Capital gains tax can be confusing. However, once explained you’ll be able to distinguish if you’re eligible for an exemption or can reduce the capital gains payable. A ‘capital gain’ occurs when you sell something for more than you spent to acquire it. This occurs often with investments and personal property.
How is capital gains calculated?
The cost of capital gains varies from asset to asset and has no set rate. Calculating this tax is found by subtracting the buying price from the sale figure, less any ownership costs. The final figure is the gain that you’ve made. Let’s look at an example.
You buy a 3-bedroom investment property in Sydney in 1990 for $194,000. In 2017, you sell this property for $770,000. Your purchasing cost in 1990 was $2,500, ownership costs were $168,820, and the sale costs $30,500. Therefore, the difference between the purchase and sale price, fewer costs is $374,180.
|Total Ownership Costs||$201,820|
|Capital Gain (Net Gain – Ownership Costs)||$374,180|
So, under new capital gains tax laws the tax payable is the marginal tax rate x half the capital gain. Of course, this tax only applies to property owned for more than 12-months. Thus, as per our earlier example, the capital gains payable on the property sold for $770,000 is $89,389.
However, under the old capital gains regime, the indexed figure for taxing is $313,408, which is less than $374,180. Although, this calculation for capital gains tax uses the equation marginal tax rate x indexation factor x capital gain. Therefore, the tax payable would be $150,653, which is considerably higher than the new regime.
What are ownership costs?
Ownership costs include any payment made for the property over the term of possession. Consequently, this includes garden and property maintenance, land rates, emergency service fees, accountant costs, and refurbishment costs. Basically, any money spent on the property is claimable if records kept can substantiate these claims.
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Are there any exceptions to capital gains tax?
In some instances, you can be exempt from Capital Gains Tax (CGT) or have the tax reduced.
Time of purchase
If you have purchased your property before 1985 then you will be exempt from CGT.
Place of residence
One main exemption to capital gains tax is a place of residence. Hence, if you live in the property and have services connected in your name, then it’s considered a family home. These properties are then capital gains exempt. The ATO doesn’t give an exact description of what constitutes a main residence, but gives the following points as a guide:
- You and your family live in the dwelling
- Your mail is delivered there
- You have personal items at the dwelling
- You have registered to vote at that property’s address
- You have a connected phone, gas and electricity at that address.
However, not all homes on land over two hectares are entirely capital gains exempt. Some of the property will attract capital gains if it’s generating an income as a primary producer.
Furthermore, gifting the property to a family member doesn’t make the property capital gains tax exempt either. The sale price of a gifted property is the market value of the property at the time of title transfer. Even though, a property left to someone in a will or dissolution of marriage is capital gains exempt.
Over the lifetime of ownership, costs can add up. Keeping your receipts for improvements made while you’ve owned the property can reduce your capital gains tax. For example, council rates in many Australian suburbs are around $500 or more a quarter for a home. So, in a year you may spend $2,000 on rates alone. Subsequently, owning the investment for 20-years and averaging $2,000 annually on rates, entitles you to deduct $40,000 from capital gains.
Discuss your options
Another way to reduce your capital gains tax is to discuss your options with your accountant before you sell. Hence, the timing of your sale can often save you a great deal. Mainly because you can maximise your deductions within the same financial year, which is similar to superannuation contributions.