Capital Gains Tax

Whether you’re a homeowner or investor, capital gains tax can potentially have a big impact on your return. Knowing how it might affect you in advance can be a major advantage when you’re ready to sell.
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What is capital gains tax?

When you sell your property for more than you paid for it, you make what is called a capital gain. This means you may have to pay capital gains tax. If you sell a property for less than you paid for it, you make a capital loss and capital gains tax does not apply.

The tax on capital gains started on 20 September 1985, and there are different methods for calculating the capital gain on properties (and other assets) bought before and after that date.

Capital gains tax (also known as CGT) only applies to the difference between the sale and purchase price, not the total cost of the property. The gain is counted as part of your income for the financial year in which the sale occurred, which is classified as the date contracts are exchanged, not when settlement occurs.

Calculating capital gain

There are different ways to calculate a capital gain, depending on how long you have owned the property and when you bought it.

If you purchased the property less than 12 months ago, you simply subtract the purchase price from the sale price. If this figure is positive, capital gains tax applies to the gain.

If you’ve owned the property for more than 12 months, there are two ways to calculate capital gains tax:

  • Discount method. For properties bought after 21 September 1999, you simply subtract the purchase price from the sale price. If you have made unclaimed capital losses through other assets, subtract them too. If the final figure is positive, give yourself a 50% discount. CGT applies to the resulting figure.
  • Indexation method. This method is more complex and applies to properties bought before 21 September 1999. By using the consumer price index to increase the cost base of the asset, you reduce your capital gains for tax purposes.

Are there capital gains tax exemptions?

The good news is you may be eligible for a capital gains tax exemption if the property you sell is your main residence.

This may only be a partial exemption if:

• You have not lived in the property for the entire time you have owned it.
• You have used part or all of the property to generate an income, for example by leasing it or using it as business premises.

If you sell an investment property, on the other hand, any gain you make on that sale is eligible for capital gains tax. Investments may include vacant land, business premises, rental properties, holiday houses and hobby farms.

One way to avoid paying capital gains tax on your investment property is not to sell it. That way, you can keep earning a slow and steady rental income without ever having to pay a cent in capital gains.

If you do need to sell, you may be able to deduct your capital losses against any capital gains to reduce your taxable income, potentially avoiding capital gains or reducing the amount you have to pay. You can also carry losses over to balance out capital gains in future years.

The information given here applies to individuals – there are different rules for individuals, trusts, companies and superannuation bodies.

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