When you sell assets such as a house or shares at a profit, then you are liable to pay Capital Gains Tax (CGT) Australia. However, there are measures you can take to minimize the capital gains tax on the sale of a property. For instance, if you are an Australian citizen and you own a property for more than 12 months, then you get a 50% capital gains tax discount. Some assets like your primary home are exempted from CGT.
In this article, we will tell you what capital gains tax is, how to calculate it and how to minimize it.
What is Capital Gains Tax on Property?
Capital Gains Tax on a property is the tax payable when you sell an asset like a real estate property or shares at a higher price than you bought it. Capital Gains Tax was introduced by the Australian Tax Office (ATO) on 20th September 1985 and apply to assets acquired since then. However, there are some exemptions. You must declare any capital gains in your tax return when you sell an asset at a profit.
When Do You Pay Capital Gains Tax on Property?
If you sold an asset such as property or shares, then you need to work out the capital gain or loss for each asset. You pay capital gains tax on a property when you sell an asset for a higher price than you bought it. However, there are a few exemptions.
To calculate capital gains tax on property:
Total capital gains
Less any capital losses
Less any discount on your gains
When Not to Pay Capital Gains Tax on Property?
There are some instances when you don’t need to pay capital gains tax on property. They include:
- When you sell your primary residence at a profit
- If the property was purchased before September 20, 1985
How Much is Capital Gains Tax on Property Australia?
For individuals, capital gains tax on a property is calculated at the same rate as your income tax. If you have held the asset for more than 12 months, you get a 50% discount.
The following are resident tax rates in Australia 2022/23. However, it does not include Medicare levy of 2%.
|0 – $18,200||Nil|
|$18,201 – $45,000||19 cents for each $1 over $18,200|
|$45,001 – $120,000||$5,092 plus 32.5 cents for each $1 over $45,000|
|$120,001 – $180,000||$29,467 plus 37 cents for each $1 over $120,000|
|$180,001 and over||$51,667 plus 45 cents for each $1 over $180,000|
How to Calculate Capital Gains Tax on Property in Australia
To calculate capital gains tax on property, you need to subtract the price at which you bought the property and associated costs from the price you are selling the property.
Capital gains tax will be calculated at the same rate as your income tax. If you held the property for at least 12 months, you qualify for a 50% discount. However, companies do not qualify for the 50% discount and foreign residents who bought the property after 8th May 2012.
SMSFs have a fixed tax rate of 15%. If you comply with SMSF, then you are entitled to a 33% CGT discount if you have held the property for at least 12 months. However, this does not apply to companies.
Capital Gains Tax on Commercial Property Australia
Capital gains tax on commercial properties works the same way as on residential properties. However, there are a few differences. Commercial property is not exempt from the capital gains tax, but there are discounts available for some types of commercial property owners.
Also, companies are not given a 50% discount on assets held for more than 12 months. For tax purposes, farms and home-based businesses are treated differently. Besides, CGT, commercial property owners are liable to pay Goods and Services Tax (GST).
Capital Gains Tax on Inherited Property Australia
CGT does not apply when you inherit a property, but when you dispose of an asset you have inherited. It is because when you transfer a property you have inherited, that is not considered a capital gain. However, if you wish to sell the property, the capital gain tax will apply.
Where CGT is applicable depends on:
- When the deceased acquired the property
- When the deceased died
- How the deceased used the property
- Whether the deceased was an Australian Citizen
How to Avoid Capital Gains Tax on Property Australia
There are several measures you can tax to avoid capital gains tax on property in Australia. These measures include:
1. Note the date of purchase. If you purchased the property before 20th September 1985, it is exempted from capital gains tax. You won’t pay tax on profits you make.
2. Hold the property for at least 12 months. Any assets held for at least 12 months attract a 50% discount on CGT when sold.
3. Make the property your primary home. Capital gains tax does not apply to the profits you make when you sell a property that is your primary residence.
4. Sell the property during a low-income year. You can lower CGT on a property by delaying the sale of a property until the year you anticipate low income. It is because CGT on a property is calculated at the same rate as your income tax.
5. Use the temporary absence rule. If you rent out a property you no longer live in, ATO will allow you to continue treating it as your primary residence for up to six years. This way, you can get a partial main residence exemption. During this period, you cannot treat any other property as your primary residence.
6. Utilize your super fund. If you buy a property through a self-managed super fund and hold it for at least 12 months, you can get 1/3 tax discount if you comply with SMSF.
7. Invest in affordable housing. Starting January 2018, an additional 10% CGT discount was introduced for those who invest in affordable housing. Hence, you can qualify for up to a 60% CGT discount. To qualify, you must rent out your house to low and middle-income tenants at a rate below the private market rental rate.
Summary of Capital Gains Tax on Property
If you are selling a property in Australia, then it is important that you be aware of the capital gains tax. It is also important you get to know how you can avoid or lower capital gains tax on property. For instance, when you sell a property you have held for at least 12 months, you qualify for a 50% CGT discount.