Capital Gains Tax 101

April 19, 2017
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Like other taxes and legalities involved in owning property, the Capital Gains Tax can be a tricky area for home owners and investors to understand and navigate.

To help you out, we’ve broken down the basics.

Suggested Reading: Median House Prices in Australia in the Last 50 Years

What is Capital Gains Tax?

Capital Gains Tax is the tax payable on the difference between what an asset cost you when you purchased it and what you receive when you dispose of it.

It was introduced on the 20th of September 1985. All assets acquired since this time are subject to Capital Gains Tax unless specifically excluded.

If you’re an Australian resident, Capital Gains Tax applies to assets you own anywhere in the world. It also applies to foreign residents if they own an asset that is considered taxable Australian property.

When a property is sold, this triggers what is called a Capital Gains Tax event and the owner will either make a capital gain or loss on the property.

Capital Gains Tax applies in the financial year the asset is sold.

How is it calculated?

A capital gain or loss can be calculated by subtracting the original purchase price and associated transaction costs from the selling price less associated transaction costs.

Consequently, there will be capital gains tax on selling a house.

Are there any exemptions?

If a property was the owner’s primary place of residence, was used mainly for residential accommodation (such as a family home, for example) and is situated on land under two hectares in size, it is usually exempt from Capital Gains Tax.

If the owner of such a property chooses to move out and lease their property out for a period of time, a Capital Gains Tax exemption is available for six years from the time they move out, provided they do not own another primary place of residence.

An example could be if a home owner leases their house out for two years while living overseas,

If this owner was to move back in and do the same thing again, renting the property out once more, a new six year exemption period will commence from the last time they moved out.

Provided each absence is less than six years, there is currently no limit on the number of times an owner can do this.

Exceptions to the rule

Only one property can be considered a primary place of residence at any one time, and therefore exempt from Capital Gains Tax.

However, there are a few exceptions to this rule, which only apply if both properties are considered the owner’s primary place of residence within a six month period:

  • The original property was the owner’s primary place of residence for at least three continuous months in the twelve months before it was sold
  • The new property becomes the owner’s primary place of residence
  • Neither one of the properties was used to provide the owner with an assessable income throughout any of the twelve months before they sold it

These exemptions would apply, for example, if an owner bought a new property to eventually move his or her family into while still living in the first family home.

Are any discounts currently in place?

Individuals or small business owners who own an investment property for longer than twelve months (from the contract signing date) before they sell it again will be eligible for a 50 per cent discount on Capital Gain Tax.

So if a property investor only holds an investment for six months before selling it, they will have to pay the full amount of Capital Gains Tax.

Current considerations

In the lead up to the 2017 federal budget on the 9th of May 2017, there has been much discussion as to whether the 50 per cent discount that property investors receive on Capital Gains Tax should be reduced or removed in an effort to improve housing affordability.

This has been discussed alongside other cost cutting measures such as reforming negative gearing, both of which are often criticised for giving property investors high tax breaks and too much power in the market.

History has shown though that there are benefits to housing availability when property investors are active in the market so any potential changes are likely to have a large impact one way or another.

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