CGT Deductions & Relief’s - Australia
What you pay capital gains tax on
If you have sold or transferred assets during the tax year, such as property or shares, you will need to calculate the capital gain or loss for each asset that has been disposed.
When you sell an asset for:
• more than it cost you – you have a capital gain
• less than it cost you – you have a capital loss.
You pay tax on your net capital gains. This is:
1. your total capital gains
2. less any capital losses
3. less any deductions, discounts and reliefs that you may be entitled to on your gains.
What deductions can I claim?
If you are a tax resident of Australia and selling your home, the good news is that there is no Capital Gains Tax to pay on any profit you make if it was your main residence throughout ownership and you are not claiming another property as your main residence. However, it also means that none of the expenses you incur are tax deductible.
The same does not apply when selling a house either as a non tax resident of Australia or that the property was bought as an investment property. This can include a property that is your main residence but where part of it is rented to generate an income.
Deductions may also be allowed if you have rented out the property for a period before it became your main residence or have rented it out after living in the property. In these cases, capital gains tax and tax deductions will only be applicable to the part of the property for the period when it was rented but not when used as your main residence.
When you sell a property that has been used as an investment property in order to reduce the chargeable gain any allowable capital expenses may be claimed, which include:
• any legal fees paid to a solicitor, such as title search fees, chargeable appraisal costs and conveyancing costs for the transfer of ownership of the property
• any fees paid to a settlement agent
• fees paid to an estate agent
• stamp duty payable on the acquisition of the property.
Some of these costs will apply when either buying or selling the property so both can be used to reduce the amount of Capital Gains Tax due.
Other expenses during the course of ownership may apply for investment properties, though these are deducted against tax each year rather than on selling the property unless eligible for them to be claimed. They include:
• the costs of maintaining and repairing the property
• local council taxes and water rates
• interest on any mortgage or loan taken out in connection with the investment property
• building, contents and landlord insurance
• advertising and property management fees
• adviser and accountant fees.
Any renovation and refurbishment work may be classified as capital costs and may need to be apportioned over a number of years. And, as before, if only part of the property is for rental or this occurs for only part of a year, the costs need to be apportioned appropriately.
Capital works deductions
Capital works expenses you incur form part of the cost base of your property for capital gains tax purposes. If you made a claim for a capital works deduction against the rental income in your tax return each year, you will need to adjust your cost base to take this into account when you calculation your capital gain or loss.
CGT discount for foreign residents
The 50% capital gains tax (CGT) discount is not available to foreign and temporary resident individuals for assets acquired after 8 May 2012.
You can only apply the discount to part of your capital gain if either of the following happened:
• you acquired the asset on or before 8 May 2012
• you had a period of Australian residency after 8 May 2012.
CGT events that occurred on or before 8 May 2012 are not affected.
How the CGT discount works
When you sell or otherwise dispose of an asset, you can reduce your capital gain by 50%, if both of the following apply:
• you owned the asset for at least 12 months
• you are an Australian resident for tax purposes.
This is called the capital gains tax (CGT) discount.
You can either use the market value basis to determine the discount eligible or the cost basis method both of which are outlined below:
If you were a non-resident on 8 May 2012, you will need to obtain a market valuation as at this date. The capital gains up to 8 May 2012 can be calculated using the 50% discount method, whilst the gain from 8 May 2012, does not receive the 50% discount. The discount from the calculation mentioned above is applied.
If the market valuation method is not used, the costs of the property would need to be used and the gain apportioned pre and post 8 May 2012 (using the number of days in each period) to calculate the gain subject to 50% discount and the gain subject to no discount.
Using the actual costs method in calculating the gain to 8 May 2012, a further apportionment issue arises with the time the property was a main residence and the time that it was not.
There are holding costs of the property (such as rates, interest, repairs, etc) and improvements that can form part of the original cost base for the period when it was not a main residence.
Who is eligible for the Main Residency Exemption?
If you are a foreign resident, you are not entitled to the main residence exemption from capital gains tax (CGT) for property sold after 30 June 2020, unless you satisfy the requirements of the life events test.
If you are an Australian resident at the time you dispose of your property this does not affect you.
Life events test
When you dispose of your residential property, you satisfy the requirements of the life events test if both of the following are true:
you were a foreign resident for tax purposes for a continuous period of 6 years or less
during that period, one of the following occurred:
you, your spouse or your child under 18 had a terminal medical condition
your spouse or your child under 18 died
the CGT event happened because of a formal agreement following the breakdown of your marriage or relationship.
If you satisfy both these criteria and meet the general requirements for the exemption, you can:
claim the main residence exemption
use the exemption as a reason to vary the capital gains withholding that would otherwise apply to your property.
GM Tax also offers the following services:
GM Tax also offers the following services:
- Tax planning advice and guidance with regards to your residency status in Australia.
- Preparation of Australian tax returns, with all returns submitted to the ATO electronically where possible.
- Advice on the tax position where a property in Australia is being let while a taxpayer is living overseas.
- Capital Gains Tax advice and guidance in relation to your Australian assets.
- Assistance to ensure Australian sourced income of those who are non-residents of the Australia is properly taxed and is not taxed twice, or double taxed.
- This last point is particularly relevant to those who have Australian sourced income or capital gains which may also be subject to tax in the country in which the taxpayer is now resident.