Looking for buyers to sell your property or house in Australia? Before finalising the buyer, let’s assess your understanding of Capital Gains Tax (CGT) existing in Australia.
- What types of properties are subject to CGT?
- What exemptions apply when selling a property in Australia?
- Do you qualify for a discount if you hold the house for about 12 months before selling it?
- Does CGT apply if you sell the house at a loss?
- Do foreign residents have to pay CGT on property sales in Australia?
Not sure about the answers to the questions? Without a clear understanding about the CGT in Australia, taxations could be challenging, leading to loss of funds without any potential gains when selling your property. Understanding the nuances of CGT will ensure you make informed decisions during your property sale by reducing a potential amount of tax burden.
This blog provides a comprehensive breakdown of Capital Gains Tax (CGT) and its impact on your property. It offers valuable insights into the process of selling a house in Australia, including exemptions and the consequences of not paying CGT.
What is Capital Gains Tax on a House?
Imagine you’re selling your house for a price higher than what you originally paid. The difference between the selling price and the purchase price is where Capital Gains Tax (CGT) applies. Simply put, CGT is the tax you pay on the profit earned from selling a property, whether it’s real estate, an investment property, or your own home. In Australia, CGT is part of income tax, with various exemptions and discounts available under the law.
The capital gain tax is calculated as,
CGT = Selling Price – ( Purchased Price + Associated Costs)
- If the result is positive, you owe CGT on the profit.
- If it’s negative, it is a capital loss, which can be used to offset other capital gains for tax purposes.
Properties Subject to Capital Gains Tax
Knowing which properties are subject to CGT will help you plan the sale and calculate the tax liabilities in advance.
Investment properties: If you own an investment property like a rental house to generate income, then CGT is applicable on the profit earned on the sale of the property.
Vacant land: Even a small piece of land with or without a structure is applicable for a CGT if the land gains a profit from the sale.
Commercial properties: Spaces like shops, warehouses, business premises, and other non-resident places are also liable for a CGT when sold at a profit.
Inherited properties: The transferred properties also incur CGT in the event if the property was not a main residence and was sold outside the exemption period.
Non-residents owned properties: Similar to Australian residents, foreigners are also required to pay CGT on the profits gained from selling the property.
Applicable Exemptions of CGT in Australia
While most of the properties are subject to a CGT in Australia, there are certain exemptions applicable based on the ownership, duration, withhold period, and usage of the property.
Main residence tax exemption
- If your property was the primary residence during the entire ownership period, then you are eligible for CGT-free taxation.
- If you had rented out the space for commercial purposes, then you are liable only for a partial exemption.
- Non-residents of Australia are not liable for a CGT exemption unless they adhere to certain criteria like serious illness or death of owners.
Pre-CGT exemption:
- Under this, any property purchased before September 20, 1985, is fully exempt from CGT.
- In the event of any significant addition done to the property after the specified date, it is subjected to CGT.
50% Discount:
- This exemption is available only to Australian residents on the account of owning the property for more than 12 months.
Small business concessions:
- Any property held for about 15 years by small business owners who are above 55 years old or nearing retirement gains a 50% discount on CGT.
- Also, if the property was an active asset, supporting business for at least half the ownership period, then it is recommended for a 50% discount on CGT.
- If the small business owners sell the business property and reinvest the profit in another business space within a specified period, then they are allowed to defer paying the CGT. But will be subjected to paying the CGT on the sale of the replacement asset.
Inherited property exemptions:
- If the property was the main residence of the deceased and was sold within two years of inheritance, then there is a complete exemption of CGT.
- Also, if the property’s purchase dates back to September 20, 1985, CGT may not apply.
Transfer of Property:
- If the transfer of property occurs between spouses during divorce or separation, CGT may get deferred until the property gets sold.
Overall, having a clear insight about the exemptions will help reduce your CGT liability to at least half while selling the property. Seeking tax advice from tax experts will also ensure you maximise the available benefits.
How is CGT Added into your Taxable Income
As stated, CGT is not a separate tax; it is a part of the taxable income that is taxed at your marginal income tax rate. If you sold a property or house in Australia, then the profit gained from the sale is taken into account as taxable income for that year. This is done in the following ways:
- As a first step, it is important to determine the capital gains your property gained from the sale. This is determined using the formula,
Capital gains = Selling price – (Purchase price + Associated costs) - Then, you should calculate any applicable exemptions or discounts like the main residence exemption, 50% discount or inherited allowance.
- After applying the necessary discounts, you get your net capital gain. Now add this net capital gain to your total taxable income for the current financial year.
- As a final step, pay the total income tax (income + capital gain) as per the tax slab for the financial year.
Consequences of Ignoring CGT
Failing to declare or missing CGT when selling a property may result in:
- The ATO conducts cross-checks and further investigations into all your financial transactions and property sales records.
- Significant penalty taxes ranging from 25% to 75% of the unpaid CGT, along with General Interest Charges (GIC), which increase the longer the tax remains unsettled.
- Backdated tax liability, requiring you to pay the full CGT amount, plus accrued interest and penalties.
- A tax discrepancy that could impact your future tax refunds.
- Legal consequences, including court fines or even imprisonment for tax fraud.
This can be avoided by
- Lodging an amended tax return with the complete CGT record.
- Disclosing the error to the ATO in advance to reduce legal actions.
- Seeking professional help from accounting firms like Accountants Direct, who will help you stay ahead by planning the CGT in advance by taking into account all possible exemptions and concessions.
Conclusion
While Australia offers a strong investment market for buying and selling properties, the process can be challenging for both investors and individuals. Capital Gains Tax (CGT) plays a crucial role in the Australian tax system, and understanding its implications on your profits can be complex. However, ensuring compliance with CGT regulations is essential, as every property sale in Australia is subject to this tax.
Considering tax planning strategies with professional accountants from Accounts Direct can help minimise CGT liability and maximise your profits. Not every property is subject to CGT, and understanding these nuances is key to making informed decisions. From guiding you on eligible exemptions to helping you choose the right investment strategy, we at Accounts Direct ensure your gains stay with you, paving the way for long-term financial success.
Frequently Asked Questions About Taxes on Selling a Home
- How to avoid CGT on my property sale in Australia?
Leveraging the main residence exemption can help you qualify for a full CGT concession. Another way to maximize benefits is by ensuring your property consistently meets the required criteria for applicable discounts. - Who is exempt from capital gains tax in Australia?
If you are a small business owner aged 55 or above and are selling a commercial property that you have owned for 15 years, you may be exempt from CGT on the sale.
- What happens when I sell my home at a loss?
Since a main residence is exempt from CGT, selling it at a loss has no tax implications. However, if it’s an investment property, the capital loss can be used to offset capital gains from other investments.
- What is the 6-year rule in CGT in Australia?
Australia’s 6-year rule is a special exemption for homeowners who rent out their property. If the property is sold within six years of being rented, the owner can still claim the main residence exemption from CGT.
- Can I reduce CGT by renovating my property before selling?
Yes, renovating enhances the property’s appeal while also increasing its cost base. This helps reduce the capital gain, ultimately lowering the CGT liability when the property is sold.
