What is Capital Gains Tax?

As 30 June approaches and our attention turns to tax, it’s time for a lesson on one of the taxes that has the greatest impact on an investor’s wealth. 

Capital Gains Tax, otherwise referred to as CGT is one of the most common acronyms thrown around in property talk. Despite its widespread impact, a lot of people don’t really know what CGT is, let alone how it will affect them.

If you own, or are thinking about purchasing, an investment property it’s important to know how you’ll be affected.

What is it?

Capital Gains Tax, as the name implies, is a tax paid when you make a capital gain.

Any capital gain resulting from the disposal of an asset is subject to capital gains tax.

When does it apply?

A capital gains tax event is any transaction or event that results in a capital gain upon the disposal of an asset. The term ‘asset’ includes shares, vacant land, holiday homes, a business premises or of course, a rental property. A capital gain (or loss) is the difference between the purchase price and selling price of a particular asset. The fees for buying, such as stamp duty, and the fees for selling, such as agent’s fess, are added to the cost base. For example, if a property is purchased at a total cost of $500,000 (including fees) and sold for $720,000 (less $20,000 in agent’s fees), the tax will apply to the $200,000 gain. A capital gain is the amount gained between the purchase price and selling price of a particular asset.

If the property is being gifted to somebody by the seller, this is still classified as a CGT event. This means that despite the owner not receiving anything in exchange for the property, they are still liable for CGT. The amount of tax will be calculated on the market value of the property.

Are there exceptions?

There are a few exceptions to paying capital gains tax. The main one being that it does not apply to the sale of your principal place of residence – that is, your own home. CGT also only applies to assets acquired after the CGT was introduced on 20 September 1985.

You won’t be charged capital gains tax on the sale of your place of residence.

Whilst it’s not strictly an exception, holding the property for more than twelve months may mean that the owner is eligible for a 50% discount on the capital gains tax payable.CGT only applies to assets acquired after 20 September 1985.

Minimising CGT

Firstly, don’t sell! If all you do is buy property and never sell, you will never need to pay CGT.

The other option is to make the purchase your principal place of residence. As your home is exempt from CGT, you can buy and sell your home many times over and not pay any CGT. There’s obviously a hassle in shifting every few years but on the plus side, any profit you make is tax free.

In conclusion…

The above is just general information on capital gains tax. If you’re considering buying property, it’s advisable to speak to a good accountant that understands property before you buy.