What is Capital Gains Tax?
Capital gains tax (CGT) is a tax levied on the profits you make when you dispose of an asset, such as property.
How do I know if it applies to me?
It only applies to assets that were purchased on or after 20 September 1985.
How is it calculated?
CGT is calculated by subtracting the cost involved in acquiring and holding an asset from the proceeds of the sale of the asset. Any gain made on the sale of a CGT asset is included in your assessable income in the financial year that you sell the asset.
(See chart below)
Where a contract is involved, such as property, CGT is assessed from the date of the contract, not the settlement. For a sale with no contract, CGT is assessed after you stop being the asset’s owner.
Selling a home:
Your main residence (your home) is generally exempt from CGT unless you’ve used it to earn rent or run a business, or it’s on more than two hectares of land. Therefore it’s important to keep records of your real estate, including your own home (in case in the future you start renting it out or running a home business).
How much CGT will I have to pay?
If you’re selling an investment property, the CGT calculation is based on the sale price of a property minus your expenses. These expenses are called your cost base. The cost base is the total sum of the original purchase price, plus any incidentals, ownership and title costs minus any government grants and depreciable items.
- Incidental costs– stamp duty, legal fees, agent fees, and advertising and marketing fees.
- Ownership costs– rates, land tax, maintenance and interest on your home loan. Note that you can only add rates, land tax, insurance and interest on borrowed money to your cost base if you acquired the property after 20 August 1991, or didn’t use the property to produce an assessable income e.g vacant land or main residences.
- Improvement costs– replacing kitchens, bathrooms or any other improvements you’ve made on the property.
- Title costs– legal fees associated with organising and defending your title on the property.
- Incidental costs– stamp duty, legal fees, agent fees, and advertising and marketing fees.
Once you’ve worked out the capital gain, the figure is then adjusted according to a number of variables, including:
- Any percentage of time when you owned the property that it was rented out and not your main place of residence.
- If you’ve held the property for longer than 12 months you are eligible to receive a 50% discount.
There are three methods of calculating capital gains tax:
Once these factors are worked out you’ll be left with the amount of capital gains that will be included in your taxable income and taxed at your marginal rate. There are ways to avoid capital gains tax though, whether fully or partially.
Full CGT exemptions may be granted if:
- property is purchased prior to 20 September 1985.
- property is your main place of residence, where land is less than 2 hectares and it has not been rented out or used as a place of business.
- you move out of your home and rent it out, under the law, the property is still treated as your principal residence for a period of up to six years this is known as the ‘temporary absence rule’ .
- you purchase the property through Self-managed superannuation funds (SMSF).
Partial CGT exemptions may be granted if:
- you decide to live in a property you purchased as an investment – the CGT you’ll owe will be worked out by comparing the number of days. you lived in the property to the number of days you rented the property.
- your main residence is being used to generate income; the CGT exemption is reduced accordingly.
- you hold an investment property for more than 12 months; you’re entitled to a 50% discount on the amount of CGT payable. The discount is 33.3% for super funds.
- you invest in qualifying affordable housing from 1 January 2018, and hold for 3 years, will receive an additional 10% discount in CGT.
Partnership Property is a boutique Brisbane Real Estate/Investment Property agency. We are happy to work with local, interstate, or overseas buyers, and we guarantee you will receive sound, honest, independent advice and information on the Brisbane property market. A large part of our clientele comprises our repeat investors, who readily entrust us with the privilege of managing successive property purchases.