Property is a hot topic right now, with many people vying to invest in property, or even purchase their first home.
We sat down with our Director, Katrina Purcell, to give us the basics on what Capital Gains Tax is, and how it affects us come tax time.
What is Capital Gains Tax?
Capital Gains Tax (CGT) is the tax you pay on profits from selling assets, such as property.
Essentially, you make a capital gain when the difference between what it cost you to acquire your property (or another asset) and what you gained from selling it is greater than zero — in basic terms, you made a profit.
Of course, if you received less than the cost base of assets then you made a capital loss. You report your capital gains and capital losses in your income tax return and pay tax on your capital gains.
Do I need to submit a separate tax return for CGT?
Although it is referred to as ‘capital gains tax,’ it’s actually part of your income tax – not a separate tax. This tax does not apply to your own home, known as your principal place of residence.
When does the CGT come into place?
If there is a contract of sale, the CGT event happens when you enter into the contract. For example, if you sell a house, the CGT event happens on the date of the contract, not when you settle.
If there is no contract of sale, the CGT event is usually when you stop being the asset’s owner. For example, if you sell shares, the CGT event happens on the date of sale.
How much Capital Gains Tax do I need to pay?
When you want to know how to calculate how much Capital Gains Tax you have to pay, other than in superannuation, there is no specific rate of tax that is applied, rather the applicable gains are added to a taxpayer’s income and the tax rate is applied to their total income, which includes the capital gain or loss.
The final tax rate will depend on your personal marginal tax rate.
CGT can be a little tricky to calculate, that’s why it’s so important to have specialists on your side – our team at MLP are here to help!
Are there any ways to reduce paying CGT?
When it comes to property, one of the major exemptions from Capital Gains Tax is if it’s your home or principal place of residence (PPOR).
You can generally claim the main residence exemption from CGT for your home. To get the exemption, the property must have a dwelling on it and you must have lived in it. You’re not entitled to the exemption for a vacant block.
What if my main residence is used for business?
As we have seen in the past few years, more and more people are working from home or working from themselves.
A tax issue that many people find themselves in, however, is that if they work from home or use the home for business purposes, that may trigger some form of CGT.
It’s important to understand that if your employer has an office in the city or town where you live, your home office will not be a place of business, even if your work requires you to work outside normal business hours.
Also if your income includes personal services income, you may not be able to claim a deduction for occupancy expenses.
To work out the capital gain that is not exempt, you need to take into account a number of factors including:
- The proportion of the floor area of your home is set aside to produce income.
- The period you use it for this purpose.
- Whether you’re eligible for the “absence” or six-year rule.
- Whether it was first used to produce income after 20 August 1996.
What about when I purchase a home that becomes an investment property?
Certainly, many people buy a home and then turn this into an investment.
Essentially, you can retain your main residence exemption for up to six years once you move out unless, of course, you’ve identified another property as your main residence.
You can only have one residence for tax exemption at a time, however you don’t have to identify which residence until you sell one.
Want to know more about Capital Gains Tax and how it will affect you this tax season? Book an appointment with one of our skilled Accountants at Moore Lewis & Partners today!