When capital assets such as real estate, shares, licenses, personal property and even cryptocurrency, are sold for a profit, you’ll be obligated to pay Capital Gains Tax (CGT). With property, depending on how much you’ve made and how long you’ve owned the property, you might be subject to significant CGT charges. All is not lost, however. There are legal ways to reduce the amount of tax payable.
CGT is only paid when you receive a gain from the sale of assets you acquired after 20 September 1985. This was when CGT became active. When you lodge your annual income tax return, you’ll need to declare any capital gains or losses as these are assessable income. Gains may increase your tax, while losses can be used to reduce a current capital gain.
Pro Tax Tip: Your main residence, car and belongings are exempt from CGT.
How Much CGT Do You Have To Pay?
CGT is the difference between what you paid for an asset and how much you received when you sold it. You can subtract any costs associated with buying and selling the asset. CGT is the levy paid upon disposal of the asset. Mostly, it is associated with property.
In Australia, CGT is calculated by treating the net capital gains as taxable income in the year the asset was sold or disposed. If the asset was held for more than 12 months, the gain is first discounted by 50% for individual taxpayers, or by 33.3% for super funds. The gain is then added to your assessable income and you will be taxed at the individual tax rate based on the amount you’ve earned.
How Do You Calculate CGT?
For every CGT event triggered, the net capital gain or loss will need to be worked out. There are three methods for calculating capital gain, and only one to calculate a capital loss.
Pro Tax Tip: Individuals and small businesses (excluding companies) can generally discount a capital gain by 50% if they hold the asset for more than one year.
The Net capital gain is calculated by subtracting costs, such as:
- Transfer costs
- Stamp duty
- Unclaimed borrowing expenses
- Mortgage discharge fee
- Advertising costs
- Termination fees
- Professional services
- Legal fees associated with purchase and sale
CGT discount method (not available for companies)
For assets held for 12 months or more, subtract the cost base from the capital proceeds, deduct the capital losses and reduce the relevant discount percentage. This allows you to reduce the capital gain by 50% for Australian residents and 33.33% for complying super funds and eligible life insurance companies.
Using this method, the relevant indexation factor is applied, then subtracted from the indexed cost base from the capital proceeds. This method can be used for assets acquired before 21 September 1999.
Using this method, the cost base is subtracted from the capital proceeds. Assets are eligible if they are held for less than 12 months before the relevant CGT event.
Pro Tax Tip: Owning your property short or long term will determine which method is used. An ITP Accounting Professional can work out which method will give you the best result – i.e. the smallest capital gain.
How To Avoid Paying CGT In Australia
There are several ways to minimise CGT paid on property in Australia. Living in a property for at least 6 months from the date of purchase may exempt you from paying CGT. You must be able to prove that the property is your main residence.
You can prove that a property is your main residence if you and your family live in the property, your personal belongings are in it, the address matches your electoral role address, and utility services are connected.
The six-year rule might also be applicable, which states that if the property was purchased to live in and you’ve had to move from the property for a job or a holiday, you might also be exempt from CGT if the property was leased to others during that time and you didn’t own another principle residence.
Pro Tax Tip: The six-year rule can only be claimed if the property is nominated as your main residence. If you move back into the same property again, the six-year exemption resets.
Avoid CGT On The Sale Of Your Home
If you sell the home you live in, you’re normally exempt from paying CGT. If you’ve bought an investment property, there is almost no way out of incurring CGT. The purchase price can be added to other purchasing expenses. Depreciation can be claimed over years as well as capital costs.
Purchasing A New Family Home
As only main residences exclude CGT, a second home bought can be temporarily treated as a second main residence under Section 118-140 of the Income Tax Assessment Act 1997 (ITAA 1997), and will not necessarily be treated to CGT. If a taxpayer purchases a new main residence before selling their existing home, both residences can be treated as the taxpayers CGT exempt main residence for a maximum period of up to 6 months.
Several conditions should be adhered to:
- The six month period needs to be immediately before selling the existing home, or
- The period of time between the purchase of the new home and the sale of the existing homes does not exceed 6 months.
If you purchased your new main residence with a settlement of less than 6 months on the sale of your original home, or settlement on the sale of your new home, then both homes can be treated as a CGT exempt main residence.
If there are 6 months between settlement of the new main residence and settlement of the original main residence, both residences will incur a maximum of 6 months period immediately before settlement of the original home. If settlement exceeds 6 months, a partial CGT exemption will be applied to the original or new main residence for the excess of time. The partial exemption is on a pro rata basis. A full exemption is based on the maximum of 6 months based on contract of sale and settlement.
The existing home must also have been the taxpayers main residence for at least 12 months and the residence must not have been used to produce assessable income in the 12 month period if it wasn’t the taxpayers main residence in the 12 month period.
This concession is also valid on the purchase of vacant land or land with a partly constructed residence as the taxpayers main residence.
Pro Tax Tip: If the residence has been used to produce an income, a portion of the capital gain may be taxable.
Invest In Superannuation
While self managed super funds attract a 33% discount for CGT, the standard tax rate for funds is set at 15%, making the CGT rate 10 percent. This is lower than most marginal tax rates. If a full retirement pension is set up using a SMSF, the applicable rate drops to zero.
It’s best to seek advice in order to achieve the best outcome of your specific situation. ITP Accounting Professionals have helped Australian individuals and businesses in all matters of taxation for 50 years. Phone 1800 367 487 and chat with a friendly professional today.