Capital gains tax can be a complex thing to wrap your head around, especially when you’re first introduced to it. Like most tax and accounting related topics, it is a matter of unpacking and making sense of everything slowly and surely. This is our guide to what capital gains is and how it applies, as well as how it will impact on your property transactions.
What is capital gains tax?
The capital gains tax is a government levied tax on the profit made from selling particular types of assets, including property. In very simple terms, a capital gain is calculated through determining the total sale price minus the original cost of the asset, less any selling costs.
When does it apply?
Capital gains tax applies in the financial year a capital asset is sold. The date of the contract is deemed to be the transaction date for capital gains, not the settlement date, so be conscious of this depending on which tax year you want the gain (or loss) to be attributable. This can be particularly important when transactions are being completed around the June or July timeframe, ie. close to the 30 June financial year end.
How much is it?
Unlike some tax jurisdictions, in Australia there is no set rate applied to capital gains tax, but rather an individual’s marginal tax rate applied. Capital gains are calculated as the difference between sale price, less associated selling expenses, agent commission, solicitor fees, building inspections and so forth, less the original purchase price. If you are an investor and have been claiming building allowances and depreciation on the fixtures and fittings of the investment property, the amounts claimed also need to be deducted from the original cost (or cost base) of the property when calculating the taxable capital gain.
A 50% discount on capital gains tax is then applied if the asset is held for more than 12 months, although a new proposal by Labour could see this reduced to 25%. The discounted gain is included in the individual’s tax return as assessable income, along with their employment income and any other income, with normal marginal rates of tax then applied.
Are there any exceptions?
The main exception is in relation to property, which is the principal place of residence exemption. This means the sale of your family home is capital gains tax-free.
If your home is built on land over two hectares, not all of the gain will be exempt. Providing a property to a member of your family will, in most cases, not exempt you from capital gains tax. Exceptions to this would be circumstances, such as a via a will, or family trauma. A property which has been ‘gifted’ will be declared to be the market value at the time of the transfer of the property. We recommend you always seek tax advice from a certified accountant if you face any of these more special cases.
Can capital gains tax be minimised?
Yes, your capital gains tax can be minimised over time, specifically if you hold the property for more than 12 months where you get access to the 50% CGT discount. You will need to ensure you maintain all records of every cost in relation to the purchase of your property, and sale of your property. You will also need to provide records for any improvements to the property while it’s yours that you may be claiming depreciation on.
How can iBuildNew help?
For more information regarding investment opportunities, be sure to speak to one of our home building experts on 1800 184 284 or book a call online.