Using the Capital Gains Tax Calculator
When you make a profit in any business, the government takes a share of the gains you make by charging you with tax. The same goes with property investments – when you record a profit or “gain” after selling your investment property, you are expected to paying your share of capital gains tax.
What is a capital gain?
When you sell a capital asset such as your property, you make either a capital gain or loss.
In essence, you make a capital gain when the difference between what it costs you to acquire the property and what you gained from selling it is greater than zero — otherwise, you make a loss.
For a simplistic example: you buy a house for $400,000. Ten years later, you sell it for $700,000. Your capital gain is therefore $300,000.
What is capital gains tax?
When you make a profit from selling your investment property, you will be required to pay capital gains tax (CGT). This tax does not apply to your own home, known as your principal place of residence.
Take note that this is not a separate tax by itself; it is actually part of your income tax. Here's why: the capital gains you make are added to your assessable income in whatever year you sold the property.
CGT was first introduced to level the playing field between taxpayers, according to the Australian Taxation Office (ATO). It was charged on any capital gains from the sale and disposal of any assets bought or acquired after September 1985. This tax applies to not just to property but to several assets such as shares, leases, goodwill, licenses, foreign currencies, and contractual rights.
How to use the Capital Gains Tax Calculator
Your Mortgage's Capital Gains Tax Calculator allows you to determine how much CGT you would have to pay when you sell your investment property.
For this tool to work, it needs to know how much you acquired your property for and how much you sold it for. It also takes into consideration your current taxable income as well as all the costs you incur from the purchase and sale of the property.
The first thing this tool does is calculate the capital gain based on the amount of purchase and the sale price you indicated. That amount is then added to your current taxable income. From there, the tool will calculate your CGT.
There is a 12-month rule when it comes to determining how much your CGT would be. If you maintained ownership of the asset for at least one year before selling it, you would be entitled to a 50% discount on CGT — this means only half of your capital gains would be taxable. A CGT discount of 33.3% is applicable for those with complying superannuation funds.
However, if you sold your property in less than 12 months of you owning it, you would have to pay tax for the full capital gains.
Another way of calculating CGT is the indexation method. This only applies to properties purchased before 21 September 1991. It takes into account Australia's inflation rate. With this method, the purchase price increases while the gain goes down. This calculator does not calculate CGT using this method.
How does the 12-month ownership rule affect CGT?
The 12-month discount was introduced as a means to encourage people to own investment properties for longer periods, as it means they will therefore be providing rental accommodation for a longer period also.
Let’s say you are using a buy, renovate and flip strategy. You buy an investment property for $450,000, and over a period of 12 weeks you spend $100,000 renovating it. You list it on the market for $700,000 and achieve this price.
Other costs, including stamp duty and real estate commission, totals $50,000.
Since you owned this property for less than a year, CGT will be applied to the total profit you made from selling the property. For the purposes of this calculation, let us set your current taxable income at $100,000. This means your $100,000 gain will be added to your taxable income, and you will pay CGT of around $37,000, according to the current tax rate of 37%.
This changes if you had held the property for more than 12 months; in this case the 50% discount will apply, reducing your taxable capital gain in half. In this instance, it might be worth considering renting the property out for 12 months to take advantage of this discount.
When are you liable to pay CGT?
As mentioned earlier, CGT is not a separate tax imposed on you but instead, is calculated as part of your taxable income.
You need to pay CGT if you make a capital gain when disposing of (or selling) your property investment. You will pay CGT when filing your tax return in the year of selling the property.
For instance: if you sell the property in August, you will pay CGT when you file your tax return the following July.
Can you be exempted from paying CGT?
There are several instances when you should not pay CGT.
If you make a loss — you sold your property for less than you originally bought it — you do not have to pay CGT.
You are also not required to pay CGT if you sell your principal place of residence (PPOR).
Generally, you can claim that a property is your primary residence for the following reasons:
- if you and your family live in it;
- if you have personal belongings inside the house;
- if it is the address your mail is delivered to;
- and if your residence is listed on the electoral roll.
When your main residence becomes a rental property, a six-year rule will apply — this means that if you dispose of your property within the 6-year time period, and you don’t own another PPOR during this time, you would still be exempted from paying CGT.
How do you lessen your CGT?
The tried-and-tested way to reduce the CGT charged to you is to make sure that you organise and keep all the relevant receipts related to the purchase and sale of your property. Any capital costs you incur would be added to your cost base.
These costs include transfer fees, stamp duty, borrowing expenses, advertising costs, professional services, and other charges made to increase the value of the property such as renovations.
Of course, the most effective way to lower your CGT is to own the property for at least 12 months, as this entitles you to the 50% discount.
Note that the ownership period is calculated based on the dates that you sign the contract to purchase and sell the property.
What if you make a capital loss?
If you made capital losses in previous years, you can lessen your CGT on your gain by carrying the losses over the gains you made in a particular year.
If you made a capital loss of $30,000 this year and you make an $80,000 capital gain next year, the CGT will only be charged to the $50,000 difference.
Currently, the ATO does not have time limits on how long you can carry your capital loss. It is crucial, however, for you to keep all the relevant paperwork proving that you made a loss in order for you to take advantage of this rule.
Ask an expert about capital gains tax
If ever you find yourself still confused about how capital gains tax works, do not hesitate to seek the help of financial experts. Not only will they able to give clarity, but they can also help you make the right decision in purchasing and selling your property.