A Complete Guide to Capital Gains Tax on Property Australia

What is capital gains tax on property?

Capital gains tax is a tax on the profit you make from selling an asset, in this case, real estate. Essentially, it’s a tax levied on the difference between what you paid for the property and what you sold it for. The taxable amount is calculated by subtracting the cost base (purchase price plus applicable expenses) from the sale price. In the very likely event that the sale price is higher than the cost base, you’ll need to pay CGT on the difference.

Understanding the tax implications, particularly CGT, is crucial for real estate investors in Australia. It not only affects the final amount you take away from a sale but also impacts investment strategy and planning. Savvy investors incorporate potential tax liabilities into their investment analysis to forecast the actual profit margins more accurately.

Short-Term vs. Long-Term Capital Gains

How long you hold onto a property before selling plays a crucial role in calculating how your capital gains are taxed. Short-term capital gains occur when you sell a property within 12 months of purchasing it. These gains are taxed at 100% of your regular income tax rate.  On the other hand, when you hold onto a property for more than 12 months before selling, you’re eligible for a 50% discount on your capital gains tax. This means that only half of the total gain is subject to CGT.

For this reason, many investors choose to hold onto their properties for at least a year before selling to take advantage of the discount. At Ironfish, we recommend holding onto your investment property for a minimum of 15 years to allow for significant capital growth and maximise the potential of your asset for long-term wealth creation.

What properties does capital gains tax apply to?

Capital gains tax (CGT) is applicable to a broad range of property types beyond the simple residential dwelling:

• Residential Properties: This covers homes and apartments, whether they’re rented out or serve as your primary residence, depending on certain conditions.
• Commercial Real Estate: These are properties used solely for business purposes, such as offices, shops, or factories.
• Vacant Land: Even without any structures, the sale of vacant land can still attract CGT.
• Holiday Homes: Properties used as holiday retreats may be subject to CGT upon their sale.
• Investment Properties: Real estate purchased with the intent of generating rental income or appreciating in value falls into this category.

Capital Gains Tax Exemptions

While CGT is generally applicable to most properties, there are a few exemptions that may apply:

• Main Residence Exemption: If the property is your main residence and you’ve lived in it for the entire duration of ownership, you may be exempt from paying CGT.
• Temporary Absence Rule: The tax act allows a CGT exemption on your main residence for up to 6 years during a ‘temporary absence’ without claiming another property as your main residence simultaneously.
• Property acquired before 20 September 1985: If you bought the property before this date, it is generally exempt from CGT. is also exempt from CGT.

As you can see, not all properties are subject to CGT, and there are certain scenarios where exemptions may apply. However, as an investor, it’s best to factor in potential CGT implications when making real estate decisions. By staying prepared, you can ensure that your investments are not only tax-compliant but also financially beneficial.

Minimising Your Capital Gains Tax

You can minimise the amount of CGT you owe by:

• Holding onto the property for at least 12 months: If you hold onto a property for more than 12 months, you may be eligible for a 50% discount on your CGT liability.
• Offsetting your capital gains with capital losses: This allows you to decrease the amount of CGT owed by carrying over any losses from previous years.
• Re-valuing before you rent out an investment property: If you decide to turn your residential property into an investment, it’s a good idea to re-value the property before renting it out. You’ll only pay CGT on the capital gain from that point on, not from when you purchased the property.

Aligning your investment strategy to reduce capital gains tax (CGT) requires careful planning and consideration of your long-term financial goals. One effective approach is to integrate the timing of your property sales with your overall investment plan. By waiting to sell during a year when your income might be lower, you can potentially fall into a lower tax bracket, thus reducing the amount of CGT owed.

Key Factors Influencing Capital Gains Tax

Major factors influencing Capital Gains Tax (CGT) include:

• Length of Ownership: The duration you’ve held the asset or property impacts the tax rate. Holding onto the property for more than 12 months often qualifies for a CGT discount.
• Income Tax Rate: Short-term gains are taxed at your regular income tax rate, while long-term gains may qualify for discounts.
• Capital Losses: Offsetting capital gains with losses from previous years can reduce CGT obligations.
• Legal Service Costs: Expenses incurred for legal services related to the purchase or sale of the property may be deductible.
• Estate Agent Service Fees: Fees paid to estate agents for selling the property are typically considered part of the cost base and can affect CGT calculations.
• Stamp Duty: Stamp duty paid on the property acquisition is generally included in the cost base for CGT calculations.

Considering these factors when planning property transactions can help investors minimize CGT liabilities and optimize their financial outcomes.

When do you pay Capital Gains Tax (CGT)?

Capital Gains Tax (CGT) becomes applicable immediately after signing a contract for the sale of your property. Once the contract is signed, you are deemed to have disposed of the property and are liable for CGT. However, the actual payment of the tax amount may be deferred until your next tax return.

Do Foreigners Pay Capital Gains Tax?

It’s important to note that foreign and temporary residents are only subject to capital gains tax (CGT) on taxable Australian property, which includes various assets such as real estate, shares, and other investments within Australia. With Australian real estate firmly on the radar of many foreign investors, it’s important to be aware of the tax implications of selling an Australian investment property.

Calculating Capital Gains Tax in Australia

The first step to figuring out how much CGT you are liable to pay is to determine the capital gain. This can be done by subtracting the cost base (the purchase price plus costs associated with acquiring, holding, and disposing of the property) from the sale price of the asset. If you’ve held the asset for more than 12 months, you may be eligible for a 50% discount on the capital gain, significantly reducing the taxable amount. After applying any applicable discounts or adjustments, the remaining capital gain is added to your taxable income for the year, affecting the total amount of tax you owe. Remember, accurate records of purchase prices, improvements, and sale expenses are crucial for this calculation.

Summary

As an investor, an understanding of how CGT works and the potential tax implications of selling a property in Australia is essential. Without proper planning, you may find yourself with a hefty tax bill when it comes time to sell.

At Ironfish, we recommend to our clients that they hold onto their investment properties for at least 15 years to not only take advantage of the 50% capital gains tax discount, but also to realise your investment’s potential; for long-term capital growth. And our strategic advice and support for property investors doesn’t end there. We also provide a wealth of resources and guidance on choosing the right properties to help you create serious long-term wealth.