Understanding Capital Gains Tax (CGT)
Capital Gains Tax (CGT) is a tax imposed on the profit made from the sale of an asset, such as real estate, shares, or businesses. In Australia, CGT is a key consideration for property investors, homeowners, and business owners who sell assets at a profit. While CGT is not a separate tax, it forms part of your income tax and is included in your annual tax return.
CGT can significantly impact your financial outcome when selling property or investments, making it crucial to understand how it works and how to calculate it accurately. This guide will provide an in-depth look at CGT, including how to calculate it, exemptions, and strategies to minimize your liability.
What Assets Are Subject to Capital Gains Tax?
In Australia, most assets are subject to CGT unless specifically exempt. The common assets that attract CGT include:
- Real estate properties (except for your primary residence in most cases)
- Shares and investments
- Business assets
- Collectibles valued over $500
- Cryptocurrency (if used for investment purposes)
However, certain assets are exempt from CGT, including:
- Your main residence (with some exceptions)
- Personal use assets under $10,000
- Vehicles (cars, motorcycles, and similar transport)
- Depreciating assets used in business (e.g., machinery)
How to Calculate Capital Gains Tax
Step 1: Determine the Capital Gain or Loss
To calculate your CGT, you first need to determine your capital gain (or loss) when selling an asset.
Formula:
Capital Gain = Selling Price – Purchase Price – Eligible Expenses
- Selling Price: The amount you received from selling the asset.
- Purchase Price: The amount you originally paid for the asset.
- Eligible Expenses: Costs associated with buying and selling, such as legal fees, stamp duty, and agent commissions.
If the result is positive, you have a capital gain and must pay CGT. If it’s negative, you have a capital loss, which can be used to offset future capital gains.
Step 2: Apply the CGT Discount (if eligible)
The Australian Tax Office (ATO) offers a 50% CGT discount for individuals and trusts who have held the asset for more than 12 months before selling. This means only half of the gain is taxable.
Example Calculation:
- Purchase Price: $400,000
- Selling Price: $600,000
- Eligible Expenses: $20,000 (legal fees, agent fees, etc.)
- Capital Gain: ($600,000 – $400,000 – $20,000) = $180,000
- CGT Discount (50% for assets held >12 months): $180,000 x 50% = $90,000
- Taxable Gain: $90,000
Step 3: Include the Taxable Gain in Your Income Tax
Capital gains are added to your total taxable income for the financial year. The final tax payable depends on your income tax bracket.
Step 4: Apply Any Capital Losses
If you have incurred capital losses from other assets, you can offset them against capital gains, reducing the total taxable amount.
Special Rules for Property Transactions
Selling Your Main Residence
Your primary home is generally exempt from CGT under the main residence exemption, provided:
- You have lived in the property for the entire ownership period.
- The property was never used to produce rental income.
- The land size is less than 2 hectares.
If you rented out part of your home or used it for business, you may be liable for partial CGT.
Investment Properties
If you sell an investment property, CGT applies based on the profit after deducting expenses. Keep detailed records of:
- Purchase costs (stamp duty, legal fees)
- Ongoing expenses (repairs, maintenance)
- Selling costs (agent commission, marketing fees)
Inherited Properties
If you inherit property, CGT rules depend on:
- Whether the deceased acquired the property before or after 20 September 1985 (when CGT was introduced).
- Whether the property was the deceased’s main residence.
- The time elapsed before you sell the property.
Generally, if you sell an inherited property within two years, you may qualify for a full CGT exemption.
Strategies to Minimize Capital Gains Tax
1. Hold Assets for Over 12 Months
To qualify for the 50% CGT discount, keep investment properties or assets for at least one year before selling.
2. Offset Capital Gains with Capital Losses
If you have incurred capital losses in previous years, carry them forward and apply them to offset gains.
3. Use Superannuation Contributions
Consider making concessional superannuation contributions using the proceeds from the sale, reducing your taxable income.
4. Sell in a Low-Income Year
If you anticipate a lower income year, selling an asset then can reduce your total tax liability.
5. Main Residence Exemption Strategy
If you own multiple properties, strategically choosing your main residence can help reduce CGT exposure.
CGT and Non-Residents
Foreign residents selling Australian property are subject to CGT but are not eligible for the 50% discount. Additionally, sales above $750,000 require a Foreign Resident Capital Gains Withholding (FRCGW) of 12.5%.
Understanding Capital Gains Tax is crucial for Australian property owners and investors. Whether you are selling an investment property, shares, or inherited assets, knowing how to calculate CGT and apply legal exemptions can significantly impact your financial outcome.
At Nationwide Conveyancing, we specialize in guiding property buyers and sellers through smooth, hassle-free transactions. If you’re considering selling property and need expert advice on CGT implications, our experienced team is here to help.
For a free consultation, contact Nationwide Conveyancing today and let us assist you in making informed financial decisions when selling property.
General advice only.