Episode Details

Paying Capital Gains Tax (CGT) isn’t necessarily a bad thing because it means that you have sold an asset and made a profit, which is better than a loss, of course. That said, I’m certain that most people would prefer to pay less tax, not more. Therefore, it’s important to understand the ins and outs of CGT.

Capital Gain Tax basics

The amount of tax you must pay on any capital gain is calculated using the below formula (for any asset purchase after 20 September 1985).

(A) Net sale proceeds – this includes the amount that you received less any direct selling costs such as advertising expenses, agent fees, legal fees, brokerage and so forth. If you have gifted the asset or sold it to a related party for less than market value, then your net sale proceeds are deemed to be equal to its market value.

(B) Cost Base – this includes the total cost of the asset, which is what you originally paid for it plus any related costs such as brokerage for shares, stamp duty and buyers’ agent fees for property, legal fees, professional fees and so forth. You may be able to include any holding costs and capital improvements in your cost base if you haven’t already claimed a tax deduction for them. The cost base will be reduced by any depreciation or amortisation claimed on the asset during the ownership period.

(C) 50% discount – if you have owned the asset for more than 12 months and you are a resident for Australian Tax purposes, you are entitled to reduce the net capital gain by 50%.

(D) Marginal Tax Rate – The final step is to multiple the discounted capital gain by your marginal tax rate. For example, if you earn between $120,000 and $180,000, your marginal tax rate is 39% (including 2% Medicare levy).

An example

Leo purchased a property in 2002 for $550,000. The total costs associated with the purchase was $33,000. Leo sold the property in December 2021 and received $2.1 million net of all selling costs. As such, the gross gain is $1,517,000. The discounted gain is $758,500. And as Leo earns over $180,000 p.a. from his job, the whole gain will be taxed at the highest marginal rate of 47%. Consequently, Leo will have to pay $356,495 of tax when he lodges his tax return after 1 July 2022.

What if you make a capital loss?

A capital loss occurs when your net sale proceeds are less than your cost base. Capital losses can be used to offset capital gains. However, capital losses cannot be used to offset other income (such as employment income). Instead, you may carry a capital loss forward to use it in future years if/when you make a capital gain.

Main residence exemption

You are permitted to claim a CGT exemption on your home if (1) you and/or your spouse live in it, (2) you have not used it to generate an income e.g. rented it out and (3) the land is 2 hectares (2,000 sqm) or less.

Your spouse and you can only nominate one main residence at any one time. Therefore, if you have two homes (e.g. a city residence and a beach-side property), only one of those properties can be deemed as your main residence.

Various rules apply for different situations such as your main residence being on multiple titles e.g. adjoining vacant land, you have multiple dwellings on the same title, or you subdivided your main residence. In these circumstances, it is very important to obtain professional advice from a holistic accountant.

Converting a main residence