Mastering Capital Gains Tax (CGT): Essential Insights for Property Owners
If you’ve tried to buy and sell assets such as property, you may be facing Capital Gains Tax (CGT). But what exactly is it, and how does it affect your wallet? Let’s explore a friendly guide to capital gains tax and discover some strategies to keep more of your hard-earned money.
What is Capital Gains Tax?
Simply put, capital gains tax is the tax you pay on the profit from the sale of an asset. If you bought a property and sold it for more than you paid for it, you made a capital gain, and the ATO wants a piece of that pie. But if you sold it for less than you bought it for, you suffered a capital loss. You need to report these gains and losses on your tax return.
Introduction of Capital Gains Tax
Capital Gains Tax has been a reality in Australia since 1985. It applies to any asset acquired after that date unless specifically exempted. When you sell an asset, the difference between what you paid and what you received is your capital gain or loss. This gain is added to your taxable income for the year and, although it is part of your income tax, it is still called capital gains tax.
Discounts and Rates
Here’s where it gets interesting:
- Individuals: If you have an asset for at least a year, your profit will benefit from an attractive discount of 50%.
- Companies: There are no discounts here; companies pay a flat rate of 30% on net capital gains.
- Self-Managed Superannuation Funds (SMSF): A reduction of 33.3% is applied, and the tax rate is 15%.
Offsetting Losses
Capital losses can offset capital gains. If your losses exceed your gains, you can carry those losses forward indefinitely. However, these losses cannot compensate for normal income.
Exemptions and Exclusions
Not everything is subject to capital gains tax. Your home, car, and personal property, such as furniture, are usually excluded. Also, depreciable assets used for tax purposes, such as professional equipment, are not affected.
For Residents and Non-Residents
- Australian Residents: Capital gains tax applies to your worldwide assets.
- Foreign or Temporary Residents: Capital gains tax only applies to your taxable assets in Australia, and you may miss out on some reductions and exemptions.
Smart Strategies to Minimise Capital Gains Tax
Main Residence Exemption
If the property you are selling is your principal residence, the gain on the sale is generally exempt from capital gains tax. But if you used it to earn income, some of that income may be taxable.
Temporary Absence Rule
This rule allows you to treat a property as your main residence, even if you move, for up to six years if you rent it out. Go back and you can reset this period.
Invest in Superannuation Funds
Self-managed superannuation funds have a lower tax rate on profits, and if you start a pension from the fund, the rate drops to zero. However, investing in property through an SMSF carries certain risks.
Timing Your Gain or Loss
Timing is everything. If your income is lower next year, consider delaying a sale to take advantage of a lower tax rate. Likewise, realising losses during a year of high profits can offset your capital gains tax.
Partial Exemptions
Holding real estate for more than one year entitles you to a 50% reduction in capital gains tax. Using your primary residence for business purposes or investing in affordable housing can also offer significant discounts.
Remember that Capital Gains Tax Doesn’t Apply to Pre-1985 Assets
Assets held before September 20, 1985, are exempt from capital gains tax. If you’ve owned real estate since the 1980s, you don’t have to worry about capital gains tax!
Get Help with Capital Gains Tax
Dealing with the complexities of capital gains tax can be daunting, but that’s where we come in at Create Real Estate. Our team of experienced real estate agents is here to guide you through the intricacies of real estate transactions, ensuring that you maximise your profits and minimise your tax liabilities.
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A complete guide to Capital Gains Tax
Property and capital gains tax