Don’t lose sleep over capital gains

It’s critical to have a clear picture of all your investments, and how they have performed over the year.

Also key is understanding when your investment income is earned, or when you realise capital gains. 

This is generally when you sell an asset, and it triggers a capital gains tax (CGT) event – which means you’ll need to report a capital gain or capital loss in your tax return.

In addition, if you invest in managed funds, part of your distributions from the managed fund may include capital gains, which you also need to include in your tax return.

The Australian Tax Office (ATO) gives regular guidance on capital gains tax and highlights its key areas of focus for each financial year, so it’s worth being aware of what they’re tracking, and what your responsibilities are.

For 2023-24, the ATO flagged it will be on the lookout to see whether you have declared all of your income in your tax return.

The ATO warned investors not to file their tax return before including income from multiple sources, which can mean waiting until income information is pre-filled in your tax return.

The ATO has stated that for most people, this information will be automatically pre-filled by the end of July. This can include the capital gains distributed by managed funds.  

Lodging a tax return in early July, as opposed to waiting a few weeks, doubles your chance of having it flagged as incorrect by the ATO.

If you sell an asset, the capital gains or losses will not be pre-filled in your tax return but will need to be included when completing your tax return.

In the previous 2022-23 financial year, the ATO flagged that one of their areas of focus was on ensuring that you have considered all your assets for capital gains tax purposes when completing your tax return, to ensure you’re meeting your obligations and paying the right amount of tax.

When you sell an asset and make a capital gain, the taxable amount of the capital gain is included as part of your assessable income for tax purposes.

Capital gains tax is the tax you pay when the value of an investment has increased and you then dispose of the investment.  Investments include property, managed funds, shares and crypto assets.

Although it is referred to as 'capital gains tax', it's part of your income tax.

You’ll need to calculate a capital gain or capital loss for each asset you dispose of unless an exemption applies.

If you have a:

• capital gain, it will increase the tax you need to pay 
  
• capital loss, you can offset it against any capital gains in the year they occur.

Any unused capital loss can be carried forward to a future year to offset any capital gains that occur in that year.

If you have owned an asset for 12 months or more, there is a CGT discount of 50%, meaning you pay tax on only half the net capital gain on that asset.

When you have a clear picture of your capital gains and losses, you’ll have a better understanding of your potential tax liabilities.

If you have a poorly performing investment that has made a capital loss and you decide to sell it before the end of the financial year, you may be able to offset the capital loss with capital gain from another investment.

However, be aware that the ATO monitors ‘wash sales’ – which is when an investor sells an asset to realise a loss just before the end of the financial year, and then buys back the same asset.

Another way of reducing your potential CGT liability is by making a tax-deductible super contribution to offset any CGT that’s owing.

Under the concessional contribution ‘carry-forward rules’, if you have not contributed the annual cap amount of pre-tax (concessional) contributions to super over each of the past five financial years*, you may be able to contribute even more than your contribution limit of $27,500 in the current financial year.

There are a range of other allowable tax deductions against which you can offset your capital gains. For more assistance with this, it’s worth seeking independent tax advice.

Being on top of tax time means ensuring that you have a clear picture of all your investments and how they’ve performed, as well as your potential tax liabilities, and your allowable deductions.

For more help managing your investment earnings, consider consulting a financial adviser.  

_{* To be eligible to make a concessional contribution under the carry-forward rules, your total super balance at the previous 30 June must be less than $500,000.}