There’s a lot to consider, financially, when you build, buy or sell a home in Australia. And one of the biggest things you’ll want to get your head across is capital gains tax. But don’t panic. Metricon Homes has pulled together an easy step-by-step guide to keep you right.
What is capital gains tax?
Australia introduced capital gains tax (CGT) in 1985. It is a fee you have to pay on the sale of any assets. That includes real estate.
Strictly speaking, it’s not a separate tax at all. It’s just lodged as another source of income during your annual tax return, in the financial year you sell your property. Depending on your personal circumstances at the time, you may or may not have to pay it.
How do I figure out how much I owe in capital gains?
Suppose you are liable to pay capital gains tax on the sale of your property. In that case, the amount you have to front up at tax time is calculated by deducting the price you paid for it when you signed the contract from the total sale price, minus any fees.
So if you bought a property for $450,000 and sold it for $500,000, the capital gains amount owing would be $50,000, minus fees related to the sale.
Those fees might include stamp duty, cost of the transfer, advertising, or professional fees, including conveyancers, brokers and accountants.
It’s also worth noting that a capital gain could push taxpayers into a higher tax bracket.
Of course, you can also record a capital loss if you sell the property for less than you bought it. But you can’t deduct a capital loss from your overall tax time income. If you make a separate capital loss, on say on shares, you might be able to capital gains owing. There are options to defer a capital loss to deduct it from any future capital gains.
Can I avoid paying capital gains tax?
The easiest way to avoid paying CGT is to live in the property. If it has been your primary residence – or that of your partner or other dependants – for the whole period you’ve owned it, you will not have to pay.
Individuals and small business can generally claim a 50 per cent deduction if they have owned an asset (like a rental property) for more than a year.
It’s worth noting that if you buy and move into a new home before you can sell your existing one, there is a six-month grace period. You will, most likely, be able to claim both as your main residence during this window.
It is a crime to fraudulently claim a property is your primary residence.
Points of proof include:
- It’s your listed address on the electoral roll
- It’s where your mail is sent
- Current utility bills in your name
- Other evidence that proves you are resident there and your belongings are there
You will have to pay capital gains if:
- You are renting it out
- You run a home business from it
- You flip your home
There are a few loopholes, however. There is a possible allowance if you genuinely purchased your property to live in but then had to move out for legitimate work reasons. You can’t claim any other property as your primary residence while this exemption applies.
You can’t claim an exemption on a vacant block. But if your home is destroyed in a natural disaster, then you sell the vacant land, you can apply the main residence exemption.
The same exemption applies if your home is compulsorily purchased, say to make way for a new public transport route.
If you bought the property before September 20, 1985, capital gains tax will not apply. And remember, you will only pay capital gains on a rental property in the year that you sell it. So if you build up a property portfolio, it may be a very long time before you have to worry about it. During that time, you may be able to make a lot of money.
Remember: selling property is a complicated business, and there are several methods to calculate capital gains. Metricon recommends seeking financial advice.
For more information on capital gains tax, visit the ATO website, when you can also find information about income tax, tax rates and assessable income.
