Capital gains tax (CGT) and goods and services tax (GST) are two of the major tax systems in Australia. Although CGT and GST are three-letter names for tax systems and sound similar, their functions differ entirely.
In this article, we’ll discuss CGT and GST and how they differ. This will help you understand two of the biggest tax systems in the country and give you a larger understanding of the subject itself.
Although we’ve discussed all the different tax systems in Australia and how they operate, it is still good to compare these larger tax systems that affect small and big businesses alike.
So let’s get right into it!
What Is Capital Gains Tax (CGT) In Australia?
Capital gains tax, in simple terms, is a tax levied on the profit you make from selling an asset, like stocks, real estate, or valuable items, that has increased in value since you acquired it. This tax is calculated based on the “capital gain,” which is the difference between the selling price and the original purchase price of the asset.
For instance, if you bought a piece of art for $10,000 and sold it later for $15,000, you have a capital gain of $5,000. Depending on your country’s tax laws, you may owe a percentage of that gain as capital gains tax. The rate and rules can vary, often with different rates for short-term and long-term holdings.
According to the Australian Taxation Office (ATO), which sets the tax regulations and rates, the capital gains tax is dynamic and the rates can be calculated online.
But what exactly are the rates now?
Capital Gains Realizations vs Tax Comparison
Capital Gains Realizations In Australia from 1989-2015
(source: Austaxpolicy)
The above graph shows you the gains that Aussie companies and individuals have realized. This shows a major spike from 2001 to 2007 (roughly), and after the 2008 financial crash, it is evident that a lot of loss had occurred. Although the gains realizations are large and were growing consistently, the taxes on this actually decreased.
Capital Gains Tax Rates from 1989 to 2015
(source: Austaxpolicy)
As you can see from the graph above, the tax rates on capital gains dropped drastically by the end of the 20th century, and have been stable ever since.
The same goes for the Australian GST regime, which has always been stable and around 10% for the most part.
So overall, the CGT rates have been favorable for Australian businesses and people. Although the rates could have been dropped further after the 2008 financial crash to support the massive losses. But all in all, business seems to be flourishing in the country, and taxes aren’t crazy high.
CGT Rates In Australia
The amount of capital gains tax you owe on your shares can change based on how long you’ve held onto them. If you’ve had the investment for less than a year, you’ll need to pay taxes on the entire profit at your regular income tax rate. But if you’ve held onto it for over a year, you’ll only pay taxes on half of the profit.
CGT gets treated like your regular income tax. So, let’s say you make $40,000 a year and you’re in the 32.5% tax bracket. If you also make a capital gain of $60,000, you’ll end up paying income tax on a total of $100,000, and your capital gains will also be taxed at the same 37% rate.
But that’s not all. You can also get a discount on this. Here’s how it works:
So, if you’ve owned an asset for at least a year, there’s a nice perk called the Capital Gains Tax (CGT) discount. Basically, it cuts your tax bill in half for the profit you make when you sell that asset.
So, you only have to pay tax on half of the money you’ve made from the sale. It’s a sweet deal for individuals looking to save on their taxes when they’ve held onto an asset for a while.
Are There Any Exemptions From CGT?
A simple answer would be NO.
Since 20 September 1985, ATO has started regulating taxes on capital gains. And this continues.
However, some assets are exempt from CGT, like your personal home or vehicle. It is better to refer to ATO’s guide on exemptions from taxes on capital gains to get accurate information.
What Is Goods & Services Tax (GST)?
Goods and Services Tax (GST) is a consumption-based tax system that applies to most goods and services in many countries. It’s designed to replace multiple layers of taxes, streamlining the tax collection process.
Under GST, businesses collect tax from customers at each stage of the supply chain, and the government refunds the tax paid on inputs. This ensures that tax is levied only on the value added at each stage, preventing double taxation.
For example, consider a smartphone’s production process. The manufacturer buys raw materials, paying GST on them. When they sell the phone to a distributor, they charge GST on the phone’s value, but they can deduct the GST they paid on raw materials. The distributor, in turn, charges GST when selling to a retailer, who does the same. Finally, the end consumer pays GST when buying the smartphone. This way, GST is collected progressively, and the government gets a fair share of tax without burdening any single entity excessively.
GST Rates In Australia
GST Rates (2000-2020) In Australia
(source: Wikipedia)
The GST rates have always been around 10% in the country and worked out to be a success when it comes to taxation systems.
GST is also known as VAT here but is hardly referred to as VAT. Before heading to this section, you can know more about the VAT or GST regime in Australia, so that you have a better idea about the subject.
Since its introduction in the year 2000, the Goods and Services Tax (GST) has seen several noteworthy trends and changes in its rates. Initially set at 10%, this rate remained unchanged for over a decade, providing a stable source of revenue for the government.
However, in 2010, there was a temporary shift when the government introduced a one-off increase in the rate, raising it to 11%. This increase aimed to fund flood relief efforts in Queensland and Victoria. Thankfully, this change was temporary and the rate reverted to 10% after a year.
Are There Any Exemptions From GST?
Again a big fat NO to this question.
Even though no good or service is exempted from GST (referring only to businesses and individuals conducting businesses), you can lodge a GST return. You can refer to our guide on GST to learn how to lodge for a return in depth.
We will still discuss briefly how a GST return can be lodged from the Australian Taxation Office’s portal.
ATO Login Portal For Tax Lodging
No matter how you signed up for Australian GST, you can easily submit your GST return online. Here’s how:
- Log in to the ATO portal, and when prompted, choose “Non-resident” from the dropdown menu.
- Once you’re in your account, you’ll find clear instructions on how to submit and pay your Australian GST.
- If you’re using the Simplified GST system, access your online business portal. Click the ‘Log in and pay’ GST button, and you can pay using a credit/debit card or an overseas bank transfer.
A crucial tip: Always make sure to provide the correct unique payment reference number (PRN) in the reference field when you make a payment. This ensures your money goes to the right place!
If you’re registered under the Standard GST system, explore your other payment options on the ‘how to pay‘ page. Some of these methods may require you to have an Australian bank account.
So, how do CGT & GST compare today?
Obviously, we know by now that both these tax systems are very different and businesses and individuals are taxed for completely varied reasons.
While one is about taxation on the gains in capital for a business or individual, the other is a tax on EVERYTHING including the movies you go to watch, the food you have in a restaurant, and even an airline ticket for travel.
Let’s look at a comparison table to narrow our differences down and locate it at a glance.
| CGT | GST |
|---|---|
| Applies to Investments: CGT is mainly levied on the profit made from the sale of assets like real estate, shares, or collectibles. | Applies to Goods and Services: GST is a broad-based consumption tax that applies to most goods and services purchased in Australia. |
| Individual Liability: It is typically the responsibility of the individual or entity that owns the asset to report and pay this tax. | Business Responsibility: Businesses are responsible for collecting and remitting GST to the Australian Taxation Office (ATO). |
| Event-Based: CGT is triggered when a specific event occurs, such as selling an asset. It’s not an ongoing tax like GST. | Transaction-Based: This is imposed on each transaction involving goods and services, and it’s typically included in the sale price. |
| Discounts Available: Individuals may be eligible for discounts or concessions, depending on factors like how long they’ve owned the asset. | No Personal Discounts: There are no individual discounts or concessions for GST. It’s a fixed percentage of the transaction value. |
| Main Residence Exemption: There’s often an exemption for the sale of your primary residence from CGT. | No Main Residence Exemption: GST is not exempted for the sale of your primary residence; however, the sale of residential property is usually exempt from this. |
Remember, tax laws can change, so it’s essential to consult the latest information from the Australian Taxation Office or seek advice from a tax professional to ensure compliance with current regulations.
Conclusion
In conclusion, we’ve explored the realms of Capital Gains Tax (CGT) and Goods and Services Tax (GST) in Australia.
CGT zeroes in on investments, taxing the profits made from asset sales, like real estate or stocks, while GST casts a much wider net, applying to pretty much everything you buy or consume. It’s a tax on your morning coffee, your favorite movie ticket, and even your airline journey.
The responsibilities also diverge – CGT falls on individuals or entities selling assets, whereas businesses shoulder the GST collection and remittance duty.
There’s another key difference in how they’re calculated – CGT is event-based, triggered by specific transactions, while GST is woven into the transaction itself, typically folded into the final purchase price.
As we look ahead, it’s crucial to remember that tax landscapes can evolve. Regulations may shift, rates may change, and exemptions may be reconsidered. Staying informed, whether you’re a business owner or an individual taxpayer, is paramount. Seek the latest guidance from the Australian Taxation Office and consult with tax professionals to navigate these ever-changing tax terrains effectively.
In parting, we hope this exploration has provided you with a clearer understanding of these two tax giants Down Under, helping you make informed financial decisions in the dynamic world of Australian taxation.
Also Read:
What Is VAT or GST In Australia?
What Taxes Do Small Businesses Pay In Australia?
