Could CGT take a big chunk of the money you have made?

It’s tax time, which means a lot of people are thinking about if, and what, their tax bill (or refund, for those lucky ones) might be for the 2015/16 financial year. And if you’ve recently sold property, or are thinking about selling property, whether or not you have to pay capital gains tax (CGT) is probably at the top of your mind. So we thought we’d have a look at what CGT is, and to whom it might be applicable.

A capital gain is the difference between what it cost you to buy an asset — such as a property, but CGT also applies to businesses and shares — and what you received when you sold it (the profit, in other words), which is then subject to tax. In Australia, most personal assets are subject to CGT. This means, your home, if it is and always has been, your primary residence won’t be subject to CGT.

If you’re an Australian property investor

If you sold an investment property in this past tax year, and the sale price exceeded the price you paid for it, then you may be required to pay CGT on fifty percent of the capital gain, under the existing rules relating to capital assets.

In other words, if you purchased a unit for $500,000 three years ago and sold it for $550,000 you are generally entitled to discount the capital gain by 50 percent, requiring you to only pay CGT on $25,000. The CGT discount, which is the subject of a raging debate between the Labor and Liberal parties and a main focus of the election, only applies if you have held the property for 12 months or more.

If you’re an Australian resident and you rented out your home

Providing you didn’t rent out your home for more than six years, you can still claim the CGT exemption, as the property can continue to be considered your main residence, even while it is used to produce income, for a maximum of six years; if you rent your home out for more than six years and receive an income, then it’s no longer considered your primary residence and you must pay CGT.

There are a couple of exceptions, however, and it’s best to consult the ATO’s website or talk to your tax agent or accountant to be sure if they apply to you. One such exception is if you moved out of your home and lived elsewhere for more than six years while someone lived in your home, but paid you no rent. Because you didn’t derive any income, you can claim the CGT exemption, provided you didn’t treat any other dwelling as your main residence — if you did, you could still be required to pay CGT.

Also keep in mind that, although you can claim the CGT exemption if you rented your home out and derived an income from it for a period of twelve months only, if you were not living in the property by December 31, you will be subject to pay land tax in your state instead.

If you’re not an Australian resident but you lived in Australia on a temporary visa

From May 8, 2012, any temporary or foreign resident individuals living in Australia must meet a certain criteria to apply for the CGT discount on an Australian property, even if it was their primary residence during the time they lived in Australia. Prior to May 8, 2012, temporary and foreign resident individuals were entitled for the CGT discount, however, the rules for how the discount would be applied were changed in the 2012-13 Budget.

If you were a temporary or foreign resident and you acquired a property after May 8, 2012 and remained a temporary or foreign resident up until the day you sold the property, you will not be eligible for any CGT discount, which means you will need to pay CGT on the whole amount of the gain.

However, if you acquired the property prior to May 8, 2012 or you became an Australian resident during the term in which you owned the property, you may be eligible for a discount based on the number of days you were a resident.

Say, for example, you purchase a property, as a temporary resident on January 1, 2013, which becomes your primary residence. On July 1, 2015 you become an Australian resident, and on June 20, 2016, you sell your property. The capital gain is $50,000. Because you were an Australian resident for 356 days during the period that you owned the property, you are eligible for a 14.05 percent CGT discount, which means $7,025 of the gain is tax free, while the remaining $42,975 with incur CGT.

No CGT for primary residences

If your home was your primary residence for the entire time that you owned it, and it remained in your name for the duration of the time that you owned the property, then you will be able to claim the CGT exemption.

If you’re not sure whether you’re eligible for the CGT exemption, because your home was rented out or because of your residency status, you should speak with your accountant or financial advisor to find out what your CGT obligations are.

If you’re thinking of selling and you’d like to know what the process involves, subscribe to receive access to our free guide, called Selling Your Property: What You Really Need to Know. Alternatively, to read more property news, insights and analysis, continue reading our blog.

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Our educational blogs are designed to help you understand each of the steps involved in selling your property so whether you choose to work with a real estate agent or do it yourself you'll understand the work involved and be more efficient and aware of what you need to do. Our articles have been seen in these major online news and information portals..

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