Capital Gains Tax

Excerpt from recent article by Craig Sankey written for THE NEWDAILY
Capital Gains Tax explained

What is Capital Gains Tax (CGT)

A capital gain (or loss), is the difference between what you paid for the asset plus what you have spent on improving on the asset, and what you sold the asset for, less any fees incurred during the purchase.

A capital gain is when you sell the property for more than you paid for it and if you make a gain, then this amount gets added to the assessable income in your tax return, less any discounts and tax is paid at your marginal rate.

A loss when you sell your rental works the opposite and is then offset against your annual income tax as a loss.

Although it has a different label (CGT tax) it forms part of your annual income tax return in the year you sell the property. Meaning if you have a gain, you will pay higher taxes that year. Scary if you own a scarcity mindset, but for those that understand the power of property investment and growing wealth, you would rather pay more income tax because you know you are making money. Making money is a wonderful thing, without it, your retirement could be rather bleak and miserable. The more income tax you have paid because of your investments, means you are that much wealthier and now have life choices.

If you purchased the property prior to 20 September 1985, no CGT is applicable.

5 Steps for calculating CGT

  • The amount you paid for the property
  • Costs of acquiring the property which could include stamp duty, solicitors fees, loan application fees, holding costs etc
  • Costs incurred owning the property such as rates, land taxes and repairs
  • Capital costs to increase or preserve the value of your asset
  • Capital costs of preserving or defending your title or rights to your CGT asset

According to the ATO, there are 5 steps involved in calculating your cost base :

It is imperative that you keep a record of all the above for proof when claiming ‘costs’ to reduce your CGT payable. When calculating CGT, all the above items are added together and deducted from the sale price. If the amount is positive you pay CGT at your marginal rate, if negative you avoid CGT.

The ATO offer you a record keeping tool check it out here.

If you have held the property for more than 12 months, you then use the CGT 50% discount calculation, meaning only half the gain is added to your tax return and tax paid on this.

The above is not advice in any way, please revert to your accountant for advice. You may also want to read up further on Capital Gains Tax when selling your rental property here on the ATO website. Provides a lot more detail than this brief overview above.

The ATO also offers further information on calculating your CGT here .

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