When you sell capital assets such as real estate, shares, licenses, personal property and even cryptocurrency for a profit, you incur Capital Gains Tax (CGT). Zooming in on property sales, depending on how much you’ve made and how long you owned the property, you might be subject to significant CGT charges.
Thankfully, all is not lost. There are some perfectly legal strategies you can use to reduce the amount of tax you’ll have to pay.
The first thing to understand is that CGT only applies to gains made from the sale of assets 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 liability, while losses can reduce any other capital gains you’ve made that financial year.
Pro Tax Tip: Your main residence, car, and belongings are exempt from CGT.
Capital Gains Tax in Australian
Capital Gains Tax (CGT) is applied to the profit made when you sell your property. You’ll need to report this profit – or capital gain – in your income tax return. To reduce the tax payable, you can subtract any costs associated with buying and selling the asset.
In Australia, CGT is calculated by treating the net capital gains as taxable income in the year the asset was sold. If you held the asset 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 Is Capital Gains Tax Calculated?
For every CGT event triggered, the net capital gain or loss will need to be worked out. There are three methods for calculating capital gains 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. For more details on precisely what triggers a CGT event, visit our broader guide to Capital Gains Tax events.
To calculate your net capital gain, you’ll first need to subtract 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
The CGT Discount Method (Not Available For Companies)
If you’re an Australian resident for tax purposes and you’ve held your property for 12 months or more, you may be eligible to use this method. The CGT discount method involves subtracting the cost base from the capital proceeds, deducting the capital losses, and then applying the relevant discount percentage.
As an individual Australian resident, this reduces your capital gain by 50%. For eligible super funds and life insurance companies, this step reduces it by 33.33%.
The CGT Indexation Method
To use this method, you apply the relevant indexation factor and then subtract the indexed cost base from the capital proceeds. You can only apply the indexation method for assets acquired before 21 September 1999.
Pro tax tip: If you’re eligible for the indexation method, you’re likely also eligible for the CGT discount method. So your best bet is to calculate both and see which one gives you the best result. If you’re feeling a bit overwhelmed by all the calculations, ITP’s certified accountants can help. Find your nearest branch today, and set up an appointment to ensure you get this vital tax step right.
The “Other” Method
If you’re selling a property you’ve owned for less than 12 months, the ATO recommends a calculation strategy they simply call the “other” method. This involves subtracting the cost base from the capital proceeds.
Pro Tax Tip: Owning your property short or long-term will determine which method is used. An ITP Accounting Professional can determine which method will give you the best result – i.e. the smallest capital gain.
How To Avoid Paying CGT In Australia
There are several other strategies you can to minimise CGT paid on property in Australia. Living in a property for at least six months from the date of purchase may exempt you from paying CGT. However, 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 there
- Your personal belongings are there
- The address matches your electoral role address
- Utility services are connected
The six-year rule might also help you out. Also known as Temporary Absence, this rule states that if you purchased a property to live in but you had to move from the property for a job or a holiday, you may be exempt from CGT. This applies indefinitely if you don’t rent out the property. Even if you lease the property to others during that time, you can claim the six-year rule so long as you:
- Don’t own another principal residence
- Don’t rent it out for longer than six years
Pro Tax Tip: You can only claim the six-year rule if the property was once your main residence. If you move back into the same property again, the six-year exemption period resets.
CHAT WITH AN ITP PROFESSIONAL ABOUT YOUR PROPERTIES
Can You Avoid CGT When Selling An Investment Property?
If you sell your home, you’re normally exempt from paying CGT. If you’ve bought an investment property, however, there is almost no way out of incurring CGT. The cost of buying the property can be added to other costs related to the purchase. You can also claim a reduction in the value of the property over time, known as depreciation, as well as costs related to improvements you’ve made to the property.
Purchasing A New Family Home
As only main residences escape CGT, a second home can be temporarily treated as a second main residence under Section 118-140 of the Income Tax Assessment Act 1997 (ITAA 1997). This can help you avoid CGT. If a taxpayer purchases a new main residence before selling their existing home, both residences can be treated as the taxpayer’s CGT-exempt main residence for a maximum period of up to six months.
Just note that you’ll need to meet some conditions:
- 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 home should not exceed six months.
If you buy a new home and sell your old one within six months, both can be considered your main home for tax purposes, so you won’t have to pay Capital Gains Tax (CGT).
If there’s a gap of six months between selling your old home and buying the new one, you get a six-month grace period where both homes are considered your main residence. However, if it takes longer than six months, you might have to pay some CGT. The amount depends on how much longer than six months it takes.
Note that your old home must have been your main home for at least a year, and you shouldn’t have rented it out or used it for business during that time.
This rule also applies if you buy a vacant lot or a partially built house to make it your main home.
Pro Tax Tip: A portion of the capital gain may be taxable if you’ve used the property to produce an income. This can get tricky to calculate, so once again, we recommend contacting one of ITP’s qualified accountants for help.
Investing In Superannuation
You can also reduce CGT by contributing to your superannuation. The ATO taxes these contributions at a lower rate. They can also reduce your taxable income, which lowers your tax rate. This can be especially helpful if you make a profit from selling an asset and contribute to your super in the same financial year.
Safely And Legally Avoiding Capital Gains Tax
As you can see, there are plenty of strategies you can use to reduce CGT or avoid it altogether. However, this is a complex area of tax law. For this reason, it’s best to seek professional advice from a qualified tax accountant. ITP’s Accounting Professionals are CGT experts and have helped many Australian individuals and businesses reduce their tax liabilities. So, if you want to achieve the best outcome for your specific situation, phone 1800 367 487 and chat with a friendly professional today.