Tax planning should include looking at potential capital gains and the tax you pay if you sell an asset. Our tax planning experts service Hamilton clients to ensure capital gains are worked into their overall financial plan.
Tax planning is a significant service that we provide to our Hamilton clients and results in significant reductions in tax payable through astute forward planning. Not only do we look at the projected profit of our clients for the coming year, but also at any asset sales that may give rise to a capital gain.
An asset that was acquired after 19 September 1985 may give rise to a capital gain when it is sold. Some personal use assets and the principal home are generally exempt, but most other types of assets will be subject to capital gains tax if they are sold for more than their original cost. If the asset has been owned for more than 12 months, the capital gain is reduced by 50%.
| Example | Sale of Asset (2015) | 100,000 |
| Cost of Asset (2012) | 80,000 | |
| Capital Gain | 20,000 | |
| 50% General Exemption | (10,000) | |
| Taxable Capital Gain | $10,000 |
A tax planning tool, in a year when a capital gain has / will arise on the sale of an asset, might be to sell a non-performing asset / investment at a loss, as the loss can be offset against the capital gain.
| Example | Capital Gain | 20,000 |
| Capital Loss | (8,000) | |
| Reduced Capital Gain | 12,000 | |
| 50% General Exemption | (6,000) | |
| Taxable Capital Gain | $6,000 |
(It should be noted that the capital loss must be offset against the capital gains before the 50% general exemption is applied.)
Capital gains assets are generally split into two categories – Passive or Active. A passive asset is generally a non-business asset such as shares in a listed company. An active asset on the other hand is generally an asset used in the conduct of a business such as business premises, farm land etc.
There may be further capital gains tax concessions available on the sale of an active asset if the entity satisfies the criteria of a “Small Business”. An entity will be deemed a small business if it is carrying on a business, it’s aggregated turnover is less than $2m and the net value of the capital gains tax (CGT) assets does not exceed $6m.
As with a passive asset, an active asset also gets the benefit of the 50% general exemption if the asset has been owned for a minimum of 12 months. However there is a “small business 50% reduction” which is also available which further reduces the taxable capital gain.
| Example | Sale of Asset (2015) | 100,000 |
| Cost of Asset (2012) | 80,000 | |
| Capital Gain | 20,000 | |
| 50% General Exemption | (10,000) | |
| 50% Small Business Reduction | (5,000) | |
| Taxable Capital Gain | $ 5,000 |
There are two further concessions available to reduce the taxable gain to zero:
1) Retirement exemption – The taxpayer may elect to rollover the remaining capital gain into their retirement exemption. If they are under 55 years of age they must make the payment into a complying superannuation fund.
| Example | Capital Gain | 20,000 |
| 50% General Exemption | (10,000) | |
| 50%Small Business Reduction | (5,000) | |
| Small Business Retirement Exemption | (5,000) | |
| Taxable Capital Gain | NIL |
2) Roll-Over Relief – It is possible to roll the remaining capital gain into a replacement active asset. This has the effect of deferring the taxation on the capital gain and may ultimately lead to no tax payable.
| Example | Capital Gain | 20,000 |
| 50% General Exemption | (10,000) | |
| 50% Small Business Reduction | (5,000) | |
| Small Business Roll-Over Relief | (5,000) | |
| Taxable Capital Gain | NIL |
Another of the small business exemptions that may be accessed is the 15 year small business exemption. An individual taxpayer can disregard a capital gain arising on an active asset if:
- The small business test is satisfied
- The taxpayer continuously owned the asset for the 15 year period just before the CGT event
- The taxpayer is 55 years of age
- The CGT event happens in connection with the taxpayer’s retirement
It can be seen that with active assets there are many options available and our role in tax planning plays a vital part in ensuring our clients in Hamilton, and across the region, avail themselves of these exemptions.