Capital Gains Tax Explained
Capital Gains Tax or CGT is a tax that most investors will be familiar with, but few think about until they’re ready to sell. The most savvy property moguls know how to work within the law to get the best profit results for their portfolio.
Ensure you speak to your accountant about any issues ahead of time and seek their advice prior to selling. Sometimes the difference of days, particularly close to the end of a financial year, can be significant.
What is CGT?
Introduced in 1985, CGT is payable based on the profits from when you sell an asset. That is, if you’ve made money from an investment property, you will be charged tax on that profit. The tax charged is at the rate of your income – so your earnings in each individual financial year and the tax bracket you fall into is significant.
Capital gains tax is not usually incurred on a family home, if you have always used the property for that purpose. For most investors, it’s the cost of doing business in the property market.
When do I have to pay it?
If you have used your home, or primary residence, as an investment property before then you may be due to pay capital gains tax when you sell. This is usually worked out by your accountant based on the proportion of your property rented out and the period of time when it was an income-generating asset. For instance, homes where a granny flat has been added and rented out for profit or where a room has been rented out, will likely need to pay some capital gains tax. If it was only for a short period of time, this amount may be negligible. However, diligent records are required to ensure you don’t pay too much.
If you sell an investment property for a profit, you will also usually have to pay CGT. This includes vacant land, holiday homes, hobby farms and business premises.
Can I get a discount?
Usually, if you have owned an investment property for more than a year, the ATO discounts the CGT payable by 50 per cent for individuals. If you hold your properties in a different vehicle, such as a self-managed super fund, a different rate of discount may be applicable.
You can also offset the gains. A “capital gain” can only be offset by a “capital loss”. If you sell a property that has decreased in value in the same financial year as you sell a property that has increased in value, then you can use the loss to offset the gain and pay less tax. In some rare situations you may be able to defer or roll over your capital gains until another “CGT event” happens.
If you acquired an asset before 1985 then you may be able to avoid CGT.
When does the CGT count from?
When you enter into a contract is the date that is crucial when timing CGT – this is especially important if you are selling close to the “one year” mark. It is not when a property settles, but the date on the contract, to be aware of.
If your property settles after you’ve lodged your tax return for the same financial year, you will be required to request an amendment. A reasonably time frame accepted by the ATO to do this within is one month.
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Readers are advised to contact their financial adviser, broker or accountant before making any investment decisions and should not rely on this article as a substitute for professional advice. All information is current as at publication release and the publishers take no responsibility for any factors that may change thereafter.