When an asset is sold for a profit, capital gains tax (CGT) is applied. This asset can be in the form of property, shares or vacant land purchased after 21 September 1999, and CGT is calculated on the difference between the purchase and sale price.
Capital gains tax on property
Here’s a simple(ish) equation:
Capital gain = (sale price) – (original purchase cost + capital improvements + agent fees).
CGT is calculated on the capital gain amount at a rate based on your income, explained below.
Given that the time between the purchase, improvement and sale of a property can be years or even decades, it is important to have a quantity surveyor perform a depreciation schedule on purchase or on change of status. Keeping clear records on property improvements, renovations and repairs (the last not being claimable against CGT) over the time of ownership will also result in an easier calculation.
Capital gains tax exemptions
A place of primary residence is given an exemption from CGT, so no CGT is payable if you purchase then sell your primary home at a profit, as long as you have lived there for more than 12 months.
Let’s say you decide to upgrade your home and turn your present home into a rental property. As soon as your primary residence becomes a rental property, you have six years from the date of vacating the property to claim a CGT exemption.
If you sell that property after 6 years, the property value for CGT will be taken from the “home first used to produce income” ruling – meaning the value of the property on the day it was first rented. Because of this, it is important to have a valuation on the property performed when converting from residence to rental.
A primary residence which is vacated can continue to be claimed as the primary residence even when it has become a rental, as long as there is only one claim at a time and the owner is not living in a new purchase. This is particular helpful for doctors, who tend to move frequently for work purposes and are provided with, or rent, accommodation – as long as the primary residence has been lived in for 12 months initially.
Note also that a 50% reduction in CGT further applies to any asset attracting CGT, property or otherwise, that has been owned for more than 12 months.
What percentage is CGT?
Capital Gains Tax is calculated using your personal income. When selling a personal asset, the “profit” – or capital gain – from the sale is added to your personal taxable income and calculated at the appropriate tax rate.
As company tax is a flat 30%, CGT for company assets is 30% of the capital gain, or 15% if the asset has been held for longer than 12 months.
The simplest way to avoid CGT is to use the equity in your asset to refinance or borrow against its value, rather than selling it. If it is not sold, it will not create a capital gain, and hence will not attract CGT. This is especially important with property which is also subject to stamp duty, agent fees and transfer fees when sold.
Capital gains tax is a complex tax. Seeking expert advice and doing some background reading from reputable sources, such as the ATO links below, will help you be more prepared.