What Is CGT?
A tax is a percentage charged on any money that one earns or gets. Capital Gain Tax (CGT) also works on the same logic. If you bought assets and then sold them for a price higher than the price you bought them. The excess money is your capital gain and it will be taxed.
Since you have made a profit, the government is eligible to receive a portion of it as a tax. However, if you have made a loss then it is called a capital loss. This loss can offset your profit from your other sources.
Exemptions:
A person’s family home is exempt from the capital gain tax if you are a resident of Australia. Besides this, if your home or dwelling is your, your dependents and your partner’s home for the entire period that you have been the owner.
Your home should not be used to generate income, like running a business from the premises. One can lose the exemption if one was running a business from the premises or renting it out while still occupying the home. You can’t avail exemption if you had purchased the house to renovate and sell it for a higher price with value addition.
Lastly, the area of the land should be less or equal to 2 hectares. You can escape capital gain tax at the time of selling the house if you meet these conditions. Even if you fail to qualify for an exemption, you can always get a partial exemption by invoking certain other conditions.
Know Your CGT?
The simple way to know the CGT is to minus the purchase price from the sale price. Then there are other rules and exemptions which are also applicable. If you are organised then you are halfway there already.
Keeping your records up to date is the critical thing in calculating capital tax gains. You need to have the original sale contract and receipts for all other expenses made on the property. You will need to add up the interest paid on all borrowings related to the house. Keep handy all receipts of expenses that are being incurred currently.
You will also need a copy of the valuations done on the house. These expenses are deductible from the capital gain tax as these were spent maintaining the house. All stamp duties and legal fees paid are also deductible as an expense and can be subtracted from the capital gain. The law is very clear even for cases where a relationship between occupants of the home, breakdowns.
If the house is transferred to one of the partners, then it is still considered as a primary residence and the capital gain tax is exempted. The rollover applies only if the property is transferred vide a court’s order. If the new owner is not the original purchaser, still the original price of purchase will apply when the sale price is calculated.
Tax Planning:
There are laws that govern the calculations of capital gain tax. These laws can be applied to get capital gain tax exemptions too. If the property is sold within the first 12 months of being bought, then there are no exemptions for any gains that accrue. The full gain amount will be taxed.
However, if you, as an individual, are selling the asset after 12 months then you could avail 50% discount on your capital gain that you profit. There is yet another rule in play that can give relief from capital gain tax. The option is of applying ‘indexation’. This discount can be applied if the asset was bought earlier than 21st September 1999 and kept for at least 12 months.
The indexation method factors for inflation escalation year-on-year and add a multiplier taking the base year as 21st September 1999. Even a capital loss can be used to your advantage. A capital loss made on an asset can be offset from any other capital gain made from other sources thus reducing your tax. What is even better is that these losses can be carried over to other years where you will make a profit.
Company’s Advantage:
Like it happens in income tax, individuals and companies pay different percentages of tax, the same applies to capital gain tax laws. As a company, you will not be getting a 50% discount. A company has to pay a flat 30% tax on the net capital gain.
An individual would have to pay the same rate of tax as that of income tax for that year. For people who are running SMSF 15% tax is applied and a discount of 33% is applicable unlike the 50% discount enjoyed by individuals.
Saving Tax:
There is a certain requirement which if you fulfil then you can get big saving on the capital gain tax. One can exclude $250,000 of gain from the sale value of your main home. Some kind of joint returns filed by couples or families can exclude up to $500,000 from the capital gain. Here are the conditions that have to be fulfilled.
- The individual should have been the owner of the asset for a minimum of two years in a period of five years.
- The house should have been inhabited for at least two years out of 5 years, as a primary residence since taking possession.
- This exclusion would not apply for a home sold or exchanged in a two-year period. This period is calculated from the date of the current sale or exchange.
- If for some reason you fail to qualify for full capital gains tax exemption then you can still get a reduced exclusion with a few exceptions. The exception will apply against these conditions,
- If you had to change your residence because your place of employment changed.
- It will also apply if you got a new job or continued working in a previous job but in a new location.
- This can also apply to a person who starts or continue self-employment.
- If the ownership and use conditions have not complied.
- If the change in job occurred while you used your residence as the main home, this can be considered as the cause of selling the home. In this case, the new job site should be at least 50 miles away from the home you used for the previous employment.
Getting a partial exemption can be quite complicated for individuals as capital gain taxes and exemptions are practically calculated on a daily basis.
Get The Best Help
It is a no brainer that one must work with the experts who know the subject and are able to understand the nuances of the law. Laws can be the same for everyone but an expert with experience and deep insight is able to interpret laws and present an argument that is compelling enough to get a favourable decision and save a lot of taxes.
It would be prudent to establish contact with an able accountant or tax specialist. Contacting ATO directly to understand the impact of the law may also be a good idea.
This has been a summary of the various options in planning capital gain taxes.
Results may alter when individual objectives and financials are factored into the equation. Please use your discretion to gauge if the information suits your circumstances.
