CAPITAL GAINS TAX AND ‘THE 15 YEAR RULE’

CGT OVERVIEW
There are many tax avenues that portfolio owners can use to improve their financial return. One of these taxes is known as the ’15 year rule’.

A capital gain or capital loss on an asset is the difference between what it cost you and what you receive when you dispose of it. Keeping adequate records will help you work out your capital gain or capital loss correctly when a CGT event occurs.

Good records can also help your beneficiaries deal with the impact of CGT. If you leave an asset to another person, it may be subject to CGT as a result of a future CGT event. For example, if your daughter sells shares you've left her in your will, she will need your records to determine her cost base for the shares and therefore how much CGT she will have to pay.

You should also keep records relating to a net capital loss in a year, which you may be able to offset against a capital gain in a later year. (And there is no time limit on how long you can carry forward a net capital loss.)

You pay tax on your capital gains. It forms part of your income tax and is not considered a separate tax – though it's referred to as capital gains tax (CGT).

If you make a capital loss, you can't claim it against income but you can use it to reduce a capital gain in the same income year. And if your capital losses exceed your capital gains in an income year, 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 started (on 20 September 1985) are subject to CGT unless specifically excluded. If you’re an Australian resident, CGT applies to your assets anywhere in the world. Foreign residents make a capital gain or capital loss if a CGT event occurs to an asset that is 'taxable Australian property'.


THE 15 YEAR RULE
There is a 15-year rule in relation to capital gains tax but to be eligible you must pass one of the following rules:

1.            You must be a small business entity.  That means you are carrying on a business and your aggregated turnover is less than $2 million: OR

2.            The total net value of capital gains tax assets of you, entities connected with you and your affiliates must not exceed $6 million.  The value is based on the assets held just before the sale of the property and is based on the total market value of the group’s assets less any liabilities relating to those assets.

If one of the above factor is passed, then the 15-year exemption applies to active assets only:

In relation to your investment the building must be an active asset for at least 7.5 years of the 15 years of ownership.  An active asset is one that is used in the course of carrying on a business.  It is important to note that a rental property is not an active asset unless the entity carrying on the business in the property is an entity connected with the landlord.   Therefore, the exemption does not apply to a landlord who is renting the property to an unrelated tenant who operates their business out of the property.  However, if the landlord owned and operated their own business out of the building, then they are eligible.

There are some further issues around acquiring the asset through marriage separation and what assets are included in the net assets qualifications that will apply.


ACQUIRING AND OWNING CGT ASSETS

When you acquire a capital gains tax (CGT) asset, you need to start keeping records of every transaction, event or circumstance that may be relevant to working out whether you've made a capital gain or capital loss.

Your records will help you work out your capital gain or capital loss correctly and ensure you don’t pay more CGT than necessary.

You need to establish exactly when you acquired your CGT asset because:

• CGT doesn't apply if you owned it before CGT started on 20 September 1985 (though major improvements to a property since may be subject to CGT)
• the rules about how you work out the cost base have changed over time
• how long you have had it may affect how you work out your capital gain.

Generally, the time you acquire a CGT asset (your acquisition date) is when you become its owner, most commonly because you have bought it or received it as a gift or it was transferred to you.

However, there are two situations where your acquisition date is likely to be different from the date you become the owner:

1. when you buy an asset under contract and don’t take immediate possession (such as with real estate) – in which case your acquisition date is the time you enter into the contract (normally the date on the contract) and not the date of settlement (except for transfers to certain trusts, where the acquisition date is the transfer date – usually settlement)
2. when you inherit a CGT asset – in which case the acquisition date is the date of the death of the person who bequeathed it to you.
   
   *Rutherfords Real Estate is not a registered tax advisor or financial advisor. Each circumstances will differ depending on the individual. This is not to be taken as financial advice. Rutherfords Real Estate recommends you speak to your financial advisors/Australian Tax Office before making any financial decisions.