CGT is a tax you pay on the profits you make when you sell an asset. This includes property. CGT applies to assets that you purchased on or after 20 September 1985.
Any gain or profit made on the sale of a CGT asset is included in your assessable income in the financial year that you sell the asset. This means the profit is added to your taxable income. The following example will help illustrate this point:
When you're selling a home, any profit you make above the cost of acquiring and maintaining the home is considered a capital gain.
You can use our CGT calculator to estimate your capital gains costs when selling a property or other asset. Please keep in mind that it's not possible to give an exact calculation of your costs using this calculator, but it can help you get a better understanding of how capital gains will affect your tax.
| Response | WA | VIC | SA | QLD | NSW |
|---|---|---|---|---|---|
| 2 | 4.13% | 1.65% | 2.15% | 2.3% | 1.53% |
| 1 | 2.48% | 2.97% | 2.15% | 5.99% | 6.12% |
| 3 | 1.65% | 0.66% | 0.46% | 0.61% | |
| 4 | 0.33% | 0.46% | 0.61% | ||
| 5 | 0.33% | 0.31% |
If you're selling an investment property, the CGT calculation is based on the sale price of a property minus your expenses. These expenses are called your cost base. The cost base is the total sum of the original purchase price plus any incidentals, including ownership and title costs, minus any government grants and depreciable items. Depreciable building items were not included in the cost base calculations prior to 1997.
Calculating capital gains tax is relatively simple:
Purchase price + all costs - FHOG (First Home Owner Grant) and claimed depreciation = cost base
Sale price - cost base = capital gain or loss
Once you've worked out the capital gain, the figure is then adjusted according to a number of variables, including the following:
There are 3 methods of calculating capital gains tax:
| Method | Description | How to calculate |
|---|---|---|
| Other method This calculation method is for those who have held an asset for less than 12 months. | This is the most basic method of CGT calculations. | Take the cost base away from the sale price. |
| Discount method This method is for those holding assets for more than 12 months. | Those using this method are entitled to a 50% discount off of the CGT liability for individuals or a 33.3% discount off of the CGT liability for super funds | Subtract the cost base from capital proceeds and deduct capital losses. Then take your discounted percentage and reduce the amount by it. |
| Indexation method If you bought the asset before 11:45am (ACT time) 21 September 1999 AND owned the property for more than 12 months. | You can increase the cost base by applying an indexation factor based on the Consumer Price Index (CPI) up to September 1999. | For more information on this calculation method, visit the ATO website. |
*Based on information from the ATO.
Once these factors are worked out, you'll be left with the amount of capital gains that will be included in your taxable income and taxed at your marginal rate. There are ways to avoid capital gains tax, though, whether fully or partially.
There are multiple scenarios where you can completely avoid CGT when selling your property. The most obvious exemption is if the property is your home (the main place of residence exemption).
You can avoid paying CGT if you sell a dwelling that's considered your main place of residence. You can only ever have one main residence at any given time unless you're selling your main residence and buying another.
The ATO doesn't give an exact description of what constitutes a main residence, but gives the following points to consider:
If you've lived in your home for the whole time you've owned it, haven't rented it out either completely or to a lodger and the land is smaller than 2 hectares, you'll get a full exemption on CGT when you sell. This is helpful if you plan to live the renovator's life: selling your home, moving into another, renovating it and then selling the renovated property. And while you won't make a rental income if you go down this path, all profits made from the renovation are exempt from CGT.
Property is exempt from capital gains tax if you purchased it before 20 September 1985.
If you have to move out of your home and choose to rent it out, you may be exempt from some CGT liability under the "Temporary Absence Rule".
What is the rule? If you move out of your home and rent it out, under the law, the property is still treated as your principal residence for a period of up to 6 years. If you sell the property within this time frame, you will be exempt from paying CGT if you profit from the sale. You are also exempt from paying capital gains on the income generated from the leasing of the property.
What's the catch? You will still need to pay CGT on the sale of one of your dwellings.
If you're moving out of your home and renting it out, you're going to need somewhere else to live. You will need to elect 1 of the 2 dwellings as your principal place of residence and a tax will be applied to the sale of your non-primary property.
Buying a property through your SMSF is one way you can generate profits from residential real estate and avoid paying CGT. You use your super fund to purchase the home along with an SMSF property home loan to make up the total. You then pay off the loan through your super contributions.
If you sell the property once you've retired, you'll pay no capital gains on the property. Even if you sell the property while you're still accumulating your super, this will be taxed at a rate of only 15%. Holding onto the property for longer than a year will effectively drop this rate to 10%.
Buying a property with your SMSF comes with some risks, so you should never attempt it without first seeking professional advice.
While avoiding CGT liability altogether may not be possible if you haven't lived in the property before you rented it out, you can still apply for partial exemptions in some circumstances.
If you changed your mind and decided to live in a property you purchased as an investment, you'll be partially exempt from capital gains tax. In this case, the CGT you'll owe will be worked out by comparing the number of days you lived in the property to the number of days you rented the property.
Bill buys a property and rents it out for 2 years, but later decides to move into it and lives in it for 6 years. He then sells it, making a capital gain of $400,000.
He only has to pay CGT on a quarter of that amount, which works out to be 2 years out of the 8 that are not eligible for an exemption.
This means Bill would add $100,000 to his taxable income because of the CGT. He's also held onto the property for longer than 12 months, so after taking into account the 50% discount he's entitled to because of this, he would be able to get away with an increase to his taxable income of just $50,000.
If you're using your main residence to generate income, the CGT exemption is reduced accordingly. The Australia Tax Office has clear differences between the two following types of businesses: a "place of business" or a "place of convenience". Different rules may apply according to how you use your main residence, so it's best to consult your accountant to see which situation applies to you.
If you are over 55 and sell a small business property, there may be a $500,000 portion that is exempted from CGT. A sale of a small business when used to support your retirement is also exempt.
It's important to consider the additional cost of CGT that could apply to the business portion of your home. This could be applied to the sale of your main residence in the future.
Maintenance costs (allowable for both a place of business and a place of convenience)
Ownership costs (only allowed for a place of business)
While this isn't technically an exemption, if you buy an investment property and hold it for more than 12 months, you're entitled to a 50% discount on the amount of CGT payable. The discount is 33.3% for super funds.
A capital loss is when you've sold the asset for less than your "reduced" cost base. A reduced cost base is the same as a normal cost base, although it also includes any balancing adjustments such as improvements to the property.
You can offset any capital losses you've made for the year against any capital gains you've made and this will reduce the amount of capital gains that'll be included in your taxable income. However, you can't deduct capital losses from taxable income. You can also carry any capital losses forward in future years and offset these against capital gains you've made.
Even if you can't improve or reduce your CGT bill, there are other tax savings you could be making. If the cost of repairing and maintaining an investment property outweighs the income it generates, you could take advantage of negative gearing and reduce your tax bill.
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