Capital Gains Tax: the importance of keeping records and knowing your cost base

What is Capital Gains Tax (CGT)?

A capital GAIN or capital LOSS is the difference between what an asset cost you (cost base) and what you receive when you dispose of it (capital proceeds). CGT is the tax you pay on your capital gains, at your marginal (or current) tax rate. 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.

What is the Cost Base?

Knowing the “Cost Base” of your asset is the key to determining capital gains or losses incurred. The cost base is what it cost you to get the asset.

What is a CGT “Event”?

The type of assets that attract CGT through any transaction, event or circumstance are known as CGT Events.  All assets you’ve acquired since tax on capital gains started are subject to CGT unless specifically excluded. Most personal assets are exempt from CGT including your home, car, and most personal used assets, such as furniture. CGT also doesn’t apply to depreciate assets used solely for taxable purposes, such as business equipment or fittings in a rental property.
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 happens to an asset that is ‘taxable Australian property’.

What sort of records do I need to keep?

Your records must be in English (or be easily translated into English) and must show the:

• nature of the transaction, event or circumstances
• date it occurred
• parties involved in the transaction, and
• how the transaction, event or circumstances are relevant to working out the capital gain or capital loss

What type of records do I need?

• receipts of purchase or transfer
• details of interest on money you borrowed relating to this asset
• records of agent, accountant, legal and advertising costs
• receipts for insurance costs, rates and land taxes
• any market valuations
• receipts for the cost of maintenance, repairs and modifications
• accounts showing brokerage fees on shares.

You should also keep records to establish whether you’ve claimed an income tax deduction for an item of expenditure.  If you’ve claimed a deduction for an amount, you can’t also include the amount in the cost base of a CGT asset.

What if l don’t have records?

• If you bought real estate: follow up with your solicitor or estate agent requesting copies of the records you need.
• Made improvements to an investment property (if you built an extension, etc): ask the builder for a copy of the receipt for payment.
• Bought shares in a company or units in a unit trust: contact your stockbroker or investment adviser for the documentation you require.
• Received an asset as a gift and didn’t get a market valuation at the time: contact a professional valuer who can provide details on the market value at the relevant date.
• Lost records due to a natural disaster: the ATO has the means to help you reconstruct them.

The thing is, understanding CGT issues and opportunities can be confusing and technical, but if you keep good records, you’ll be in a much better position.

Carbon Group is ready to help you manage your finances.