When capital assets are sold for a profit, Capital Gains Tax (CGT) must be paid. Assets such as real estate, shares, licenses, personal property and even cryptocurrency are characterised as capital assets. In regards to property, depending on how long you have owned the property and how much you have made off it will change the amount of CGT you will be required to pay. However, there are ways in which you can reduce the amount of potential tax payable.
CGT is only paid from the sale of assets that were purchased after 20 September 1985, as this is when CGT was introduced. When you lodge your annual income tax return, you will need to declare any capital gains or losses as these may impact your assessable income. Gains may increase your tax, while losses can be used to reduce a current capital gain and potentially pay less tax. Your main residence, car and belongings are generally exempt from CGT.
How Much CGT Do I Have To Pay?
In Australia, CGT is calculated by treating the net capital gains as taxable income in the year the asset was sold or disposed. If the asset was held for more than 12 months, the gain is first discounted by 50% for individual taxpayers, or by 33.3% for super funds. The gain is then added to your assessable income, and you will be taxed at the individual tax rate based on the amount you’ve earned from other sources. You can subtract any costs associated with buying and selling the asset.
How To Avoid Paying CGT In Australia
There are many ways to minimise the amount of CGT paid on property in Australia. Living in a property for at least 6 months from the date of purchase may exempt you from paying CGT. You must be able to prove that the property is your main residence. Examples include; utility services being connected or if the address matches your electoral role address.
The six year rule might also be applicable, which states that if the property was purchased to live in and you’ve had to move from the property for a job or a holiday, you might also be exempt from CGT if the property was leased to others during that time and you didn’t own another principle residence. The six-year rule can only be claimed if the property is nominated as your main residence. If you move back into the same property again, the six-year exemption resets.
Avoid CGT On The Sale Of Your Home
If you sell the home you live in, you’re normally exempt from paying CGT. If you’ve purchased an investment property, there is almost no way out of incurring the CGT. The purchase price can be added to other purchasing expenses. Depreciation can be claimed over years as well as capital costs.
Purchasing A New Family Home
As only main residences exclude CGT, a second home bought can be temporarily treated as a second main residence under Section 118-140 of the Income Tax Assessment Act 1997 (ITAA 1997), and will not necessarily be subjected to CGT. If a taxpayer purchases a new main residence before selling their existing home, both residences can be treated as the taxpayer’s CGT exempt main residence for a maximum period of up to 6 months.
Some conditions should be considered:
- The six month period needs to be immediately before selling the existing home, or
- The period of time between the purchase of the new home and the sale of the existing homes does not exceed 6 months.
If you purchased your new main residence with a settlement of less than 6 months on the sale of your original home, or settlement on the sale of your new home, then both homes can be treated as a CGT exempt main residence.
If there are 6 months between the settlement of the new main residence and settlement of the original main residence, both residences will incur a maximum of 6 months period immediately before settlement of the original home. If settlement exceeds 6 months, a partial CGT exemption will be applied to the original or new main residence for the excess of time. The partial exemption is on a pro-rata basis.
The existing home must also have been the taxpayers main residence for at least 12 months and the residence must not have been used to produce assessable income in the 12 month period if it wasn’t the taxpayers main residence in the 12 month period.
Get in touch with the team at MKS Group to find out more about ways to reduce your capital gains tax, 9374 8400.
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