How much Capital Gains Tax I have to pay as a seller In Australia
What is Capital Gains tax:
Capital gains tax is the tax which is paid on the profits that arise from disposing of the assets like property, shares & units, investments, crypto assets etc. Capital gains tax is not a separate tax, it is a part of Income Tax therefore the rate of tax is same as person’s individual income tax rate tax. This CGT will be paid at the time of filing income tax return and not at the time when the asset is sold. If someone has a capital gain, it will increase the tax that is to be paid on the other hand if someone has a capital loss then such loss can be offset against any capital gains either in the same year as they occur or in the future years which will then reduce the tax amount needed to be paid. Make sure you include the losses in your tax return.
Let’s take an example to understand this in numbers.
John acquired a house for $200,000.00, In a couple of years, he decides to sell his house and comes to know that the property’s value has risen considerably to $1,200,000.00. John eventually sells the property and makes a profit of $1,000,000.00. John will pay tax on this $1,000,000.00.
(Selling price $1,200,000.00, less cost price $200,000.00 = Profit of $1,000,000.00. Tax on $1,000,000.00).
Ideally, when the owner sells the asset and makes a profit from that sale, they make a common mistake of ‘spending’ without realising that they must pay tax on the profit they made. The owner should estimate the tax amount and must keep aside such an estimated amount. As I said, it’s easy to forget and much easier to spend.
What Is Capital Gains Tax (CGT) Event:
To put in simple terms when you dispose of an asset which is subject to Capital Gains Tax (CGT), a CGT event is created. Whenever you buy or sell any investment such as cryptocurrency, shares, investment properties etc you either make a capital gain or loss. Any income that is generated or loss made from such sale and purchase process triggers a CGT event. Common disposals that create CGT event include,
- Selling an asset,
- Trading, exchanging or swapping assets,
- Loss or destruction of an asset.
Capital Gain or Loss will me made in the year in which you entered the contract of sale and not in the income year i.e., the year settlement took place.
What Assets Attract and Are Exempt from Capital Gains Tax:
To start with, not every kind of an asset is subject to Capital Gains Tax.
Capital Gains Tax was introduced in Australia in 1985. Thus, any asset that has been acquired before 20 September 1985 is exempt from Capital Gains Tax.
1. Real Estate:
Most of the property is subject to CGT, including.
- Most of the property is subject to CGT, including,
- business premises,
- rental properties,
- holiday houses,
- hobby farms etc.
Primary place of residence or your home:
Your main residence is exempt from Capital gains Tax. However, Capital Gains Tax will apply if,
- A part of the house is rented out,
- The house is used for business activities,
- It is more than 2 hectares of land,
- The homeowner is a foreign resident and does not satisfy the requirement of the ‘life events test’ at the time when the ‘CGT event’ happens. In a nutshell, a foreign resident is not entitled to the primary place of residence or the main residence exemption from capital gains tax for property sold after 30 June 2020 unless such an owner satisfies the life events test.
What is a life events test: When such a homeowner disposes their residential property, they need to satisfy life events test requirements where both of the following are true:
- Homeowner were a foreign resident for tax purposes for a continuous period of 6 years or less.
- During that period one of the following occurred
Owner, owner’s spouse, or owner’s child under 18 had a terminal medical condition- Owner’s spouse or owner’s child under 18 died.
- The CGT event happened because of a formal agreement following the breakdown of owner’s marriage or relationship.
If the homeowner is able to satisfy both of the above criteria and meets the general requirements for the exemption, he/she can.
- Claim the main residence exemption.
- Use the exemption as the reason to vary the capital gains withholding that would otherwise apply to the property.
2. Granny Flat Arrangements:
In order for a granny flat to be exempt from CGT, such granny flat arrangement must:
- Be in writing,
- Parties to the arrangement need to indicate their intentions that they are legally bound by such an arrangement,
- Such an arrangement must not be commercial in nature.
It should include:
- The parties involved in the arrangement, including the individuals with an ownership interest in the property,
- Those circumstances which can vary or terminate the arrangement,
- What will happen when the arrangement is varied or terminated.
A granny flat arrangement can be entered into with any party, including family or friends.
3. Cars and Motorcycles:
Car or motorcycle is exempt from CGT. What is a car? Car is a motor vehicle that carries a load of less than 1 tonne and fewer than 9 passengers.
4. Shares and Units:
Shares, units and similar investments attract CGT when a ‘CGT event’ happens. This includes selling or receiving a distribution other than a dividend from a managed fund.
https://www.ato.gov.au/individuals/capital-gains-tax/shares-and-similar-investments/
5. Crypto Assets:
Disposing of crypto assets might have CGT implications. In simple terms, if a crypto is a personal use asset, then capital gains or losses from its disposal may be exempt from CGT. Crypto is regarded as personal use asset if it is used to purchase items mainly for personal use or consumption.
https://www.ato.gov.au/individuals/investments-and-assets/crypto-asset-investments/
6. Personal Use Assets:
Personal use assets will be subject to CGT if it costs more than $10,000 to acquire such an asset. What are personal use CGT assets? Personal use assets are CGT assets that one keeps for his/her enjoyment or personal use including:
- Boats,
- Furniture,
- Electrical goods,
- Household items,
- An option or right to acquire a personal use asset,
- A debt resulting from making a private loan to a family member or friend.
Selling such personal use assets individually where they are usually sold as a set, owner will get an exemption if the set was acquired for $10,000 or less.
7. Collectables:
Collectables include:
- Artwork,
- Jewellery,
- Antiques,
- Coins or medallions,
- Rare folios, manuscripts or books,
- Postage stamps or first day covers.
Collectables are subject to CGT unless:
- They were acquired for less than $500 or less,
- A share in the collectable was acquired for $500 or less before 16 December 1995,
- A share in the collectable was acquired when the collectable had a market value of $500 or less.
8. Intangible Assets:
An intangible asset is an asset which is not physical in nature and have no shape or form. They include:
- Leases,
- Goodwill,
- Licenses,
- Contractual rights.
A good look at the CGT event is advised as in this case several CGT events, other than disposal, can happen to these assets. Like, granting a lease is a CGT event.
9. Foreign Currency:
If any capital gain or loss is made from fluctuations in foreign currency exchange rate which arises from buying or selling of foreign currency, the foreign currency in that case is subject to CGT.
This will also apply in those circumstances where the foreign currency is held as cash and the capital gains tax assets are denominated in a foreign currency such as, overseas rental property. For example, if ‘’ John enters a contract to sell his overseas rental property, obviously, denominated in foreign currency, John has the right to receive foreign currency which is the selling price of that rental property. Once the payment of foreign currency is made in this particular transaction, the right ceases. Rights and obligations as explained in the example above arise when a CGT asset is acquired or disposed of, just in the example.
Furthermore, when a foreign currency denominated CGT asset is acquired or disposed of, normally a forex gain or loss arises due to currency exchange rate fluctuation between the date when the contract was entered and the date when the payment occurs (settlement date). Here, the cost base and the capital proceed of such a transaction will be translated into Australian currency keeping in mind the currency fluctuations that occurred between the date of acquisition and the date of disposal of such CGT asset, in this case the foreign rental property.
10. Depreciating Assets:
Depreciating asset is an asset whose effective life is limited and declines in value with time and usage. Some examples of depreciating assets can be computers, electric tools, furniture, business equipment, and motor vehicles. Such depreciating assets which are used only for business and other taxable purposes are not subject to capital gains tax (CGT) rather any money made or lost on these assets will be treated as assessable income or can be claimed as a deduction. Whereas, when someone disposes of depreciating assets which are used for a private and other non-taxable purpose might be subject to capital gains tax (CGT).
The concepts of ‘cost and termination value’ under the ‘uniform capital allowances system’ is used to calculate a capital gain or capital loss from a depreciating asset. Such capital gain or capital loss that arises as a result of the disposal of the depreciating asset will arise to the extent that the owner has used the asset for non-taxable purpose for example, private purposes.
If a depreciating asset has been used at some point of its life for non-taxable purposes, capital gains tax (CGT) will apply when the owner, stops using it or stops holding it (sold, lost, or destroyed). When the depreciating asset is stopped being held or used that point is called ‘balancing adjustment event’.
https://www.ato.gov.au/Business/Capital-gains-tax-for-business-assets/Depreciating-assets-and-CGT/
Capital gain from a depreciating asset is made when the termination value of such a depreciating asset is more than its cost. Whereas capital loss occurs when the cost of such depreciating asset is more than its termination value. Depending on whether the depreciating asset is in a low value pool or not, there are two formulas that are used to calculate capital gain or capital loss.
- Capital gain: Depreciating asset not in a low-value pool:
(termination value – cost) x (sum of reductions note 1 ÷ total decline note 2) - Capital loss: Depreciating asset not in a low-value pool:
(cost – termination value) X (sum of reductions note 1 ÷ total decline note 2) - Capital gain: Depreciating asset in a low value pool:
(termination value – cost) x (1 – taxable use fraction (note 3)) - Capital loss: Depreciating asset in a low value pool:
(cost – termination value) x (1 – taxable use fraction (note 3))
Note 1: the ‘sum of the reductions’ in one’s deductions for the asset’s decline in value that is attributable to:
- One’s use of the asset
- Having it installed ready for use, for a non-taxable purpose.
Note 2: the ‘decline in the value’ of the depreciating asset since one started to hold it.
Note3: ‘Taxable use fraction’ is the percentage of asset’s use that is for producing owner’s assessable income, expressed as a fraction. This is the percentage the owner reasonably estimates at the time when he/she allocates the asset to the low-value pool.
https://www.ato.gov.au/Forms/Guide-to-capital-gains-tax-2023/
How To Calculate the Capital Gains Tax Rate:
In order to calculate the CGT one has to have the following information and figures ready.
- Asset’s purchase price,
- Asset’s selling price,
- Cost base (cost of acquiring and disposing of the asset).
- Period or extent of ownership of the asset,
- Owner’s current taxable income i.e., the tax bracket which you fall into,
By selling the asset you will either have a capital gain or a capital loss.
Capital gain: where the selling price of the asset is more than the cost price for that asset.
Capital loss: where the selling price of the asset is less than the cost price of that asset.
Capital gains tax (CGT) will be paid on the net capital gains. (Net capital gain = Total capital gains – any capital losses – discount on the capital gains). Briefly, discount of 50% on capital gains is achieved if you owned the asset for at least 12 months and you are an Australian resident for taxation purposes.
Example:
John buys a block of land for: $600,000 and sells it for $700,000 after 4 years.
Selling price or capital proceeds from the sale: $600,000
Total cost base of the land: $633,000.
(Purchase cost of the land: $600,000 + 15,000 stamp duty + $1,500 conveyancing fees.
Selling cost of the land: $15,000 agent’s commission + $1,500 conveyancing fees).
Capital gains: $700,000 – $633,000 = $67,000.
John can use CGT discount as he is an Australian resident and owned the asset for at least 12 months: $67,000 x 50% = $33,500.
John will report the net capital gain of $33,500 and a capital gain of $67,000. He will pay tax on this gain at his marginal income tax rate.
https://www.ato.gov.au/Individuals/Capital-gains-tax/Calculating-your-CGT/
What Is Capital Gains Tax Discount:
Upon disposing of the asset you can receive a discount of 50%, in other words, you can reduce your capital gains by 50%, if you meet both of the following conditions:
- Seller had the asset’s ownership for at least 12 months.
- Seller had the asset’s ownership for at least 12 months.
12-month ownership: To obtain a CGT discount on an asset you must have owned the asset for at least 12 months before the CGT event happens. CGT event is when you make a capital gain or loss. While working out whether you owned the asset for 12 months before the CGT event happened, you exclude the acquisition day and the day when CGT event happened.
- Contract of sale: When there is a contract of sale for the CGT asset, CGT event takes place on the date of contract and not on the settlement date.
- Absence of contract of sale: When the seller and the buyer have not entered into any contract of sale for the CGT asset then the CGT event is considered to happen at the time of sale.
- Destruction or loss of the asset: In case if the CGT asset is destroyed or lost then the CGT event takes place when any compensation or insurance payment is received. In absence of any compensation or insurance payment, when the loss occurred was discovered.
Asset’s previous ownership can be included in counting the 12 months ownership period if the asset was acquired through a deceased estate (on or after 20 September 1985), through a relationship breakdown (where you have to show that your spouse and yourself jointly owned the asset for more than 12 months). Or, as a rollover replacement where the asset was lost, destroyed or compulsory acquired.
https://www.ato.gov.au/Individuals/Capital-gains-tax/CGT-discount/
Capital Gains Tax and Inheritance:
When a property is transferred to a beneficiary or to heir after the death of the owner it is known as inheritance. Generally, the Capital Gains tax (CGT) does not apply at the time of inheritance of an asset. When an inherited asset is sold then the following apply. Where the asset is,
- A property for example, a house then it might qualify for the main residence exemption from the CGT.
- Not a property, then the normal rules apply for calculation of CGT.
- A personal use asset or a collectable then the asset is subject to CGT unless it was acquired for less than the thresholds for such assets.
Where the inherited property is immediately sold then the factors such as,
- Whether the deceased was an Australian citizen at the time of their death,
- When the deceased acquired the property,
- Type of use of the property by the deceased when they owned it,
- Date of deceased’s death,
- Whether the person inheriting the property was an Australian resident when they sold the inherited property.
https://www.bmtqs.com.au/bmt-insider/capital-gains-tax-on-inherited-investment-property/
Selling your home with Bargoti Real Estate:
When you are selling your home, you are not only selling the biggest financial asset of your life, but you are also dealing with lots of family memories and emotions during the whole process. On one hand you are looking to achieve a great price for your house and on the other you are looking for a seamless transition. This is where the help from Bargoti Real Estate will achieve you a higher price and a smooth selling process.
High level of dedication and commitment from Bargoti Real estate will help you in keeping up to date with the market trends, designing a customised advertisement strategy, home improvement suggestions and regular feedback from the market.
We at Bargoti Real Estate guarantee the 5-STAR customer service because for us our clients come first, and their satisfaction is our primary goal.
Useful links/Sources:
https://business.gov.au/finance/taxation/capital-gains-tax-for-business
https://www.ato.gov.au/Individuals/Capital-gains-tax/
https://www.ato.gov.au/Individuals/Capital-gains-tax/List-of-CGT-assets-and-exemptions/
https://www.commbank.com.au/articles/tax/quick-guide-to-capital-gains-tax.html
https://www.forbes.com/advisor/au/investing/capital-gains-tax/
DISCLAIMER – The information and opinion provided is for guidance and general informational purposes only. The sole intention is to provide general understanding of the subject matter so the readers can assess whether they need more detailed information. The information provided on this website should not be regarded as a financial, business, legal or real estate advice and it is strongly recommended that the readers should seek their own independent financial, business, legal or real estate advice. While every effort has been made to ensure that the information and the material is correct and up to date at the date of publication. However, we do not guarantee or warrant the accuracy or completeness of the information provided as the factors like changes in circumstances after the time of publication, may impact such accuracy or completeness. Bargoti real estate will not accept responsibility or liability for any reliance on the blog information, including but not limited to, the accuracy, currency or completeness of any information or links.
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