There never has been a capital gains tax in Australia. There is a tax on capital gains, but it is an income tax and not a capital gains tax. This is not just playing with words. The term “capital gains tax” is enshrined in legislation and is repeated so often that the average taxpayer, who has much better things to do than reading the Income Tax Assessment Act 1997, can be forgiven for thinking that capital gains tax is calculated separately and distinctly from income tax. This is not so. Net capital gains are added to other taxable income to determine total net taxable income. If taxpayers are not aware of this, they might make unfortunate decisions when disposing of capital assets.
Take the example of Mort Horsesense and his wife Hortense. Mort is fed up with dealing with issues plaguing his two rental properties so he sells both of them in the same year. Mort figures that, because capital gains tax is a stand-alone calculation, it does not matter when he sells because the tax will always be the same. This is not so. The housing market is buoyant so he makes impressive capital gains on both houses. The net capital gain from the first house sits on top of his salary and soaks up all the lower tax rates. The net capital gain from the second house sits on top of Mort’s salary plus the taxable gain from the first house, so it is all taxed at the highest marginal rate rate, which is 47% (including the medicare levy). If Mort had known that capital gains tax is an income tax, he would probably have sold the second house in the year after he sold the first house. While this is ho-hum obvious to the cognoscenti, it is surprising how many people do not connect capital gains tax with income tax.
Mort’s wife Hortense also has a rental property. She is retiring and hates doing income tax returns so she sells her rental property in June and resigns on 30 June so she will never have to do another return after that year. The sizeable taxable gain she makes sits on top of her salary plus all her lump sum annual and long service leave and is therefore taxed at high rates. If Hortense had realized in advance that capital gains were included as income, she might have made different decisions. She could have taken all her leave starting from 1 July and then resigned. With no other income in that year (and eligible for the seniors and pensioners tax offset) Hortense might have enjoyed a refund of all or most of the tax paid. A year later, Hortense could then sell her rental property when once again she had no other income, this saving a bucket-load of tax.
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