Capital Gains Tax

[middo]

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]

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.  I’d 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, I’ll take into account the implied CGT liability when assessing net worth.  If I intend to hold my asset, I won’t.

[marty998]

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]

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. 

[Murdoch]

Sorry to re-open this old thread but wanted to check my understanding.
Below statements are how I currently understand it, but am pretty sure I'm off the mark of a few of them.
Can someone please correct me?

Purchase asset (house/shares) at $100k. Sell at $200k. Capital Gains = $100k.
Capital Gains is considered income in the financial year it is paid into your account and is therefore assessable according to below.
The $100k is treated differently in terms of Capital Gains Tax (CGT) depending on how asset is classed and length of ownership.

House (PPOR) lived in for <12 months = full CGT
House (PPOR) lived in for >12 months = no CGT
House (investment) owned for <12 months = full CGT
House (investment) owned for >12 months = 50% CGT
Shares owned <12 months = full CGT
Shares owned >12 months - 50% CGT

Does a capital gains on a jointly owned house sale get split evenly amongst the owners?
If house owned in a Discretionary Trust, can you split CGT according to Trustees allocation for tax optimisation?

Cheers
Murdoch

[marty998]

Not quite.

PPOR's are exempt for CGT but only to the extent that it is your main residence (two spouses or de factos may only be able to have one PPOR even if they own and live in separate residences, or they may only be allowed partial CGT exemptions), and only to the extent of a maximum of 2 hectares. If your property is larger than two hectares you need to apportion it and CGT will be payable.

Some people who regularly flip houses may be caught under trading rules which could class gains made on sale as ordinary income.

For a discretionary trust, the CGT discount is available to individual beneficiaries only. Companies and corporate beneficiaries of trusts are ineligible.

Lastly, property disposed of within 12 month of acuiring it from a deceased estate may still be eligible for the CGT discount.

Sorry to re-open this old thread but wanted to check my understanding.
Below statements are how I currently understand it, but am pretty sure I'm off the mark of a few of them.
Can someone please correct me?

Purchase asset (house/shares) at $100k. Sell at $200k. Capital Gains = $100k.
Capital Gains is considered income in the financial year it is paid into your account and is therefore assessable according to below.
The $100k is treated differently in terms of Capital Gains Tax (CGT) depending on how asset is classed and length of ownership.

House (PPOR) lived in for <12 months = full CGT no CGT with some exceptions
House (PPOR) lived in for >12 months = no CGT with some exceptions
House (investment) owned for <12 months = full CGT
House (investment) owned for >12 months = 50% CGT
Shares owned <12 months = full CGT
Shares owned >12 months - 50% CGT

Does a capital gains on a jointly owned house sale get split evenly amongst the owners?
If house owned in a Discretionary Trust, can you split CGT according to Trustees allocation for tax optimisation? You need tax advice for this.

Cheers
Murdoch

[Gremlin]

My understanding, which may very well be wrong, is that the CG event attaches to the year that the contract was entered into, NOT when the settlement was received. Although you don’t have to report until you receive settlement.

[Ozlady]

Serious question on the above scenario:

Can one do the below strategy?

Step 1: Move out from your present PPOR into the investment property and make the latter your new PPOR...ensure you live there for more than 12 months...then sell it avoiding capital gains tax....

Step 2: Move back into your old PPOR ...

[Model96]

Serious question on the above scenario:

Can one do the below strategy?

Step 1: Move out from your present PPOR into the investment property and make the latter your new PPOR...ensure you live there for more than 12 months...then sell it avoiding capital gains tax....

Step 2: Move back into your old PPOR ...

The PPOR exemption doesn't work backwards in time unfortunately. A property that has been your PPOR for more than a year is CGT exempt for a further 5 years though,  iirc.

[Ozlady]

Serious question on the above scenario:

Can one do the below strategy?

Step 1: Move out from your present PPOR into the investment property and make the latter your new PPOR...ensure you live there for more than 12 months...then sell it avoiding capital gains tax....

Step 2: Move back into your old PPOR ...

The PPOR exemption doesn't work backwards in time unfortunately. A property that has been your PPOR for more than a year is CGT exempt for a further 5 years though,  iirc.

Huh?

Would appreciate with an example :)

[Model96]

Serious question on the above scenario:

Can one do the below strategy?

Step 1: Move out from your present PPOR into the investment property and make the latter your new PPOR...ensure you live there for more than 12 months...then sell it avoiding capital gains tax....

Step 2: Move back into your old PPOR ...

The PPOR exemption doesn't work backwards in time unfortunately. A property that has been your PPOR for more than a year is CGT exempt for a further 5 years though,  iirc.

Huh?

Would appreciate with an example :)

https://www.ato.gov.au/general/capital-gains-tax/your-home-and-other-real-estate/your-main-residence/treating-a-dwelling-as-your-main-residence-after-you-move-out/

[Ozlady]

Serious question on the above scenario:

Can one do the below strategy?

Step 1: Move out from your present PPOR into the investment property and make the latter your new PPOR...ensure you live there for more than 12 months...then sell it avoiding capital gains tax....

Step 2: Move back into your old PPOR ...

The PPOR exemption doesn't work backwards in time unfortunately. A property that has been your PPOR for more than a year is CGT exempt for a further 5 years though,  iirc.

Thanks for link!  Tried reading it but not any wiser:(

Can you explain the above (in red) please? thanks

[Model96]

Apologies, my first comment does seem a bit cryptic. Basically, if you have lived in your ppor for more than a year, you can then move out and rent it out without a cgt liability for a further 5 years. But you can't move in to your investment property for a year (that you have never lived in previously), and then avoid all cgt when you sell it.

This might be a better link to explain if your strategy will work, search terms with 'cgt six year rule' will help👍

https://duotax.com.au/capital-gains-tax-property-6-year-rule/

[Ozlady]

Thanks Model 96 for the link....

I had a cursory read; will have to re-read a few more times to get it haha!

BUT it sounds like it is not DO-ABLE:(...unless one moves out for 6 years and then moves back..urghh..quite complicated..i will have to ask my accountant.