The word “tax” never fails to make us feel scared or worried. Yes, it’s a bit stressful seeing a part of your hard-earned income vanish. But you don’t have to feel this way about paying taxes, in general – if you do it properly.
With regards to Capital Gains Tax (CGT), you have to know just how much you are obligated to pay and what percentage of your profits is considered taxable income.
Any profits you earn from selling an asset are taxable. This form of tax is called CGT. One of the types of assets that trigger this form of tax, which is collected by the Federal Government through the Australian Taxation Office (ATO), is property.
With regards to real estate, CGT only applies to the property you own that isn’t your main place of residence, or where you live most of the time. Examples are investment properties and holiday homes. Your family home is exempted from CGT.
For properties that served as your primary residence for a period of time but you also leased, CGT is required only for those periods when you didn’t live there.
How to Calculate CGT
You can compute CGT in three ways, which are all based on the length of time you were an occupant in the property. You are charged at marginal tax rate at all three methods.
If you own a property for less than 12 months and you sell it, you are required to pay the maximum rate of CGT on any profits you earn from the sale. But if you owned it for over a year, even for one day more, you can claim a 50% discount in the CGT you are required to pay. So it is practical to consider that when making investment plans.
For people who’ve had a property since prior to 21 September 1999, the cost base for a property can be increased by using indexation, which results in the reduction of capital gain.
The ATO offers a lot of information for calculating capital gain and the amount you may have to pay. It also provides video guides on tax effects for lessors.
One aspect that always brings misunderstanding is when an individual has occupied the property for just a time when they’ve owned it.
The rules on principal residence are rather complex and technical.
For instance, an individual bought property for $200,000 in 1995 and occupied it for 15 years. The property was rented out in 2009 when the individual migrated to the UK. In 2014, they occupied the property for six months before divesting the home for $850,000.
You can still claim for the principal residence exemption, if the owner occupies the home again for three months before selling it. This results in the owner not paying CGT for selling the property.
Clearly it would benefit you to hire a tax specialist to be in charge of your CGT affairs. Not forgetting that CGT doesn’t apply on family home is a first step towards understanding your tax obligations on any capital gains and always be compliant with ATO rules.
See a qualified tax advisor, accountant or bookkeeper for tax enquiries, including capital tax gains. PJS Accountants can help you organise your tax affairs. We work with large companies, SMEs, family businesses and individuals. For enquiries, contact PJS Accountants.