What is capital gains tax?
LIKE most tax and accounting related matters, capital gains tax can be complex and daunting for the uninitiated.
Lisa Haberfield, a partner and director at Queensland-based PJS Accountants, explains how capital gains tax (CGT) impacts on property transactions.
What is capital gains tax?
Capital gains tax is tax on the profit made on the sale of any capital item, Haberfield explains.
"This includes all different types of investments, including, but not limited to shares, units in unit trusts, businesses and property."
When does it apply?
"Capital gains tax applies in the financial year a capital asset is sold. The date of the actual contract is the purchase or sale date for capital gains purposes, not the settlement date," she says.
"This becomes relevant for sales made towards the end of the financial year, which settle in the next financial year."
How much is capital gains tax?
There is no actual rate of capital gains tax, Haberfield says.
"The capital gain is calculated as the difference between the sale price, less associated expenses, such as solicitor fees, agent commission etc, and the original purchase price, plus associated costs of purchase, such as stamp duty, solicitor fees, building inspections etc," she says.
"Once you have calculated your actual gain, then for assets held by individuals over 12 months, there is a 50 per cent discount, so the gain is halved. The discounted gain is then included in the person’s tax return as assessable income, along with their employment income and any other income. The normal marginal rates of tax then apply."
Are there any exceptions?
"The main exception in relation to property is the principal place of residence exemption, where the sale of your family home is capital gains tax-free," Haberfield says.
"For homes on land over two hectares, not all of the gain will be exempt. Gifting a property to a family member will generally not exempt you from capital gains tax, except in limited circumstances, such as via a will or on family breakdown. The sale price of a ‘gifted’ property will be deemed to be the market value at the time of the transfer of the property," she says.
How can it be minimised?
"Your capital gain can be minimised by ensuring you keep records of all costs in relation to the purchase of your property and also for any improvements you make to the property while you own it," Haberfield says.
"You should also see your accountant when considering selling a property to ensure you plan around the sale. The timing of the sale can make a difference as can ensuring you maximise other deductions in the same financial year, like superannuation contributions, to reduce your overall taxable income."
More information
"The Australian Tax Office website has a lot of information regarding capital gains tax and a visit to your accountant will always help with more specific advice tailored to your situation." This information is of a general nature and does not constitute professional advice. You should always seek professional advice in relation to your particular circumstances.