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15-Oct-2020 By - team

Can I avoid CGT?

 

At the very least in passing, the majority of Australians are familiar with the concept of the capital gains tax. However, much like other concepts in the financial world, it has a tendency to be shrouded in a tremendous lot of uncertainty and misunderstanding.

If you sell rental or investment property, you can avoid capital gains and depreciation recapture taxes by rolling the proceeds of your sale into a similar type of investment within 180 days. This like-kind exchange is called a 1031 exchange after the relevant section of the tax code.

In the interest of avoiding capitals gains tax, you'll need to live in the property for a minimum of six months for it to be considered your main residence before moving out and using it as an investment property.

With some assets, you can reinvest proceeds to avoid capital gains. Still, for stock owned in regular taxable accounts, no such provision applies, and you'll pay capital gains taxes according to how long you held your investment.
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If you plan to buy a property and then sell it, or if you currently own a property and plan to sell it, you will unavoidably have to deal with the capital gains tax on some level. However, when the time comes to sell, if you are familiar with the capital gains tax ahead of time, you will be able to save yourself time, aggravation, and money when you sell your property.

Continue reading for our comprehensive guide to the CGT, in which we cover topics such as how to compute the capital gains tax, how to avoid or minimise the amount of tax that you pay, and more.

Because investing in real estate is officially considered a form of personal income, this is the time of year when the Federal Government collects its portion of the profit you’ve gained from doing so.

Therefore, in this piece, we will explain what capital gains tax (CGT) is, how to minimise it, and how to calculate it so that no one will be taken aback when the taxman (or taxwoman) comes knocking on their door.

You own a property that is used for investment. Since you acquired it, the value has gone up and up, and the idea of getting your hands on some of that equity has you daydreaming about exotic vacations and brand-new gizmos and gadgets. However, before spending your nest egg, you should ensure you’ve done all the necessary research.

Selling an investment property may save you a significant amount of money if you are aware of the ramifications of capital gains tax and how to avoid paying it. By reading this page, you’ll understand what it is, when it applies, and some strategies to cut down on the taxes owed when selling a home.

Capital gains tax usually rears its head whenever you sell an asset for a profit, but selling your home may be different.

If you have ever researched the potential repercussions of selling an asset such as a house, you may have come across the phrase “capital gains tax” (CGT). This tax is levied on the profit made from the sale of an item. According to the Australian Taxation Office (ATO), the way that it is typically handled is that any capital gain (profit) that you make as a result of selling a capital asset is added to your assessable income for the year and taxed at the rate that applies to your particular bracket. This is the case even if the sale of the asset was a loss. Having said that, when it comes to selling a property, there are a few different scenarios that may play out based on a variety of criteria, such as what the house was used for and when the current owner purchased it.

We have looked at some of the factors to consider below; but if you want assistance with the arrangements you have made for your taxes, it may be good to seek the counsel of a skilled tax adviser.

Capital gains tax

When you sell a capital item, such as a piece of property or shares in a company, you will typically either make a gain or a loss on the sale of that asset. This is the difference between the amount of money you spent to buy the item and the amount of money you make when you sell it.

You are required to disclose any profits or losses from the sale of assets on your income tax return and pay tax on any gains from the sale of assets. Although it is commonly known as the capital gains tax (CGT), this type of tax is really a component of your overall income tax and is not a separate tax in and of itself.

When you earn a gain on an investment, that amount gets added to your total income and might result in a considerable rise in the amount of tax you are required to pay. Because taxes are not automatically deducted from the proceeds of capital gains, it is in your best interest to estimate how much money you will need to pay in taxes and set aside enough money to meet that amount.

If you have a capital loss, you won’t be able to deduct it from any of the other income you bring in, but you can put it towards offsetting a capital gain.

Unless otherwise specified, the capital gains tax (CGT) applies to any and all assets you purchased after September 20, 1985, the date the tax on capital gains was first implemented.

  • The vast majority of personal assets, such as your home, automobile, and assets used primarily for personal purposes like furnishings, are free from CGT.
  • Depreciable assets utilised exclusively for taxable purposes, such as business equipment or fixtures in rental property, are exempt from CGT.

When you settle is not the time at which you make a gain or loss on a capital investment; rather, it is when you engage into the contract for the disposal of an asset. Therefore, if you enter into a contract to sell an investment property in June 2017 and discover in August 2017 that you need to record the capital gain or loss on your tax return for 2016–17, the contract to sell the investment property must be reported.

If you are a resident of Australia, the CGT will be applied to any assets you own, no matter where they are located. The capital gains tax (CGT) is applicable to any assets purchased after October 23, 2015, by inhabitants of Norfolk Island. If a CGT event occurs to an investment that is considered “Australian taxable property,” then foreign residents will either realise a capital gain or a capital loss.

According to the Australian Taxation Office (ATO), capital gains tax (CGT) is not a distinct tax but rather an additional amount that must be paid in relation to your income tax in the event of a capital gain. This indicates that you will be subject to whatever your marginal tax rate is in addition to the CGT. Therefore, it is important to remember that a gain on an investment might result in an increase in your taxable income that is high enough to cause you to fall into a different tax bracket.

The ATO advises that tax is not withheld on capital gains in the same way that it is on other payments, such as a salary you get from an employer. Because of this, it may be smart to keep some money aside when it comes time to pay taxes if you believe you may be required to pay CGT. The ATO emphasises that if you make a separate capital loss in the same financial year, this will not diminish the amount of income that is subject to taxation; rather, you may be able to use it to offset or minimise the amount of CGT that you are responsible for paying.

 

How much is Capital Gains Tax in Australia?

It is crucial to have an understanding of how the Capital Gains Tax (CGT) is computed since the great majority of individuals are required to pay CGT when they sell or otherwise dispose of a rental property.

Because determining your capital gains tax liability can be challenging at times, it is critical to work with knowledgeable professionals, including an experienced tax accountant.

Remember that you will only be responsible for paying CGT in the tax year you sell or get rid of your rental property. Therefore, if you adopt a long-term strategy for creating wealth, you won’t need to worry about paying this for a very long time—possibly even decades—because you will have enough of money saved up. In the interim, you are free to make use of any increase in money so that you can expand your portfolio and strengthen your overall financial situation.

Your capital gain is calculated as the difference between your capital proceeds and the cost base of your CGT asset for the vast majority of CGT events. This occurs when you make more money off of an investment than it originally cost you to make the venture. According to the ATO, the cost base of a capital gains tax asset is primarily comprised of the amount that you paid for the item, in addition to a number of other expenditures connected with acquiring, keeping, and eventually getting rid of the asset.

If the rental property or asset was purchased prior to 1985, then there is no obligation to pay CGT; nevertheless, any major changes made to the property after that time may be liable to CGT.

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How do I avoid capital gains tax on property in Australia ?

There are a few different approaches that you may take to avoid paying any capital gains tax on a property or to reduce the amount of tax that you do pay.

You may not be required to pay the capital gains tax on the sale of your home if you continue to occupy it for at least six months after the purchase. On the other hand, given the circumstances, you will need to be able to demonstrate that this is your principal place of abode. The following factors are considered when deciding whether or not a given property will serve as a person’s primary residence:

  • You and your family make your home there.
  • Your private belongings are stored in there.
  • It is the address that is listed for you on the electoral roll.
  • Your correspondence will be delivered to the address.
  • Connected services include things like the phone, gas, and power.

The six-year rule is another tax advantage that may be available to you. This means that if you acquired the property with the intention of living there but then had to move away for reasons such as a work or a lengthy vacation, you can become exempt from the CGT even if you continue to rent the property out.

However, in order to qualify for this exemption, you must demonstrate that you do not occupy any other property as your principal residence. It is interesting to note that the six-year exemption will begin again if you finally go into the same item.

If you meet the requirements of the principle residence exemption, you won’t typically have to pay capital gains tax if you sell the house in which you’ve been living. When it comes to real estate, one of the most important exclusions from the Capital Gains Tax that you might qualify for is if the property in question is your home or primary place of abode (PPOR). As a result, your house qualifies for an exemption from the capital gains tax known as the principle residence exemption.

In order to qualify for the exemption, the piece of property in question must contain a residence, and you must have occupied that dwelling at some point.

You’re not entitled to the exemption for a vacant block.

In most cases, a dwelling is regarded to be a person’s primary residence if all of the following criteria are met: 

  • You and your family live there.
  • Your private belongings are stored in there.
  • It is the location to which your mail will be delivered.
  • It is listed as your address on the electoral record and is also connected to services like the phone, gas, and electricity.

If your PPOR is converted into a rental property, you may be eligible for a tax credit that was not previously available to you. There is a particular regulation that applies after six years, which states that in order for a property to continue to be free from CGT once it has been rented out for the first time, it must be sold within six years of when it was first rented out.

You are only eligible for the exemption if you do not occupy any other property as your principal residence at any given time.

The intriguing thing about this regulation is that it restarts the six-year exemption period if you reoccupy the same home as your primary residence after it has been vacant for at least six years.

Therefore, you are eligible for a further six years of exemption beginning on the day that it generates its next revenue.

Talking to a tax accountant is the best way to ensure that you obtain the most accurate and up-to-date information on how to avoid paying capital gains tax in Australia. They will consider all the possibilities and work with you to help you avoid or reduce the amount of tax liability you have, including determining whether you are qualified to claim that the home you are selling is actually your primary residence and if this will affect the amount of tax liability you have.

However, there are several things that you may do to reduce the amount of capital gains tax that you owe. First, keep things straightforward by adhering to these three guidelines:

  1. If you keep any investment property for more than a year, you may be eligible to obtain a reduction on your capital gain equal to half of the original amount.
  2. Keep meticulous records of all the money you spend on the property, beginning with the day you buy it so that you can perhaps deduct some of the gain when you sell it in the future.
  3. If you are planning to sell an investment property, the best time to do it is during a year with a low income. Since the amount of tax that you owe on capital gains is calculated based on a percentage of your income, if you anticipate having a year in which your earnings will be lower than normal, this might result in a reduction in the amount of tax that you owe on capital gains.

If you sell your home and meet all of the following conditions, the ATO states that you will not be obliged to pay any form of capital gains tax on the profit you make from the sale of your home:

  • Again, this is because this home serves as your primary place of abode.
  • During the whole time that you have been the owner of the property, you and any dependents that you may have lived there.
  • It has not been used to generate “assessable revenue,” which means that you have not operated a company out of it or rented it out, and you are not “flipping” it either.
  • There is no more than two hectares of land here.

If you acquired your home before September 20, 1985, the day that CGT was first implemented, you won’t have to pay capital gains tax on the profit you make from selling it. However, it is important to keep in mind that these requirements also apply to capital losses, which, in the event that they are exempted, cannot be used to offset your taxable income, as explained by the ATO.

According to the explanation provided by the ATO, the regulations concerning the payment of CGT on a property that was inherited from the estate of a deceased person are somewhat more complicated. For example, these regulations require knowledge of the date on which the deceased person acquired the property as well as the value of the property at the time of the acquisition. In circumstances such as these, in particular, it may be beneficial to seek the guidance of an experienced tax professional.

Capital gains tax property exemption tool

Because of recent modifications to the legislation, non-Australian citizens and permanent residents can no longer qualify for the capital gains tax exemption on the sale of property in Australia unless one of many exceptions applies.

The capital gains tax exemption for primary residences can be claimed by foreign residents who previously owned property as of May 9, 2017, up to June 30, 2020. After that, the CGT exemption for the primary home no longer applies to the sale of things from that date onward for properties bought after May 9, 2017, except for particular conditions.

See the revised Capital gains tax for foreign investors for further information if you are affected by this change. The administrative procedure will walk you through what steps you need to do. For example, suppose you have just sold a property or are planning to sell or otherwise dispose of one in the near future. In that case, you may use this calculator to determine what portion of your capital gain is exempt from taxation under the rules governing capital gains (CGT).

You must have owned the property in your capacity, either solely or jointly with another person, to be eligible for the grant. The application takes into account scenarios in which the property is (or was): 

  • your house, even if you resided in it for a time and subsequently left it unoccupied or utilised part of it to earn revenue; 
  • a rental property; 
  • an empty piece of land; and so on.

What this tool doesn’t cover

This tool won’t cover your situation if:

  • you and your spouse, or you and your dependent children, had different principal residences at the same time the property is being transferred to or from you because of a marriage or relationship breakdown, you inherited the property on or after September 20, 1985, and there was a dwelling on it when you sold it you owned two or more properties that had both been your primary residence and the periods that you held them overlapped you and your spouse, or you and your dependent children had different principal residences at the same time the property is being transferred to or from you because
  • you sold the property less than three months after you first occupied it; you used a portion of the property, other than the dwelling, to produce income; you had a building or different structure constructed on the property, and you acquired the property before September 20, 1985; and the building works were after that date.
  • You bought one property or property before to CGT and another subsequent to CGT, and you combined the titles of the property that the government is now acquiring.

 

If your scenario is described above, go to the section of this guide under “Capital gains tax – Your house and another real estate” to learn how the CGT affects your specific situation.

If I can’t avoid capital gains tax, can I reduce the amount I need to pay?

The Australian Taxation Office (ATO) advises that you should investigate whether or not you are eligible for a reduction in the amount of tax that you are required to pay on your capital gain, even if your house does not fulfil the requirements for a full exemption (for example, if it is an investment property).

Take, for instance, the case where you sold the property after having held it for at least a year before doing so. In such scenario, if you are a resident of Australia, you will typically be qualified to get a reduction of fifty percent off of any potential capital gains tax that may apply to you. However, according to the ATO, if you live in a country other than your own, you will not, in most cases, be qualified for this deduction.

It is also important to note that, according to the ATO, you are allowed to carry a nett capital loss forwards from one year to another in order to offset a nett capital gain in a different year. The loss can be carried forwards indefinitely until it is used in this manner, which is something else that is important to keep in mind.

Maximum exemption

The calculator is intended to provide you with the largest allowable deduction for capital gains. It raises your exemption percentage automatically to cover some or all of those times when you weren’t occupying the property, provided that you meet certain requirements. This can cover some or all of those periods. For example, if you made a capital loss and either of the following conditions were met: 

  • you were absent from the dwelling after occupying it as your primary residence 
  • you built or renovated a home on the property and then occupied it as your primary residence, then you will be at a disadvantage because the exemption percentage will be increased automatically.

 

 

DISCLAIMER
THIS WEBSITE IS ONLY INTENDED TO PROVIDE GENERAL ADVICE; IT DOES NOT PROVIDE PERSONAL FINANCIAL OR INVESTMENT ADVICE IN ANY FORM. ALSO, CHANGES IN LEGISLATION MAY OCCUR FREQUENTLY. BEFORE TAKING ANY ACTIONS DEPENDING ON THE CONTENTS OF THIS INFORMATION, WE STRONGLY RECOMMEND THAT YOU SEEK OUR OFFICIAL ADVICE FIRST. THE INFORMATION CONTAINED IN THIS DOCUMENT HAS BEEN OBTAINED FROM SOURCES THAT EWM ACCOUNTANTS & BUSINESS ADVISORS BELIEVES TO BE RELIABLE; HOWEVER, WE MAKE NO REPRESENTATIONS OR WARRANTIES AS TO THE ACCURACY OF SUCH INFORMATION AND ACCEPT NO LIABILITY IN CONNECTION THEREWITH. WE RECOMMEND THAT YOU CONSULT WITH A TAX ADVISOR, a CPA, a FINANCIAL ADVISOR, an ATTORNEY, AN ACCOUNTANT, AND ANY OTHER PROFESSIONAL THAT CAN HELP YOU TO UNDERSTAND AND EVALUATE THE RISKS THAT ARE ASSOCIATED WITH ANY INVESTMENT.

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