Where there's profit, there's capital gains tax. It's an area of taxation that's important to understand, especially if you're hoping to minimise its cost. Here we answer your questions about this commonly misunderstood tax.
As the name suggests, capital gains tax (CGT) is the tax that is payable when you make a profit on a capital asset such as shares or investment property. Provided your investment property increases in value above the purchase price, you'll be up for CGT when you sell. But don't expect it to be charged as a separate tax. Instead, it will be added to your assessable income which in turn increases your income tax.
2. How is capital gains tax calculated?
Depending on how long you have held your property and when you bought it, there are three methods of calculating CGT. Simply put, these calculations are based on subtracting the expenses of the property – the cost base – from your property's sale price. The cost base includes the initial cost of buying the property as well as the expenses of selling, such as stamp duty and legal fees. This figure is then adjusted depending on the calculation method used
3. How can capital gains be avoided?
If you sell or dispose of your property in less than 12 months, you'll pay the full capital gain. But if you hold onto it for at least a year before selling, you may be eligible for a significant discount off the CGT liability – 50% for individual Australian taxpayers and 33.3% for superannuation funds. There are some capital gains exemptions, such as if the property is your principal place or it was acquired before CGT tax was introduced in 1985. Check out exclusions on the ATO website which can include your car and your main residence.
4. When do you pay capital gains? Capital gains and losses must be reported in your income tax. This way, any capital gain you make is added to your assessable income in whatever year the property is sold – as per the date of the contract, not the settlement.
5. Are capital gains paid on an inherited property?
If you inherit a property, in most cases you won't need to pay CGT. However, don't assume the same applies when you sell. Although there are special rules for deceased estates and inheritances, you will need to check your eligibility with the ATO. Speak to your tax agent for specific CGT advice and contact us to find out more about the best ways to finance the buying and selling of investment properties.