Capital Gains

NO-ONE likes paying taxes but if you have to pay a tax there is no doubt the best one is capital gains tax (CGT).

It is much milder than tax on your salary or on your bank interest because it is not payable until you have disposed of the asset and in many cases you are entitled to a 50 per cent concession.

If you follow the preferred strategy of building up quality assets throughout your working life, there will be no CGT payable. Furthermore, if you have shares when you retire, you can progressively sell down assets and minimise the rate at which CGT is payable. This ability to sell in part makes shares particularly attractive - if you own a rental property, you can't sell one of the bedrooms.

Capital gains tax is seldom paid by a deceased estate; in most cases the liability is transferred to the beneficiaries who receive the assets, and is paid by them when they sell those assets. The treatment depends on whether the assets were acquired before September 20, 1985 (when CGT was introduced) or since.

From time to time, readers have asked about the possibility of death duties but the likelihood of them returning is minimal. In the past they were state taxes and the states are now adequately provided for by the GST. In any event, death duties fall heaviest on the wealthy and they are most likely to be in a position to arrange their affairs to minimise it.

In practical terms, death tends to trigger CGT liability because there are few beneficiaries who can resist the temptation to sell the asset and live it up on the proceeds.

The family home is one of the few assets that is free from CGT but it is only exempt if it is in the names of the residents. If you put it in the name of your family company or family trust, you will lose the exemption. This has important implications for people who are trying to protect their assets as it may get down to a choice of asset protection or paying no CGT.

If you rent the house out, the CGT is calculated on a pro-rata basis. For example, if you owned a house for 10 years and lived in it for seven, you would pay CGT on three-tenths of the capital gain.

There is a provision that allows you to be absent from your house for up to six years without losing the CGT exemption. It is designed for people who are transferred and wish to retain their family home.

However, you lose the CGT exemption if you maintain another principal place of residence.

You cannot move out of one home, buy another in a different area, and then have both as your principal place of residence at the same time. It is possible to own two houses and be claiming an exemption on the house you are renting out, even though you are living in the other one.

With the recent rising prices, it's important to be aware of the 12 months rule. Provided you have an investment asset for at least a year and a day, you pay CGT on only half of the capital gain. However, if you sell it before that time, you pay CGT on the whole gain.

A couple of days' difference in the date on the contract can make a huge difference. Just remember, it's the dates on the contract that count for CGT purposes not the time of settlement.

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