Understanding Capital Gains Tax


It is that taxing time of the year again! If you are a property owner and/or property investor there are various tax considerations you need to be familiar with – including capital gains tax (CGT).If you haven’t been subject to CGT before it may seem complex. Let’s explore the basics…

What is capital gains tax?

A capital gain (or loss) on an asset is the difference between what you paid for it and what you receive when you dispose of it. Tax is payable on any capital gain.CGT applies in the financial year that an asset is sold and forms part of your income tax. It applies to all assets acquired since20 September 1985.

To calculate net capital gain:

• total your capital gains for the year,

• deduct total capital losses (this may include net capital losses from previous years), then

• deduct any CGT discounts or entitlements that apply to you.

The resulting total is the net capital gain that is subject to tax.

Properties subject to CGT
In terms of property related assets most real estate apart from your ‘main residence’is subject to CGT including

• rental properties (houses, apartments, home units)

• vacant land

• holiday houses and hobby farms

• commercial premises such as shops, factories and offices

Are there exemptions?
The most significant exemption is your main residence – there can be exceptions to what is classified as a main residence. Asa general rule a property is no longer your main residence once you stop living in it.You should keep records of all expenses associated with your family home – just as you would with any other property.Other assets exempt from CGT (sometimes subject to certain conditions) include:

• cars

• assets acquired prior to 20 September 1985

• collectables and jewellery costing less than $500

• personal use items costing less than$10,000, eg boats, furniture, electricalgoods

• depreciating assets

• compensation for personal injury

• winnings/losses from gambling, a game or competition prize

• shares in a pooled development fund etc

In the case of certain events, eg a marriage or relationship breakdown, you may be able to roll over a capital gain from a CGT event until another CGT event occurs.

It is essential you speak to your taxation specialist to determine exemptions or rollover eligibility that may apply to your individual situation.

Beware Airbnb and CGT!
Have you ever hosted Airbnb guests?Companies such as Airbnb and Stayzhave opened up a whole new world of short stay rental opportunities for some homeowners and investors, however, many people are unaware of their tax obligations. It pays to be aware!

The sharing economy is now very much on the radar of the Australian tax Office and they are using advanced data matching technology to track such income.

The ATO advises: When people rent out all or even part of their residential home, they become liable for CGT when they eventually sell their house or apartment.CGT applies to the proportion of the floor area that is set aside to produce income and the period it is used for that purpose.

Property owners could also be at risk of fines for unpaid income tax if they don’t-declare extra income for short term rental arrangements.

What does the future hold?
There was a recent proposal for the government to halve the current 50% CGT discount and restrict negative gearing on investment properties. While this was rejected by the government there is potential for property investment strategies to be back under the spotlight in the future or under a different government. Property investors should keep abreast of proposed changes.

Remember, as your finance specialist is our job to keep up to date with finance and property investment market changes. Have a question? Then give us a call today!

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