Did You Know There Is No Such Thing As Capital Gains Tax?

There has never been a Capital Gains Tax - what there is, is a Tax on Capital Gains and there is a subtle difference between the two.

Did you know that there is no such thing as Capital Gains Tax? It is not that there has been a recent change in legislation that slipped through unannounced….. there has in fact never been a Capital Gains Tax – what there is, is a Tax on Capital Gains and there is a subtle difference between the two.

The way the tax system works is to apply income tax – the same tax that we all pay on our income – to capital gains. What usually happens though is that income tax is paid on only a portion of the capital gains.

As an example, if a person sells shares in a company listed on the stock exchange – or if a business owner sells the shares in their private company- and in each case, the shares have been owned for at least 12 months and were purchased with the intention of deriving income from the shares, and not for the purpose of selling at a profit, then only 50% of the gain is taxed (the so-called 50% capital gains tax concession). The rate of tax that is paid on the gain is the marginal tax rate of the taxpayer.

So what we have is a tax on a capital gain, not capital gains tax.

The rules on the taxation of capital gains, though, are not the same for each type of entity. Companies are specifically excluded from qualifying for the 50% capital gains tax concession, so companies will pay tax on 100% of their capital gains (at the company tax rate).

In the right circumstances, and given the is appropriate business structure, further concessions are often available to further reduce the amount of capital gain on which tax is paid. Without going into further detail here, provided

  • the assets sold is an active asset (for example, shares in a business that you have operated); and
  • the business turnover is below a certain level, or
  • the net assets of the person selling the business are below a certain level,

then in many circumstances the amount of the capital gain that is taxed is halved once again – so only 25% of the gain, rather than 50% of the gain is now subject to tax (at the marginal tax rate of the taxpayer).

To make things even sweeter, in many circumstances it is possible then to avoid paying tax on even that 25% of the capital gain – so for example, if you have run the business for more than 15 years, or put the proceeds of sale into a superannuation fund (there are limits to the amounts that can be put into a superannuation fund), or you buy replacement active assets, then it may be that no tax whatsoever is paid on the capital gain. A desirable outcome!

If we set up your business structure for you, we considered all these factors in choosing the most appropriate structure. On an ongoing basis, we assess the appropriateness of your continuing business structure. And we always consider how to minimise tax if you are thinking of selling your business. Please talk to us about any of these issues if you need further explanation.

The information contained herein is of a general nature only and is not intended to be relied upon nor is it a substitute for appropriate professional advice. Whilst all care has been taken in the preparation of the material, it is not guaranteed to be accurate. Individual circumstances are different and as such, require specific examination. Asparq cannot accept liability for any loss or damage of any kind arising out of the use of or reliance upon all or any part of this material. Additional information may be made available upon request.