Author Topic: Capital Gains Tax  (Read 968 times)

middo

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Capital Gains Tax
« on: March 20, 2018, 11:11:11 PM »
OK, so I am fairly new to the idea of capitals gains tax, as historically everything we have sold that could be a CGT asset has been the family home.  But now we are starting to look at selling a rental property, and the capital gains have been very significant.  The property was bought in the early 80's as a family home.  It was rented out from some time in the 90's, and we inherited it around 2010.  As far as I can tell, we will be responsible for the CGT from the time it was rented out first, until today.  The calculation I have come up with works something like:

CGT =  1/2 of:   (sell price - cost price) *  (number of days rented/total number of days from purchase)

Since the purchased price was around 10% of current value, CGT looks like it will take a chunk of value from us.

A couple of questions for the greater (Australian) community, and thank you in advance for any helpful answers and discussion.


Firstly: Is my calculation correct?

Secondly: Do you factor CGT into your net worth calculations if you own rentals or shares?


Gremlin

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Re: Capital Gains Tax
« Reply #1 on: March 21, 2018, 01:46:04 AM »
There are a number of things that complicate this scenario.  Pre-1985 asset, family home converted to investment, inheritance, any depreciation claimed by you or whoever you inherited from all make this less than 100% straightforward to determine your CG.  Id seek an opinion from an accountant.

But then if you hold an investment asset for longer than 1 year, you should be entitled to a discount on your Capital Gains of 50% for tax purposes (at least with current legislation- Labor have indicated that they may change this if they win the next election).  At first glance, this halves your CGT liability, but as mentioned above, your circumstances are complicated.

If I intend to sell my asset, Ill take into account the implied CGT liability when assessing net worth.  If I intend to hold my asset, I wont.

marty998

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Re: Capital Gains Tax
« Reply #2 on: March 21, 2018, 02:04:49 AM »
One of the great misconceptions is that people think CGT is a separate tax. It's not, it's simply a taxing regime on a certain type of income

  The calculation I have come up with works something like:

CGT =  1/2 of:   (sell price - cost price) *  (number of days rented/total number of days from purchase)

This is not CGT - this is your capital gain. Your capital gain is then added to you other assessable income for the year, to form your taxable income.

Tax is then levied using marginal rates in the normal manner.

You should follow this link and try and work out exactly where your circumstances lie. This is one transaction where a good tax accountant can save you quite a bit of coin by figuring out all of the cost base adjustments you might be entitled to. Hopefully you've kept records!

https://www.ato.gov.au/General/Capital-gains-tax/Deceased-estates-and-inheritances/Inherited-dwellings/CGT-exemptions-for-inherited-dwellings/

On the second question - one day I will sell my investment property, but since I won't know what my income is going to look like in many years time or what the tax brackets will be it is very hard to predict how much tax will be payable.

For now I don't don't deduct the "deferred tax" position from my net worth. You could say my balance sheet is therefore not in compliance with the accounting standard AASB112 Income taxes :)


middo

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Re: Capital Gains Tax
« Reply #3 on: March 25, 2018, 03:07:36 AM »
One of the great misconceptions is that people think CGT is a separate tax. It's not, it's simply a taxing regime on a certain type of income

  The calculation I have come up with works something like:

CGT =  1/2 of:   (sell price - cost price) *  (number of days rented/total number of days from purchase)

This is not CGT - this is your capital gain. Your capital gain is then added to you other assessable income for the year, to form your taxable income.

Tax is then levied using marginal rates in the normal manner.

You should follow this link and try and work out exactly where your circumstances lie. This is one transaction where a good tax accountant can save you quite a bit of coin by figuring out all of the cost base adjustments you might be entitled to. Hopefully you've kept records!

https://www.ato.gov.au/General/Capital-gains-tax/Deceased-estates-and-inheritances/Inherited-dwellings/CGT-exemptions-for-inherited-dwellings/

On the second question - one day I will sell my investment property, but since I won't know what my income is going to look like in many years time or what the tax brackets will be it is very hard to predict how much tax will be payable.

For now I don't don't deduct the "deferred tax" position from my net worth. You could say my balance sheet is therefore not in compliance with the accounting standard AASB112 Income taxes :)

Thanks for the replies.  Yes, sorry, it is the Capital Gain, which is then added onto our salary.  The property is in my wifes name, and she makes a reasonable income, so the actual tax amount will be significant.  It reduces the value of our asset by about 15%. 

We will need to talk to an accountant, and will do so before we make any serious decisions.  We have a possibility of splitting the property into two, and maybe selling over 2 financial years to reduce the actual tax paid (by about 10%).  So many things to consider.

I think I may track the Capital Gains tax liability a bit closer in the future.