Understanding Capital Gains Tax

When you invest in property, there are two main types of tax that have the potential to affect your profits.

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The first type, and one that we all know about because we pay it whenever we earn money, is Income Tax.

That is a portion of the income you derive from employment, or investment or any other form of taxable payment you receive from any source.

The second tax that impacts property investors is Capital Gains Tax (CGT).

As you’re aware, a good property investment will appreciate in value over time.

When you sell the property, the amount it has increased by since you bought it – the capital gain – is subject to tax (Capital Gains Tax).

CGT is payable on any property you sell where the capital gain itself is more than $30,000, except when it’s your own home.

How much tax do you pay?

In other words, if you sold a property after achieving a capital gain of $50,000 more than 12 months after the initial purchase, the applicable CGT would be calculated on a capital gain of $25,000.

The applicable rate of CGT is the same as income tax, however if you own the investment property for more than 12 months, you get a 50% discount on the capital gain.

Of course my property investment strategy entails rarely selling your assets.

By holding onto your properties for as long as possible, you will minimise your CGT obligations, as it’s only when you sell that this tax is payable.

Structuring your portfolio in the correct way can greatly reduce the amount of income tax and CGT that you might have to hand over to the government.

Older versus newer properties

Back in 1985, two things happened:

  1. The ability to depreciate the cost of construction of a building used for income purposes was introduced, but
  2. So was capital gains tax.

Interestingly what capital gains tax takes away, the building allowance gives you back (but during the time you own the building.)200319384-001

However if you buy a property for investment purposes today that was built before 1985, you still pay capital gains tax if you sell it, but you do not get the trade-off benefit of the building allowance.

This creates a real distinction between older and newer properties for investment purposes.

Newer is just clearly better from a taxation standpoint.

Having said that, as many new properties are bought at a premium this negates some of the tax benefits.

Remember… you should never buy a property just for tax benefits; it’s only one of the many factors to consider when making your decision.

What is excluded from CGT?

Specific exclusions include your family home, your car and most of your personal use assets including items such as furniture.

By the way…if you move out of the home for up to six years, you may still find yourself exempt from capital gains tax.

But if you rent out part of your home or use it as an office and claim a tax deduction for it, you may find you need to pay CGT on a portion of your capital profit.

Now I’m not an accountant nor qualified to advise on these matters, so I really just wanted to share some general information on CGT so you know the types of questions to ask your accountant.

It’s also worth consulting your accountant before selling any asset and especially if you’re planning to sell near the end of the financial year so you understand when CGT will be payable.

This is important, as it is based on the the date on the contract of sale, not settlement date, which can be some months later.

Of course you’ll make your life a lot easier if you keep accurate records including the acquisition date when you bought the property), how much you purchased it for and all the associated acquisition costs which make up the capital base (the starting point for working out the sums.)

Also published on Medium.

Want more of this type of information?

Shannon Davis


Shannon is director of Metropole Properties Brisbane and as a successful property investor and licensed estate agent, his years of industry experience helps his clients maximize the performance of their investment properties. Visit www.BrisbaneBuyersAgent.com.au

'Understanding Capital Gains Tax' have 6 comments

  1. February 6, 2015 @ 8:06 am Hamish

    Understanding how CGT works is key to optimising a successful property investment.
    Companies don’t get the CGT discount – so if you buy an investment property in the name of a Pty Ltd entity (say) then capital gains are payable at 30% (currently) on the full gain.

    Using a trust (with a corporate trustee) means the capital gain can be distributed to a beneficiary who is a natural person – and they can obtain the discount. However any losses due to negative gearing are trapped or quarantined in the trust and can only be used to offset future profits.

    Capital losses – can be carried forward, but can only be used to offset future capital gains.

    In the USA they have a flat rate for capital gains: Wikipedia says
    “Short-term capital gains are taxed at the investor’s ordinary income tax rate and are defined as investments held for a year or less before being sold. Long-term capital gains, which are gains on dispositions of assets held for more than one year, are taxed at a lower rate than short-term gains. In 2003, this rate was reduced to 15%, and to 5% for individuals in the lowest two income tax brackets.”


    • April 22, 2015 @ 3:00 pm Gerry Mellas

      Thanks for your article Michael. You make a reference to CGT being “payable on any property you sell where the capital gain itself is more than $30,000, except when it’s your own home”. I wasn’t aware there was a $30k threshold and I can’t find any reference on the ATO website. Is this widely known or is it referred to anywhere else?


  2. September 28, 2015 @ 9:18 am Hamish

    Hi Michael

    One of the other factors which needs to be considered in calculating the capital gain is the reduction in the “Cost Base” due to depreciation.

    So if I buy a property for $500,000 and sell it after 10 years for $1m, and during that time have claimed $75,000 in depreciation, then my cost base is reduced to $425,000. My understanding is that the Capital Gain is calculated based on the $1m less $425k, not the original cost of $500k. In this way the depreciation is “clawed back” (well only half is clawed back since the 50% CGT discount would apply to the net gain of $575k).


    • September 28, 2015 @ 6:02 pm Michael Yardney

      You are exactly right Hamish – this is not well known


  3. October 13, 2015 @ 7:20 am Morten

    It is also important for non-residents and Australian expats living overseas to understand the changes to the CGT discount rule which applies after 08 May 2012, so be prepared to give a larger portion of your gains back to the ATO if you live overseas or have lived overseas.



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