Capital Gains Tax – What is it and when could it apply to me?

Capital Gains Tax (CGT) pops up for many people when selling property. Calculations can be very complicated, so we recommend getting in touch as soon as possible when selling property that will (or might) cause a capital gain event for you. We have summarised some of the CGT basics for you below:

What is Capital Gains Tax?

The Australian Taxation Office defines CGT as the tax paid on the net capital gain made on assets that you sell.

The capital gain or loss is generally calculated by comparing the cost of purchasing the asset against the amount received for selling your asset. Adjustments are then made for certain other costs. At the end of each financial year, you must calculate your overall capital gain or loss from all assets sold which are subject to CGT. Your accountant will then work out your net capital gain and add this to your taxable income.

If you derive a capital loss, you may be able to use it to reduce your other capital gain in the same, or future, income years.

Is your rural property subject to CGT?

If:

  1. your home has over 2 hectares of land; and
  2. you purchased it after 19 September 1985

You will most likely need to pay CGT when you sell your property for a profit.

How is my capital gain calculated?

Though this is a complicated process, the calculation of your capital gain can be broken down into a few steps. Basically, the original purchase price and the sale price are apportioned between your house, 2 hectares and remaining land. However, there are many things that need to be taken into consideration. For instance:

  • Generally, your home and 2 hectares of your choice will be exempt from tax. We recommend you choose the best 2 hectares of land and pay tax on the lower valued land. For example, on a 20 hectare property which is not used for business purposes, we could include the area immediately around your house and any dams, cleared area and flat land. The 2 hectares you choose does not have to be adjacent but rather can be spread all around your property.
  • To ensure an accurate valuation we suggest you consult a registered valuer to perform a retrospective valuation.
  • If you purchased your property after 21 August 1991, adjustments can be made for a portion of your non-tax deductible costs like interest on your mortgage, council rates, improvements and incidental ownership costs.

What are some ways to improve a CGT situation?

There are a number of adjustments you can make to your CGT calculation. Some things to consider include:

  • The date of sale: this is the date contracts are exchanged, not the date of settlement. It is best not to exchange in June and settle in July, as you will bring forward your tax debt by 12 months. In this instance, we would encourage delaying exchanging until July.
  • If you have owned your property for more than 12 months, you will only pay tax on half the gain. Consider delaying the sale if it is a new property.
  • Choose the best (most valuable) 2 hectares to claim your exemption on.
  • Using a registered valuer can help to determine your cost base and sale price apportionment.
  • Running a small business can actually save you tax when you sell the property. You may be entitled to extra concessions such as a full exemption if retiring, or a further 50% reduction on your business land.
  • Different rules apply if you inherited your property. If this applies to you, it is crucial you talk to your accountant from the onset!
  • You can rent your main residence for up to 6 years and still claim a full CG exemption on your house and 5 acres. The ATO will only allow you to claim the main residence exemption on one dwelling at a time. This means if you purchase a new home, you cannot claim the exemption except in certain limited circumstances.

Here’s an example:

Let’s say Peter and Anne purchased a 20 hectare property in Ellalong in 2010 for $300,000. They paid $20,000 in legal fees and stamp duty when purchasing the property. The property was then sold in July 2022 for $600,000, with contracts exchanged in May 2022. Peter and Anne paid $15,000 in real estate agent commission and conveyancer fees. Here are the tax effects we would consider for Peter and Anne:

  • Ignoring any CGT exemptions, the gross capital gain on the sale of the property would be $295,000. As the property was jointly owned, this gain would be split equally between Peter and Anne. The actual tax payable would depend on what other income they earned.
  • As the property had been owned for more than 12 months, they will be entitled to a 50% discount on the capital gain. The net gain would then be $147,500, or, $73,750 each.
  • For CGT, the date of the sale is the date the contracts were exchanged (May 2022, being the 2022 FY). So even though Peter and Anne didn’t settle and receive sale proceeds until July 2022 (during the 2023 FY), the capital gain will still be included in their 2022 tax returns.
  • If Peter and Anne had lived on the property since purchase, they could reduce the capital gain for the portion relating to their home and 2 hectares. They would need to apportion the purchase and sale values between the exempt home and 2 hectare area and the taxable 18 hectares. They can choose which 2 hectares they wish to claim the exemption on.
  • If Peter and Anne had run a legitimate business on the property and used the land for that business, they could potentially claim a further 50% reduction as a “Small Business Active Asset” concession.

CGT can be an extremely complication situation, and it is important you have your accountant involved from the onset to ensure all boxes are ticked in the best way possible for you. Capital Gains Tax Advice is one of our team’s speciality services, so if you require CGT assistance please contact us today.

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