Capital gains tax, often referred to as CGT, is included in your taxable income and indicates tax payable when an asset is sold or otherwise disposed of. The costs associated with your investment property, such as the cost of purchase, the interest paid on the loan and the expenses incurred in maintaining the property are all taken into account when calculating the capital gain achieved. Likewise, if a loss is made on the sale of an investment property, this will result in a ‘capital loss’. As a capital gain will influence your taxable income, it is important to consider this factor when buying or selling investment property.
The history of capital gains tax
First established in 1985 by the Hawke/Keating government, capital gains tax was established to include profits received from investments, such as property, as a part of taxable income. Originally, CGT was indexed against the rate of inflation, however it was subsequently simplified in 1999 by the Howard government, and a 50% concession was introduced for individual taxpayers; meaning that of any capital gains made on a property sold, only 50% was included in taxable income. It is important to note that there are a number of exceptions to CGT, most notable of which is the family home. CGT does not apply to companies, and is reduced for superannuation funds.
In the leadup to the release of the 2017 federal budget, there was much debate around negative gearing and capital gains tax. For Australian residents, CGT has not changed, however some restrictions were introduced for foreign investors which limit the investment in new developments, and were designed to make it easier for first home-buyers, and other Australians, to acquire property.
Engaging the services of a buyer’s agent means that you’ve got a wealth of knowledge at your disposal.
How does CGT apply to my property investment?
Whilst the benefits of negative gearing allow many investors to afford the holding costs of an investment property (link), when a property becomes positively geared (once the rental income begins to exceed the costs involved) the investor will begin to pay tax on their investment. Likewise, an investor will be subject to capital gains tax when the property is sold, be that in 10, 20 or even 30 years.
When considering investing in property, it is important to understand how both negative gearing, capital gains and other taxation will affect your taxable income. The goal of investing in property is, of course, to make a return on your investment, and the rate of tax you might pay will determine the amount of deductions or additions to your income tax.
The ATO website has some handy tools which can help you to work out the CGT which will apply to you. As there are three different methods of calculating CGT based on when you acquired the property and how long you have owned it, there are also tools available for determining the best method of calculation for your situation. Visit the ATO website for more information, and to access their CGT-related tools.
Key points to note
- There are some exemptions to CGT, including the family home.
- Keeping good records (including the interest and expenses you’ve paid) is the best way to ensure you calculate your CGT properly.
- Your buyer’s agent can help you to understand CGT and its implications to your investment. You should also consult your accountant.
- CGT is calculated and payable in the same year that the property is sold.
- CGT is not a separate tax, it is calculated as a part of your taxable income.