Capital gains tax is what's due when you sell certain assets and make a profit.

Capital gains tax is what you pay when you profit on the sale of certain assets. These could be assets you own or that you’ve inherited.

Capital gains tax applies to shares, land and property, unless it’s your primary residence. It may even apply to certain collectibles and personal items depending on what you paid for them.

The good news is if you understand the general ins and outs of capital gains tax in Australia, you could reduce what you pay by up to 50%. We break it down in simple terms.

Capital gains tax in a nutshell
The first thing to understand is that capital gains tax actually forms part of your income tax. While it has its own name, it’s not a standalone tax.

For example, when you declare any capital gains, which you’ll need to do when you lodge your tax return, any capital gains you’ve received will be looked at as part of your total income for the year.

The amount of tax you pay on your income will vary depending on what income bracket you fall into.

In the instance you have a shared asset—you need to work out each owner’s individual interest in the asset as this is how capital gains and losses are determined for each party involved.

The assets exempt from capital gains tax
If you make a profit on an asset, there are instances where you won’t be hit with capital gains tax.
Capital gains tax generally does not apply to:

• Assets acquired before 20 September 1985
• A property that is your main residence
• A car, motorcycle or similar vehicle
• Winnings or losses from gambling and prizes.
  

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The Australian Tax Office (ATO) has further details as to which assets are subject to capital gains tax and which assets are exempt on its website.

Ways to calculate capital gains tax
Generally, you can calculate your net capital gain by adding up your capital gains over the financial year and then subtracting your capital losses (including any net capital losses from previous years) and any capital gains discounts (or any small business CGT concession6 you may be entitled to).

A capital gain is typically reduced by 50% when an asset has been held for at least 12 months. So, if you sell an asset you've owned for less than a year—an investment property or shares in a business for example—the tax bite will be a lot bigger.

The importance of record keeping
You must keep records of everything—every transaction, event or circumstance—that may be relevant to working out whether you’ve made a capital gain or loss from an asset for a period of five years.

There is no time limit on how long you can carry forward a net capital loss and it can be deducted against capital gains in future years.

This could help to reduce the tax you pay in future years and assist any beneficiaries you’re leaving assets to.

For more information, speak to your accountant or we can help you find one who specialises in taxation.

Source: amp.com.au

Millions but not all to benefit from 2017 super changes...

With changes to super now in effect, numerous Australians will get a leg up, many being low-income earners.

According to the Association of Superannuation Funds of Australia (ASFA), more than four million Australians will benefit from the super changes that came into effect on 1 July 2017.

The industry body said while many would be impacted by new rules and restrictions, millions would benefit from the Low Income Superannuation Tax Offset, the ability to claim tax deductions on personal super contributions and obtain rebates on contributions made to their spouse.

Tax offset for low income earners
ASFA Chief Executive Officer Martin Fahy said of the three-million plus people to receive the Low Income Superannuation Tax Offset, an estimated 63% would be female, adding the average super balance of recipients of the Low Income Superannuation Tax Offset was less than $50,000.

Under the initiative, individuals with an income below $37,000 will receive a refund of the tax paid on their before-tax super contributions (up to a maximum of $500) into their super account.

The scheme replaces the Low Income Super Contribution, which ceased on 30 June 2017.

Tax deductions on personal contributions
ASFA highlighted that previously most salary and wage earners could only claim a tax deduction under salary sacrifice arrangements, which not all employers offer.

Under the new rules however, ASFA said 850,000 additional people would be able to claim a tax deduction for personal contributions made to their super.

The incentive is generally available to anyone between the ages of 18 and 75 that is making a personal contribution, with work test requirements necessary for those over age 65.

Tax rebates on spouse contributions
ASFA said increased access to the spouse contributions tax offset would also see an additional 10,000 Australians who contribute money to their spouse’s super (whether they be husband, wife, de facto or same-sex partner), eligible for a maximum tax rebate of $540 if certain requirements were met.

Under old rules, the receiving spouse’s income needed to be $13,800 or less for the contributing partner to qualify for a full or partial tax offset, whereas the income threshold is now $40,000.

Not good news for everyone
While the news for over four million Australians was positive, Fahy said around 800,000 individuals, in a given year, would be impacted by other super changes.

Lower caps and added tax
An estimated 80,000 people would be affected by the $100,000 annual cap for after-tax contributions, which was previously $180,000, ASFA said.

Meanwhile, the reduction in the before-tax super contributions cap from $30,000 per year (or $35,000 for those over age 50) would impact more than 250,000 people who make contributions in excess of the new cap of $25,000 a year (which applies to everyone, irrespective of age).9

A similar number of people would be affected by additional tax on before-tax super contributions. This is because from 1 July 2017, those earning $250,000 or more have to pay an extra 15% tax on any before-tax contributions, on top of the concessional rate of 15%, bringing the tax rate to 30%.

Previously, this tax only applied to those earning $300,000 and above.

Limitations on pensions
ASFA estimated around 110,000 people, many in self-managed super funds (SMSFs), would also be affected by the new $1.6 million transfer cap.

Effective 1 July 2017, those converting super into a pension are restricted to a limit of $1.6 million in terms of what they can transfer into tax-free pension accounts, not including subsequent earnings.

Any excess needs to be placed back into the super accumulation phase (where earnings are taxed at the concessional rate of 15%), or taken out of super completely. Penalties for exceeding the cap apply.

Removal of TTR tax exemptions
Around 170,000 people in Australian Prudential Regulation Authority-regulated funds accessing a transition to retirement (TTR) pension and a further 100,000 people with such an arrangement in an SMSF would also be affected, ASFA said.

Investment earnings on super fund assets that support a pension are tax free, however, this no longer applies to TTR arrangements. From 1 July 2017, earnings on fund assets supporting a TTR pension are subject to the same maximum 15% tax rate that applies to accumulation funds.

Next steps
To ensure you understand how the new rules impact you and what the potential benefits may be, speak tone of our financial advisors. 

Source: amp.com.au

According to Dr Shane Oliver, Australian shares will likely be higher by year end, but global shares are likely to continue to outperform.

Despite numerous forecasts for a recession following the end of the mining boom, the Australian economy has continued to grow. However, recently it seems to have hit a rough patch. 

Cyclone Debbie and its aftermath disrupted housing construction and trade in the March-quarter and the weather impact on trade will worsen – as indicated by a 45% collapse in coal exports in April. 

Overall, March-quarter growth was just 0.3% quarter-on-quarter and annual growth slowed to 1.7% year-on-year, its slowest since the global financial crisis (GFC). But it’s still growing!

Key considerations

• Consumer spending and confidence is constrained by record low wages growth and high levels of underemployment.
• A slowing housing cycle, with a downtrend in housing construction activity and a likely peak in Sydney and Melbourne property price growth under the weight of bank rate hikes, tighter lending standards, rising supply and poor affordability.
• But then there are some positives supporting growth. First up, the drag from falling mining investment is close to the bottom: While mining investment is still falling rapidly, currently around 2% of GDP, its weight in the economy has collapsed, reducing its drag on growth to around 0.5% for the year ahead.
• Public infrastructure investment is strong, up 9.5% over the last year, in response to state infrastructure spending, financed in large part from the privatisation of existing public assets. This is particularly the case in NSW and Victoria.
• Trade is expected to contribute to growth, as the impact of Cyclone Debbie fades and coal export volumes rebound, resource projects for gas finish and services exports continue to strengthen.

Will the Reserve Bank cut rates?
The chance of an interest rate hike in the next 12 months is very low, whereas the probability of another rate cut is around 40% or so. But with the Reserve Bank of Australia (RBA) remaining reluctant to cut rates again, our best case is for rates to be on hold.

Key things to watch include a softening in jobs data; continued weak consumer spending; another downwards revision in RBA growth and inflation forecasts; significant cooling in the Sydney and Melbourne property markets; and the Australian dollar remaining relatively resilient.

Tips for investors
In the current market environment, Australian-based investors could consider:

• Global over Australian shares: While US and global share indices have hit new record highs, Australian shares remain well below their pre-GFC peak. In fact, Australian shares have been underperforming global shares since October 2009. This reflects higher interest rates and no money printing in Australia, the commodity slump, the lagged impact of the rise in the Australian dollar above parity in 2010, which reduced our global competitiveness. And the fact that our share market had a boom last decade, reaching a much higher peak than US and global shares did just prior to the GFC. We’ll likely see the ASX200 trending higher by year-end, but global shares are still likely to do better.
• Exposure to foreign currency: A simple way to maintain a decent exposure to foreign currency is to leave a proportion of global shares unhedged. Historically, the Australian dollar has tended to fall against the US dollar when interest rates in Australia are falling relative to the US. With the US Federal Reserve likely to continue (gradually) raising rates and the RBA on hold or potentially cutting rates again, there is downside risk for the Australian dollar.
• Commercial property, infrastructure investments and shares offering decent sustainable yield: The return on bank deposits will likely remain depressed, so it makes sense to consider alternatives offering decent sustainable income flows, while at the same time allowing for the greater risk of volatility in the underlying capital value that comes with such investments.

Final thoughts
Annual Australian growth slowed to 1.7% in the March quarter, hit by bad weather and weak consumer spending. A declining drag from falling mining investment, strong public infrastructure spending and a likely renewal of trade contributing to growth, should all help keep Australia out of recession.

However, soft consumer spending and a slowing in the housing cycle will act to hampergrowth compared to relatively optimistic government forecasts. So there is far more chance of another RBA rate cut than a hike over the next year. Australian shares will likely be higher by year-end, but global shares are likely to continue to outperform. 

Source: amp.com.au