It’s important to understand the tax implications of your investments especially when markets move up and down. Our five step end of financial year checklist will help keep you on top of your tax for 2024-25.
As the 2024-25 financial year draws to a close, it’s important to understand the tax implications of your investments.
This is particularly important when markets are volatile, as the capital gains tax on your investments will be affected by when you made your investment, when you sold it and whether your investment increased or decreased in value.
What is capital gains tax?
Capital gains tax (CGT) is the tax you pay on profits made from the sale of investments, adjusted for any cost base amounts and any eligible capital gains tax discounting.
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. Although it is referred to as ‘capital gains tax’, it’s part of your taxable income.
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:
- net capital gain in a year, it will generally increase the tax you need to pay.
- net capital loss in a year, you can carry it forward to a future year to offset against future capital gains.
For individual taxpayers who 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.
End of financial year checklist for investors
Below are some key issues to be aware of as 30 June approaches.
- Understand your responsibilities
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 important to be aware of what it’s tracking, and what your responsibilities are.
This year, the ATO has flagged it will be on the lookout for a broad range of issues, some of which include:
- inappropriate calculations of the CGT discount.
- trusts over claiming deductions to reduce net income.
- residents not including distributions from foreign trusts.
- property development income classified as a capital gain.
- omission of income on disposal of real property.
- franking account balance discrepancies.
Previous areas of focus have included checking whether investors declared all their income and warning investors not to file their tax return before including income from multiple sources.
- Have a clear picture of your investments
It’s critical to have a clear picture of all your investments so you can be sure to include all your investment income if it’s subject to CGT.
Cash in bank accounts, high interest savings accounts and term deposits, as well as fixed interest investments such as bonds, may generate earnings that need to be included in your assessable income.
Investments that may be subject to capital gains tax include:
- investment properties.
- shares owned directly, or through managed funds and exchange traded funds (ETFs).
- alternative investments including cryptocurrency, art and other collectibles, commodities and private equity.
Generally, the family home is exempt from capital gains tax for Australian residents, providing it:
- has been the home of you, your partner and other dependants for the whole period you have owned it^.
- hasn’t been used to produce income – that is, you have not run a business from it, rented it out or bought it to renovate and sell at a profit.
- is on land of 2 hectares or less.
If you don’t meet all these conditions, you may still be entitled to a partial exemption. You can work out the proportion that is exempt using the ATO’s CGT property exemption calculator.
- Understand capital gains
It’s important to understand how your investments have performed so you’re not surprised by unexpected tax liabilities.
Also key is understanding when any investment income is earned or when you realise capital gains.
This is generally when you receive the income or you dispose of an asset, such as by selling it, triggering a capital gains tax 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 from the managed fund selling the underlying assets, which you also need to include in your tax return.
- Can you reduce your capital gains tax?
If you have a poorly performing investment that has decreased in value since you purchased it, and you decide to sell it before the end of the financial year, the capital loss can be used to offset any other capital gains you have made in the same year, resulting a lower net capital gain. Alternatively, where you are left with a net capital loss, you can generally carry that loss forward and use it to offset capital gains in future years.
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 immediately buys back the same asset. This type of arrangement is covered by the general anti-avoidance rules in the Tax Act and can attract significant penalties.
- Can you make a tax-deductible super contribution?
Another way of reducing your potential CGT liability is by making a tax-deductible super contribution (taxed at 15%) to potentially reduce your taxable income which is taxed at your marginal rate (which may be higher than 15%).
Under the concessional contribution ‘carry-forward rules’, if you have unused concessional cap amounts from the past five financial years*, you may be able to carry them forward to increase your contribution limit of $30,000 in the current financial year. Conditions apply, so please check with your tax adviser before claiming a deduction.
There are a range of other allowable tax deductions that may reduce your taxable income. For more assistance with this, it’s worth seeking independent tax advice.
* 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.
^ Special rules can apply to allow you to still qualify for the main residence exemption even where you are absent from your home for a period of up to six years – even if it is rented out during this period. Please speak to a tax adviser for more information.
# The timing of when you are taken to have disposed of a CGT asset can vary depending on the circumstances. Please speak to your tax adviser for more information.
Source: Colonial First State
