Most people have heard of capital gains tax, but not many people have a true understanding of what it is and how it may affect you, particularly when you are part of a real estate transaction.
In a nutshell, Capital gains tax is a tax on the profits from the sale of a capital item. This could be the sale of investments in shares, business and property.
Unlike income tax, there is no PAYG format, and it isn’t applicable until the sale of that capital asset. The date on the contract of sale is what is used to determine the capital gains tax, not the settlement date, this is very important to note when dealing with transactions toward the end of the financial year.
Capital gain is calculated by using the sale price, less any associated expenses with the original purchase such as stamp duty, conveyancing, pre purchase inspections and the original purchase price.
Once you ascertain exactly what the gain is you can apply any applicable discounts. If the asset has been held by an individual for greater than 12 months there is a 50% discount, effectively halving taxable gain.
Once all the calculations are complete this will be assessed in a persons tax return as assessable income in addition to their regular income. The standard tax rate then applies.
So is there any way to avoid Capital Gains tax? Well there are some exemptions. Firstly, if the gain is in relation to a principal place of residence, then the sale of the property is CGT free and it is not assessed.
CGT is applicable to assets purchased on or after the 20th September 1985. If you acquired the asset prior to this there will be a general exemption.
Homes on land greater than two hectares, not all of the gain will be exempt.
Gifting a property to a family member will generally not exempt you from Capital Gains Tax, unless via a will or family breakdown. The sale of a gifted property will be deemed as the market price at the time of the transfer.
CGT also applies to assets anywhere in the world, if you are an Australian resident.
Time limits also apply on exemptions of CGT as do different calculations when the home is used as part primary residence and part investment.
To reduce the amount of CTG you pay, you need to keep thorough records of the costs associated with the original purchase of the asset, and also any improvements made to the asset whilst you own it.
The most important advice is to ensure that you speak to a financial advisor/tax accountant when considering selling an asset to ensure you can plan the disposal of the asset to best suit your taxation requirements and obligations.