What is capital gains tax?
Many years ago, capital gains to me was gobble di goop and meant nothing with very minimal understanding. it was delivered to me in a way that this is an evil tax that noone likes paying. the fact is though – if you are paying this tax, you are making money 🙂
Capital gains tax is tax on the profit made on the sale of any capital item.. For example it could be the profit on a property you have purchased and sold
This includes all different types of investments, including, but not limited to shares, units in unit trusts, businesses etc.
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.
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.
Once you have calculated your actual gain, then for assets held by individuals over 12 months, there is a 50% 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.
Eg, purchase price of property = $250,000 and sold for $350,000.
The cost to gain the value including agent fees, solicitor fees, materials, labour interest on a loan you may have gained for the purchase, lets say = $30,000 giving you a profit margin of $70,000. You have held on to the property for over 12 months meaning you need to declare 50% of that to the tax man = $35,000. This figure gets tacked onto you taxable income for that year meaning if you generally earn $80,000 for the year, your taxable income would be increased to $115,000 and taxed accordingly.
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.
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.
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.
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.