Contributor Ridhwan Hannan, Senior Accountant from OnePath Accountants
CAPITAL GAINS TAX IN PROPERTY
Don’t know enough about Capital Gains Tax in property? Don’t worry, many people don’t.
WHAT IS IT?
Capital Gains Tax (CGT) is a tax that is applicable to anyone who has made a gain after buying and selling any investable asset.
Whether it be a property or shares, if you have made a capital gain that exceeds the purchase price and holding and transactional costs, then you will be liable to pay CGT.
HOW IS IT CALCULATED?
CGT is generally calculated as part of the investor’s marginal rate of tax. For example, if an investor earned $100,000 taxable income from work, as well as $100,000 from property, any net gains will be taxed as part of their ordinary income rates.
CAN IT BE OFFSET?
CGT can only be offset by capital losses. It is possible to have a reduced overall taxable component on the gain due to investing losses. The gain itself, however, cannot be offset by anything other than capital losses.
CAN IT BE REDUCED?
If you have held an asset for more than 12 months before selling, you should generally be entitled to a 50% reduction on the amount you are taxed.
In other words, if you made $100,000 in capital gains, you would only be taxed on $50,000.
HOW DOES SHARE OF OWNERSHIP AFFECT CAPITAL GAINS TAX?
CGT is generally divided in line with the ownership structure. If two people own an asset with a 50/50 structure, the capital gains will be split accordingly.
If purchasing with another party, it is important to understand how the ownership structure may implicate each purchaser’s tax rate upon sale.
WHAT TYPE OF CAPITAL GAINS TAX IS IT?
If capital gains are made from a business activity or an investing activity, there may be different implications involved. CGT may be recorded and/or offset in different ways depending on the type of capital gains. Small business offsets are available for transactions which are not only passive assets.
CAPITAL VERSUS TRADING GAINS
If you are a share-holder or a developer, you may be making trading gains rather than capital gains. These have different implications to those of capital gains.
WHAT PROPERTIES DOES IT APPLY TO?
Brand new properties, or those less than five years old, may be subject to GST as well as CGT. If you are doing a buy and build project, you will need to factor these costs in from the outset.
WHAT ABOUT BUY AND HOLD INVESTORS?
Not unless they sell. However, it is always important to have an understanding of future tax implications. During the consolidation phase of a portfolio, an investor may sell existing properties or complete a project build. In both cases, the sales would have different taxation costs attached that should be factored in.
CAN YOU AVOID PAYING CAPITAL GAINS TAX?
You can’t hide away from CGT. The most important thing to do is to be aware of how it will implicate your finances. Make sure you have an understanding of how it works so you can avoid any nasty surprises.
WHEN IS IT PAYABLE?
After selling, CGT is included in the next taxation filing obligation. If using a tax agent to file your tax return, you may not be liable to pay the amount until up to Feb or May in the following year.
This may give you a bit of time up your sleeve.
So, if you sold in October 2017, you wouldn’t have to pay the CGT until May 2019.
IS IT EVER NON-APPLICABLE?
You may not have to pay CGT on a principle place of residence (PPOR) that you have sold within six years of leaving.
The Temporary Absence Rule (TAR) states that if you leave your PPOR and rent it out for up to six years before selling, you won’t have to pay CGT. You can only have one PPOR during that time.
If you are living in the property at the time of sale, you may not be liable to pay CGT. However ask your accountant if you will be liable
If you have an existing carried forward loss that is equal to the year’s capital gain, you can offset part or whole of the gain incurred
FINAL WORDS ON CAPITAL GAINS TAX
CGT is a fact of life as an investor. If you have held the asset for more than 12 months or are doing a buy and build – understand your obligations. A lot of people don’t realise what can be added back.
If you are claiming depreciation, for example, this gets added back to the cost base of the property. This means you may pay more in CGT.
Make sure your accountant provides an accurate indication of CGT after claimable costs such as depreciation and stamp duty are factored in.