The financial landscape is changing, and Australian investors and retirees must take notice. This is particularly true for unrealised capital gains tax implications, which are rapidly changing investment strategies.
Before you wait too long and miss your opportunity to adjust your financial strategy, set up some time to speak to our financial planners. With tailored financial planning advice, you will understand the ideal scenario to help you confidently plan for retirement in a fast-changing political and economic environment.
What Are Capital Gains and How Are They Taxed in Australia?
Unrealised capital gains occur when the value of an asset you own increases, but you have yet to sell that asset. Here is a simple example. Your investment portfolio includes real estate. That property has increased in value since you purchased it. However, because it remains unsold, the growth in value is an unrealised gain to your wealth.
In most situations, the sale of an asset triggers the payment of tax. When you sell the asset and realise the gain, you pay taxes. However, rules are changing, and that has a significant potential impact on investors.
Let’s break this down a bit further.
- A capital gain is the increase in value of an asset. It is the profit an investor typically makes when they sell the property. You are selling at a value higher than the purchase price.
- A capital loss occurs when the value of an asset falls, and the property owner sells the asset for less than the purchase price.
Under current Australian tax laws, a specific event must trigger the required tax payment on the value increase of your assets. Common disposals of assets that could trigger a capital gains tax (CGT) event include:
- Selling the asset
- Trading the asset
- Exchanging the asset
- Swapping the asset for another
- Loss or destruction of the asset
- Creating contractual or other rights
In these events, the total income, which would include the capital gain, is taxed at your marginal income tax rate, meaning the amount you pay in income tax depends on your income. You pay the same tax on capital gains as you do on other income.
Note that there is a CGT discount application. If you maintain an asset for at least 12 months, you then receive a 50% CGT discount. At that point, the capital gains tax is only half of the capital gain.
Note that the government expects you to report this information on your tax return.
What Are Unrealised Gains?
An unrealised gain occurs when the value of an asset increases on paper, but no sale has occurred. The value of an investment property is now significantly more than it was a year ago. It has a higher value, but you do not plan to sell the property and, therefore, have “unrealised” that potential increase in value.
Under current Australian tax law, unrealised gains are not taxed. Remember, they are only taxed when one of the previously mentioned events occurs. The law could change, and proposals to change it have become more mainstream in recent months.
Why You’re Not Taxed on Unrealised Gains (Yet)
You have to sell the asset to “realise” the value increase. You may believe the property has increased in value, but you do not plan to sell it to find out for certain.
Current Australian tax law does not allow taxes to be applied to just the “paper” increase in value. However, proposals in the works around the world could change this, requiring a complex process of evaluating the value of assets before any real transaction has taken place.
By keeping the current Australian tax law in place, investors benefit. It enables you to determine when you must pay the capital gains tax by not selling or otherwise disposing of the asset. You do not pay any taxes until you dispose of the asset.
When Unrealised Capital Gains Tax Becomes Realised
When should you worry about paying capital gains taxes? The Australian Government Taxation Office makes it clear when capital gains tax applies. Consider these common, current scenarios.
- Selling the asset. This is the most straightforward event. You sell it, it changes hands, you realise the capital gain, and you must pay taxes on it.
- Transferring the property. Another indication is when transferring the asset to another party, therefore realising the capital gain. The tax is then applicable.
Consider the financial implications that come from capital gains taxes carefully. With the help of a financial planner, you may be able to mitigate at least some of the financial loss you could face otherwise. Consider the following examples.
- Hold for at least 1 year. Before selling, maintain the ownership of the asset for at least 12 months. This reduces the capital gain by a full 50%.
- Strategic selling. Work with your financial planner to create a strategy to reduce your ownership of the asset while minimising your tax liability.
- Apply your expenses to your cost base. The cost base is the original purchase price with all costs added to it that you incurred along the way, such as stamp duty, legal fees, and capital improvements. Adding expenses—including incidental costs like rental ad fees, ownership costs, such as searching for and investing in properties, and improvements to the property, such as installing new flooring—reduces the capital gain.
Managing capital losses could be a necessary step for some investors. Your financial planner could help you navigate strategies such as using a family trust, alternative wealth vehicles such as investment bonds or company structures, and diversification into low-volatility assets.
How a Financial Planner Can Help You Manage Capital Gains
The implications of unrealised capital gains tax can be frustrating and overwhelming. Most people want to see the value of what they own grow, but paying high taxes on it reduces that benefit.
At PAC Financial, we provide you with the guidance you need:
- Time your asset sales in such a way as to optimise tax outcomes, reducing what you have to pay under the law.
- Structure investments for tax efficiency.
- Navigate any changes to CGT, including the impact on those who are in or soon-to-be retiring.
Contact us today to discuss your capital gains tax risks for 2025. Let our team help you plan around the financial risks.
