A Complete Guide to Capital Gains Tax

 

The thing about property investing is that eventually you, or your beneficiaries if you hold for the extremely long-term, will likely have to pay Capital Gains Tax (CGT).

This is the time when the Federal Government gets their share of the profit that you’ve made from investing in property as it’s technically classed as personal income.

So, in this article we’ll outline what CGT is, how to minimise it, and how to calculate it, so no one’s surprised when the taxman (or woman) comes a-calling.

What is Capital Gains Tax?

What-is-capital-Gains-Tax-200x300

Capital Gains Tax was introduced in Australia in 1985 and applies to any asset you’ve acquired since that time, unless specifically exempted.

According to the Australian Tax Office, a capital gain or capital loss on an asset is the difference between what it cost you and what you receive when you dispose of it.

You pay tax on your capital gains, which forms part of your income tax and is not considered a separate tax – though it’s referred to as CGT.

If an asset is held for at least one year, then any gain is first discounted by 50 per cent for individual taxpayers or by 33.3 per cent for superannuation funds.

Capital losses can be offset against capital gains, and net capital losses in a tax year may be carried forward indefinitely.

However, capital losses cannot be offset against normal income.

According to the ATO, most personal assets are exempt from CGT, including your home, car, and most personal use assets such as furniture. CGT also doesn’t apply to depreciating assets used solely for taxable purposes, such as business equipment or fittings in a rental property.  

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If you’re an Australian resident, CGT applies to your assets anywhere in the world.

Foreign residents make a capital gain or capital loss if a CGT event happens to an asset that is ‘taxable Australian property’.

When you sell or otherwise dispose of an asset it’s called a CGT event, which is the moment when you make a capital gain or capital loss.

It’s also important to establish the timing of a CGT event because it tells you in which income year to report your capital gain or capital loss, and may affect how you calculate your tax liability.

If you dispose of a CGT asset, the CGT event usually happens when you enter into the contract for disposal.

In the case of real estate, for example, the CGT event generally occurs when you enter into the contract – that is, the date on the contract, not when you settle.

How Much is Capital Gains Tax?

The vast majority of people pay Capital Gains Tax on a rental property when they sell, or dispose, of it, so it’s important to understand how CGT is calculated.

CGT can be a little tricky to calculate, that’s why it’s so important to have specialists on your side – and especially a good taxation accountant.

Remember CGT is only payable in the financial year in which you sell or dispose of your rental property.

So, if you follow a long-term wealth creation strategy you won’t need to worry about paying this for many years or possibly decades. CGT (Capital Gains Tax) on Stacked Coins Isolated White Backgrou

In the meantime, you can access any capital growth to grow your portfolio and improve your overall financial position.

For most CGT events, your capital gain is the difference between your capital proceeds and the cost base of your CGT asset – that is, where you receive more for an asset than it cost you.

According to the ATO, the cost base of a CGT asset is largely what you paid for it, together with some other costs associated with acquiring, holding and disposing of it.

If the rental property or asset was acquired before 1985, then no CGT is payable, however,  major improvements to a property since that time may be subject to CGT.

There are three options to calculate your capital gain.

You can choose the method that gives you the best result (that is, the smallest capital gain) as long as you satisfy certain conditions.

The three different calculations are:

CGT discount methodHow-Much-is-Capital-Gains-Tax-300x300

For assets held for 12 months or more before the relevant CGT event. Allows you to reduce your capital gain by:

  • 50 per cent for individuals (including partners in partnerships) and trusts
  • 3 per cent for complying super funds.

This is generally not available to companies.

Indexation method

For assets acquired before 11.45am (by legal time in the ACT) on 21 September 1999 (and held for 12 months or more before the relevant CGT event).

  • Allows you to increase the cost base by applying an indexation factor based on the consumer price index (CPI) up to September 1999.

Other method

For assets held for less than 12 months before the relevant CGT event. To determine whether you acquired the asset at least 12 months before the CGT event, exclude both the day of acquisition and the day of the CGT event.

  • Basic method of subtracting the cost base from the capital proceeds.

An example of using the CGT discount method is: calculator coin money save debt

Julie buys a rental property on 1 June 2014 for $300,000 and sells it for $350,000 on 15 July 2015.

As she owned the asset for more than 12 months she is entitled to the 50 per cent CGT discount.

She would need to also subtract the cost base from the capital proceeds, deduct any capital losses, then reduce by the relevant discount percentage.

There are a number of Capital Gains Tax calculators available online so you can work out how much CGT you might have to pay if you sell a rental property.

It’s important, of course, to use a specialist taxation accountant when it comes to time to lodge your tax return for the financial year in which you’ve disposed of the asset.

Avoiding Capital Gains Tax by living in the Property

When it comes to property, one of the major exemptions from Capital Gain Tax is if it’s your home or principal place of residence (PPOR).

You can generally claim the main residence exemption from CGT for your home.

To get the exemption, the property must have a dwelling on it and you must have lived in it.

You’re not entitled to the exemption for a vacant block.

Generally, a dwelling is considered to be your main residence if:Property-Investment-Checklist

  • You and your family live in it.
  • Your personal belongings are in it.
  • It is the address your mail is delivered to.
  • It is your address on the electoral roll, and
  • Services such as phone, gas and power are connected.

There is also a tax break which you may be able to access if your PPOR becomes a rental property.

There is a special six-year rule, which means that a property that was previously your PPOR can continue to be exempt from CGT if sold within six years of first being rented out.

The exemption is only available where no other property is nominated as your main residence.

What’s interesting about this rule is that if the same dwelling is reoccupied as your main residence, then the six-year exemption resets.

So another six years of exemption is available from the date it next becomes income-producing.

Paying Capital Gains Tax if your main residence is used for business

Advancements in technology means that more and more people are working either from home or working for themselves.Man Signing Contract

A tax issue that many people find themselves in, however, is that if they work from home or use they home for business purposes, that may trigger some form of CGT.

It’s important to understand that if your employer has an office in the city or town where you live, your home office will not be a place of business, even if your work requires you to work outside normal business hours.

Also if your income includes personal services income, you may not be able to claim a deduction for occupancy expenses.

According to the ATO, it’s important to consider any CGT impacts of claiming your home as a business premises.

To work out the capital gain that is not exempt, you need to take into account a number of factors including:

  • Proportion of the floor area of your home that is set aside to produce income.
  • Period you use it for this purpose.
  • Whether you’re eligible for the “absence” or six-year rule
  • Whether it was first used to produce income after 20 August 1996.

Avoiding Capital Gains Tax with a Self-Managed Super Fund

The ability to borrow money to invest in property, in particular, by using the mechanism of a SMSF has resulted in the number of funds increase rapidly in recent years.

Close to 600,000 SMSFs are now in operation, according to the latest statistics released by the Australian Taxation Office (for December 2015).Avoiding-Capital-Gains-Tax-with-a-Self-Managed-Super-Fund

While people have generally always been able to buy property through SMSFs, what has changed in the past few years is that SMSFs can now borrow money to do so.

Buying a property through a SMSF should not be the sole reason that someone chooses to set up a SMSF but it can be an option for people who want more control over their super.

Similarly it’s important to not consider buying property with a SMSF solely as a way to avoid, or minimise, paying CGT.

It should work for your long-term investment strategy as well as meet a number of checks and balances for your financial future.

If you do choose to invest in property using a SMSF, the unique ownership structure provides a number of taxation benefits.

If you sell the property once you’ve retired, you’ll pay no capital gains on the property.

There’s also a 33 per cent discount available under the CGT discount method calculation.

Borrowing or gearing your super into property must be done under very strict borrowing conditions and can present investment risks.

Some of the property risks associated with geared real estate bought via a SMSF include:

  • Higher costs – SMSF property loans can be more costly than other property loans, which must be factored into your investment decision. Home Finances
  • Cash flow– Loan repayments must be made from your SMSF, which means your fund must always have sufficient liquidity or cash flow to meet the loan repayments.
  • Hard to cancel– If your SMSF property loan documentation and contract is not set up correctly unwinding the arrangement may not be allowed and you may be required to sell the property, potentially causing substantial losses to the SMSF.
  • Possible tax losses– Any tax losses from the property cannot be offset against your taxable income outside the fund.
  • No alterations to the property– Until the SMSF property loan is paid off alterations to a property cannot be made if they change the character of the property.

*The information provided in this article is general in nature and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information you should consider the appropriateness of the information with regard to your objectives, financial situation and needs.



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About

Andrew is a leading finance strategist who holds a Diploma of Financial Planning (Financial Services). With over 27 years of experience in finance, Andrew has been acknowledged by the mortgage industry with multiple awards.Visit www.intuitivefinance.com.au


'A Complete Guide to Capital Gains Tax' have 34 comments

  1. Avatar for Property Update

    September 19, 2018 @ 4:20 pm Jamie

    Hi
    If i bought 2 properties today for $500,000 each and i lived in 1 for 15 years whilst i rented the other out. If i then sell my PPOR for $1,000,000 and move into the previously rented property. Would i pay any CGT?
    Would the investment that i move into be subject to CGT later when we pass away for example and leave in in a will?

    Reply

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      September 19, 2018 @ 5:23 pm Michael Yardney

      Jamie – you wouldn’t pay CGT on selling your PPOR for $1million, and when you move in to the next property you won’t have to pay tax for the growth you have while it is your PPOR, but you’d have to pay tax on the growth in the first 15 years if you sell it. Your heirs won’t pay tax on the proeprty till they sell it.
      But here’s the thing…the tax laws will change a few times before then, so don’t invest or strategise for tax purposes

      Reply

  2. Avatar for Property Update

    September 3, 2018 @ 8:23 pm Tenzin

    I bought my place back in 2012 and it has been my primary residence, i want to buy another property with intention of selling my original property after i do renovations. Will i be exempt from CGT? Also i were to keep my old place and rent it out whilst living in the new property how long am i exempt from cgt?
    Thanks

    Reply

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      September 3, 2018 @ 9:07 pm Michael Yardney

      As I understand you will be exempt of CGT if you sell your home as described adn for up to a further 6 years unless you declare a different PPOR

      Reply

  3. Avatar for Property Update

    August 31, 2018 @ 3:08 am Ben

    I bought a house in 2011 and lived there for two years then relocated and rented out from 2013 since job changed. Now I just bought new house close to my work and having no intention to sell the previous one. Due to its close to six years since I rented it out, if I want to nominate new house as my PPOR today, can I do a valuation of old house without ceasing renting as base cost of CGT for future selling or the base cost would be market value when I first rented out regardless? Or I have to stop renting out to do the appraisal…….not clear at this point, any advise would be much appreciated.

    Reply

  4. Avatar for Property Update

    August 30, 2018 @ 1:53 pm Rohit

    Hi
    I have got several rental properties in New Zealand (purchased during 2004-2006) and after having migrated to Brisbane last year in November 2017, now I am confused as to whether I will be paying CGT here to the Australian Government when I sell as currently there is no CGT back in NZ.

    Reply

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      September 10, 2018 @ 7:29 am Rohit

      Would appreciate your help with this please

      Reply

      • Avatar for Property Update

        September 10, 2018 @ 3:44 pm Michael Yardney

        Rohit As an Australian citizen you’ll be now paying tax on all income you earn aropund the world, unless you pay it in the country where you earned it and we have a reciprocal agreement – Best to ask your accountant

        Reply

  5. Avatar for Property Update

    August 27, 2018 @ 2:03 pm Jamie

    Hi. I see in the article that the 6 year rule resets’. So i lived in my PPOR first then rented it out for 10 years. I am 4 years over the 6 year rule. If i live in it again e.g for a year or twi then rent it out again, will i get another 6 years where no capital gains applies?

    E.g if i were to aquire it in year 1 and live in it for a year. Then rent for 10 years. Then live in it for 2 years. Then rent for another 6 years would capital gains only apply to 4 years out of a total of 19? Or would only 6 yrs plus the years i lived in it be exempt?

    Reply

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      August 30, 2018 @ 4:46 pm Kenneth Raiss

      Hi Jamie
      In summary, yes you reset the 6 years each time you move back in but each period only counts to the days of residency and if you rent out for a period of more than 6 years the benefits are diluted given the calculation required to determine the capital gain and then the taxable capital gain. This area of the Main Residence Exemption can be complicated and other issues such as the actual date when the property was first used to generate income can greatly change the outcome as the gain is proportional and the cost base is determined by the market value when you move out. Happy to give more detail if you send specific details including dates and relevant market values.

      Reply

  6. Avatar for Property Update

    August 24, 2018 @ 12:22 am Benjamin Foster

    Hi Michael, I have a property that I purchased in 2012 for $515,000, current market value is $750,000. I lived in the property until 2014 before moving overseas. The property is now rented out. As an Australian citizen but current non-resident (I live now in Switzerland) what would be the rate of CGT I would need to calculate if I was to sell the property? What other things do I need to consider? Thanks

    Reply

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      August 24, 2018 @ 7:28 am Michael Yardney

      [signinlocker]If you had this as your Primary Place of residence and haven’t claimed another one since, it is possible their would be no CGT (6 year rule) – definitely worth speaking to your accountant

      Reply

  7. Avatar for Property Update

    August 23, 2018 @ 6:54 pm steve

    hi i recently sold an investment property that was purchased in march 1998 and sold sept 2017, I bought it for $94000 inc expenses and sold it for $340,000 and minus expenses collected $320,000. I am a little confused about the cgt .
    I have been trying the cgt calculators and getting figures ranging from $38000 to $50,000+ ,Is this the figure i will pay the tax office or is this a figure that is added to my taxable income .
    I have not received a wage in the past couple of years so does this effect the amount i will owe the ato.
    THANKS.

    Reply

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      August 23, 2018 @ 8:07 pm Michael Yardney

      Your capital gain gets a 50% discount and then this is added to your income – if you earned no income, then you pay no tax on the first $18,000 and then the applicable tax rate on the balance. Don’t waste your opportunity and get it wrong – see an accountant

      Reply

  8. Avatar for Property Update

    August 21, 2018 @ 4:44 pm Robyn

    Hi Michael,
    We purchased a rental property in 2014 with the intention to make it our primary residence when my husband retires from the defence force which will happen in the next 6months.
    We have decided to live closer to our children which means selling this to buy something closer. As this would be our first primary residence are we able to avoid capital gain under these circumstances?

    Reply

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      August 21, 2018 @ 7:01 pm Michael Yardney

      Sorry – this was never your primary place of residence so it can’t be excempt from CGT

      Reply

  9. Avatar for Property Update

    August 9, 2018 @ 7:02 pm Joyce Lazar

    We migrated to Australia on a Contributory Parent Visa in 2016. For the past 2 years we have been living with our son. We now want to buy our own place and move out. For this we plan to sell a property we own in India and with the sale proceeds purchase a unit for ourselves in Australia. Will I be liable to pay capital gains tax in Australia for the money I bring in? Especially since I do not own any prproperty in Australia and we will be residing in the unit we buy.

    Reply

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      August 10, 2018 @ 8:02 am Michael Yardney

      I’m not an accountant – but I believe CGT is for the sale of your assets here – not overseas

      Reply

  10. Avatar for Property Update

    July 24, 2018 @ 7:50 pm Aj

    Hi Michael
    I have just sold a property and make a good capital gain. this Rental property was on our personal names so My question is
    Can i use that Capital gain money to buy another property on different structure like trust, as only us two (Same owners) will be trustee
    cheers
    Aj

    Reply

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      July 24, 2018 @ 8:27 pm Michael Yardney

      This money is now yours and if you set up a trust you can lend or gift the funds to the trust. Get your accountant’s advice

      Reply

  11. Avatar for Property Update

    July 24, 2018 @ 1:16 pm Jozef Zygadlo

    My wife and I built our house in 2001 ($160K) and lived in it till 2017 (est $450K) when we moved overseas and rented the house out. Could you please advise me if CGT is applicable if I were to sell the property after July 2019 an estimate how much CGT would be payable. I’ve been reading conflicting reports. Thank you.

    Reply

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      July 24, 2018 @ 4:29 pm Michael Yardney

      Jozef – sorry – we can’t estimate your tax liabilities on line – that would be irresponsible, but if you have still claimed it as your PPOR as you have no other home in Australia it is possible their will be no CGT at all;

      Reply

  12. Avatar for Property Update

    July 23, 2018 @ 3:19 pm John

    Hi. I bought a house in 2011 and lived in it until 2013 where i then moved back in with my parents. In 2013 i made it a rental property. In 2015 I moved out of my parents house and purchased another house and made it my PPOR. In 2017 i sold the rental property.
    My understanding is that i calculate capital gains between 2015 and 2017.
    My question is can i still offset this gain by deducting conveyancing fees, stamp duty etc i paid when i purchased the property in 2011?
    Thanks

    Reply

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      July 25, 2018 @ 10:44 am Michael Yardney

      Hi John
      The capital gain or indeed capital loss is calculated by subtracting the net sales proceeds from the purchase price including all buying costs and any renovations etc (cost base). How much tax you pay on the gain is dependent on a variety of factors. If it is your main residence for tax purposes and passes all the tests then no tax. If the property was partly used as an investment then that part of the gain will be subject to tax. Do not forget to add back capital works depreciation to reduce the cost base.

      Ken Raiss
      Metropole Wealth Advisory

      Reply

  13. Avatar for Property Update

    July 22, 2018 @ 8:05 pm Annie Banbury

    I bought a house in 1998 and lived in it until 2008 when I rented it out. My understanding is that if I sell it now, I need to pay CGT from 2008. Between 1998 to 2008 I made some improvements to the house such as a loft conversion and a new kitchen. Can these improvement costs from before the rental period be taken into account when calculating the gain?

    Reply

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      July 23, 2018 @ 8:00 am Michael Yardney

      Annie – it is possible that you will pay less CGT than you think – if you haven’t nominated a different PPOR you could get 6 years reprieve on your tax – this is the time to see a proficient accountant and sort out your situation

      Reply

  14. Avatar for Property Update

    July 21, 2018 @ 3:20 pm Mary

    Hi. My parents purchased a holiday house prior to CGT, where myself, my two brothers my mum and dad were all on the title. Ie 5 names at 5 equal shares. In 2006 mum and dad gifted their 2 shares to the 3 kids. If we sell the house… do we only payCGT on the acquired shares in 2006? Or the entire value? Help!!:(

    Reply

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      July 21, 2018 @ 6:17 pm Michael Yardney

      Mary – please check with your accountant but you should not have to pay CGT on the portion you owned before CGT was introduced

      Reply

  15. Avatar for Property Update

    July 1, 2018 @ 7:50 pm Pam M

    In 2001 I purchased a house for $160K plus costs. I lived in this house as my PPOR until 2007, when I moved out and started renting it out. In 2007 the house and land had an estimated value of $350-$400K. I am now demolishing the house, land value is now approx $400K. I will subdivide the property into 2 and build 2 new houses. The building costs are approx $250K for each house plus demolition costs of $10,000. Once the houses are built, if I sell one, how do I calculate CGT? I understand a CGT event occurs when I sell, but how will the cost base be calculated? Would appreciate your general advice please.

    Reply

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      July 2, 2018 @ 12:12 pm Michael Yardney

      Pam – how much tax you pay and which tax you pay will depend on how you document your intentions – in other words were you always planning to sell part of the completed development. Invest in some smart tax advice – it will be worth it

      Reply

      • Avatar for Property Update

        July 12, 2018 @ 2:40 pm Lincoln

        What if Buy a place in 2011 april. Live in it and then rent it in 2012 August out till i sell it. I sell it says after august 2018 . what tax will i be up for. taking in the cost of selling and buying yada yadda?

        Reply

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          July 12, 2018 @ 4:36 pm Michael Yardney

          Lincoln – I’m not an accountant, but if you’ve documented things correctly and not claimed any other residence as your principal place of residence it is likely the 6 year rule would apply and you would not have to pay capital gains tax.

          Reply

  16. Avatar for Property Update

    June 20, 2018 @ 3:32 pm Christopher Hall

    If you purchase your first property and live in it for 6 months, but within that time you have got plans to demolish and subdivide, will you still be exempt from capital gains tax, if you sell the newly created lots?

    Reply

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      June 20, 2018 @ 4:04 pm Michael Yardney

      Chris – you have now created a new property – and clearly he intention wasn’t to keep the property as your primary place of residence.
      Selling a property within 12 months doesn’t even allow you to receive the 50% CGT exemption

      Reply


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