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What is Capital Gains Tax and how to calculate it for property.

Posted by Anthony Van Der Wielen on 28/03/2022
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What is Capital Gains Tax?

Capital Gains Tax (CGT) is the tax paid on the monetary gap between the original price you paid for an asset and the price you pay when the asset is sold. Even though CGT is named separately to general tax, the gain or loss on that asset, as well as any sales costs, is added to your taxable income for that year, and not paid as a separate amount. 

When are you exempt from paying Capital Gains Tax?

Main residence exemptions –  When your property is your main place of residence, you are not eligible to have to pay the CGT Tax. CGT is primarily used on investment properties being leased, business properties and large properties for over 2 hectares of land. 

Temporary absence rule – When you move out of your main place of residence. You can continue to treat it as a place of residence if you don’t lease your property for up to six years. If you move back into your property after leasing then your temporary absence rule would reset and be another six years. 

Timing capital gain or loss – Considering the timing of when you make a capital gain or loss is a simple way to decrease CGT. If you know your income will be lower next year, you can strategically choose to wait until then to sell so that your lower marginal tax rate results in less CGT.

Prior to 1985 exemption rule – Properties purchased before September 20, 1985 are exempt, but if major changes or renovations have been made since that date, they may be classified as separate assets under the law and so liable to CGT.

How to calculate your capital gains – 

For Capital Gains Tax, there is no specific rate that can be applied to any individual amount. The gains or losses are added to the taxpayer’s annual income, and tax is deducted from the total amount based on the individual’s marginal tax rate. When a property is held for more than twelve months a fifty percent discount is generally applied to the gain. The discount techniques and index method are the two options in calculating CGT, and having the appropriate counsel from a tax accountant is crucial. For further information, visit the Australian Taxation Office’s website via this provided link – https://www.ato.gov.au/individuals/capital-gains-tax/calculating-your-cgt/#HowtocalculateyourCGT

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