Capital Gains Tax (CGT) is a tax on the difference between what it cost you to acquire an asset and what you receive when you dispose of that asset. Although CGT is calculated separately your net capital gain is considered to be part of your taxable income. Your net CGT is grouped together with your other net income to calculate how much tax is payable by you or your business.

Capital losses cannot be claimed against income. They can however be used to reduce other capital gains in the current tax year or can be carried forward to future years to offset future capital gains.

Careful planning is required when choosing which business structure will best meet your overall business and personal objectives including consideration of taxation consequences. For business owners the complication with CGT is understanding:

• what a CGT asset is;
• when a capital gain ‘event’ has occurred;
• what deductions might apply to decrease the amount of capital gain that is subject to CGT; and
• whether your capital gain falls into one of the categories that allows you to claim a full or partial exemption or a reduction in the amount of capital gain that is subject to CGT.

As with ordinary trading, income deductions can be claimed when capital gains are generated which can decrease the amount of capital gain that is subject to CGT. For example if you spend money on major structural improvements to property that your business acquires this capital expenditure can be claimed as a deduction against your capital gain when you sell the property.

However the most important deduction is the 50% deduction that is available to individuals and small businesses if the asset that has been sold was owned by the seller for at least 12 months.

There are other concessions available if the asset that generated capital gains is associated with small business. These are of two types: exemptions and reductions. If you are entitled to an exemption none of the capital gains you made will be taxable. If only reductions are available your taxable capital gain will decrease rather than be exempted.

Although CGT concessions in tax law are generous the Australian Taxation Office (ATO) strictly applies the rules governing how CGT is calculated. It is therefore essential to obtain legal advice regarding CGT during both the establishment and operational phases of your business to ensure you secure the full benefits of the concessions and that you are not adversely affected.

This Legal Guide on Capital Gains Tax provides small to medium business owners with information about capital gains tax. Before making important decisions it is advisable to obtain legal advice specific to your situation. LegalEagle’s™ free directory profiles all lawyers in Australia. You can use it to Find a Lawyer near you.
Our legal guide on Income Tax contains information on the capital gains tax main residence exemption for home owners.

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Warning: Information provided through LegalEagle™ is for general guidance. It is not legal advice. Laws and procedures referred to may change and differ between states, territories and nationally. There may also be important exceptions or qualifications. Only a lawyer providing formal legal advice can assess your particular circumstances to determine how the law will apply.