avoiding it altogether! If you are interested in getting personal advice or want to explore your situation in more detail feel free to book a free initial consultation with us.
Disclaimer: * The information contained in this site is general and is not intended to serve as advice as your personal circumstances have not been considered. DPM Financial Services Group recommends you obtain personal advice concerning specific matters before making a decision.