Some basics about Capital Gains Tax
Capital gains tax is a tax on the ‘profit’ from having decided to buy, and later sell an investment. If you don’t make a gain, then there’s no tax to pay, and potentially the loss you made has to be held on record in your tax return.
The way capital gains works for individuals is that a gain is added to your assessable income, and then taxed at marginal rates. Sadly, unlike rental losses, a capital loss does not reduce your assessable income. It has to be carried forward to later years until you have another capital gain and at that stage it can be used to reduce the capital gain before being taxed.
So how is the gain or loss calculated?
Well in some way it’s a little like the rental income/loss, but the concepts here are called ‘Cost Base’ and ‘Capital Proceeds’.
The cost base of an asset is calculated at the point you enter into a contract to buy that asset.
The cost base has five broad elements which are:
- Money paid to buy the property. So generally the contract price.
- Incidentals of buying the property which include professional fees, transfer costs, stamp duty, advertising, valuations, search fees, borrowing expenses etc.
- Ownership costs which were not claimed as deduction. So basically if your property didn’t make income, then all the costs listed under the ‘Income Tax’ section may fall into this category.
- Capital costs to improve or preserve the asset and can include initial repairs, renovations, new buildings and major repairs.
- Capital costs of preserving or defending your title in the asset and can include legal fees if you have a dispute in relation to your property.
So the records associated with these five elements need to be stored very carefully, so that when you sell the asset, which could be twenty years down the track, you can pull together all the documents and work out what you’ve spent.
This is the easier part of the calculation and it’s simply the amount of money you received (or were entitled to receive) when you sell the property. Once again, generally that is the contract price.
So when you buy, hold and sell property, you need to be very diligent and thorough with your record keeping and substantiation. And in most cases, your accountant can assist to make sure of the accuracy and calculations.
Calculating the gain or loss is simply:
Capital gain / (Loss ) = Capital proceeds – Cost case
If you have made a loss, then as we said earlier just roll it forward or offset it against any other gains you might have made in the year.
If you made a gain, then the next step is to see how you must declare the gain and whether you are entitled to discount the gain. You see the tax office is kind enough to reward long term investors with potential discounts.
In the case of individuals, there’s really only one discount, but it is a good one. If you held the property for more than 12 months, (contract date to contract date), then you are allowed to discount that capital gain by 50% to arrive at the net gain which is then added to your assessable income before you get taxed.
Property bought 1 January 2012 for $100,000
Property sold on 1 January 2013 for $150,000
Capital Gain = $150K less $100K = $50K
Discount = 50% of $50K
So Net Gain = $25K
Therefore $25K is added to your other assessable income to arrive at your taxable income, and then you are taxed on the total.
This is just a taste of the kind of information that you will receive at our Introduction to Property Investment session on Wednesday 29 July at Burleigh Surf Club. BOOK NOW to save disappointment and secure your seat.