Capital gains refers to the profit, that is gained from the disposal of capital assets such as financial investments and real estate, whereas, the loss incurred from the disposal of such capital assets is called capital loss. Put another way, the price returns arising out of the purchase and sale of the capital assets is called capital gain.
For Example, consider you acquired 10 shares of ABC Company Limited for A$2000 and paid $20 in brokerage for those shares. Now, those shares are valued at $4000. Therefore, the capital gain made on those shares is $1980 (4000-2000 +20). If you sold those shares for $4000 and paid $40 in brokerage, this equates to a capital gain from the transaction of $1940 (4000- 2000 +20 +40).
Dividend income refers to the residual income from the profit of the company, which is distributed to its shareholders. Companies follow dividend policies to act on certain predefined parameters while distributing the profit. Besides, companies can utilise the profit gained from the financial period to distribute it, along with the retained earnings.
Companies would not be able to pay dividends when they are making losses, and even if the company is making profits, it could not be guaranteed that the dividend would be paid. Suppose the company has certain upcoming growth prospects, which requires capital, and the existing capital sources are not complementing with requirements. Therefore, the company may cut its dividend or even go for no dividends.
At the outset, capital management of the company is an important factor while distributing income or dividends. It includes management of the company’s capital, sources of financing, repayments related to debt, provisions on debt, contingent liabilities, and anything that is concerned with capital outflow or inflow.
For Example, consider you are holding 1000 shares of ABC Company Limited, and the company declares a dividend of $10 per share. Therefore, the holders of the shares would be entitled to a dividend of $10 per share, and your pre-tax (if any) entitlement would be of $10,000.
Capital Gain Vs Dividend Income
Capital Gain: Capital gain means an increase in the value of an asset, and when there is a decrease in the value of the asset, it is called capital loss.
Dividend: Dividend is a part of the earnings of the company, which is distributed to the shareholders of the company.
Capital Gain: Capital gain depends upon a range of factors, which could vary from asset class to asset class. However, the macroeconomic factors could impact all the asset classes equally.
Dividend: Dividend depends on the management of the company, which undertakes the capital management initiatives of the company, as well as the decision on the possible dividends to be paid to the shareholders. Besides, the primary factor affecting the dividend is the profit of the company.
Capital Gain: Investment in capital asset varies from asset class to asset class, as it includes real estate estates, acquisition of machinery or plant as well. Meanwhile, investment in the financial assets is relatively cheaper than others.
Dividend: Dividend requires investment in equity shares, stapled securities, managed funds, ETFs or any financial security that pays dividend to the holder of these securities.
Capital Gain: Capital gain is realised when the assets are disposed by the owner. In another way, the selling of the assets leads to the realised value of capital gain. Hence, the capital gain is realised only once from an asset.
Dividend: Dividend is realised when the payment of the dividend is made by the company to the shareholders. Besides, the dividends are periodical, which could be paid yearly, quarterly or semi-annually.
Capital Gains Tax – the Australian Perspective
In Australia, the capital gains are taxable similar to most of the countries. Australia Tax Office (ATO) regulates the taxation practice in the country. Therefore, it is the apex public body in the country dealing with matters of taxation. Capital gains in Australia are calculated through three different perspectives:
Capital Gains Tax Discount: In this case, those assets are considered which were held by the owner for less than twelve months, and all of the capital gains are taxable. Put another way, if the asset was acquired and disposed in the twelve-month period, this method is applied to calculate the capital gain, which requires all of the capital gains to be counted in the taxable income.
Conversely, an individual could get a 50% discount on the capital gains, when these assets are held over a twelve-months period. Before applying the 50% discount, capital losses should be applied to calculate net capital gain.
Indexation: Indexation method is applied to the assets acquired before 21 September 1999 and was held at least for twelve months, and it applies a multiplier to account for inflation on the cost base of the asset.
Capital loss: Consider that you made capital losses on some asset classes, and now it could be deducted from the capital gains arising out of the other assets. In case, you do not have capital gains for the period, the incurred capital losses could be carried over to the next income year.
Taxability & Exemptions: Capital gain is not a separate tax, and it is a component of income tax assessment for the income year. Besides, the net capital losses are not taxable and can be only used to offset capital gains. So, if someone has incurred net capital losses in a given income year, those capital losses could be used to lower the capital gain in upcoming years.
Meanwhile, there are substantial items that are exempted from the capital gain tax, which are listed at the ATO’s website. Further, the capital gain tax rate paid by the company and individual is different, and the companies are not entitled to capital gain discount and pay 30% on any net capital gains.
Whereas an individual does not have any specific tax rate for a capital gain, and it is paid at the same rate as the income tax rate for that year. In addition, for a self-managed super fund (SMSF) the tax rate is 15%, and the capital gain discount is 33.33%.
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