Today, CGH Explains The Basics Of Capital Gains Tax And How It Affects Rental Property.
Hello lovely clients and assorted web surfers. In this April article we discuss the dreaded Capital Gains Tax (CGT) and how it relates to you. In particular, in this blog we look at CGT vis a vis rental property.
As a tax agent and small business accountant primarily, we have lots of customers with investment properties and regularly answer loads of questions about the dos and don’ts of CGT.
The below info is easy to follow, our accountants reckon, but then again, they are a lot better with numbers than words. So, if you still need to know more about CGT or any other accounting or tax issues, get in touch with a CGH CPA in Ballarat or Torquay. Meanwhile, beware acronyms beginning with C!
Speaking of our two office locations, April is a great time of year at both. In Ballarat we’ve got a couple of cool events happening at Kryal Castle: the Unicorn Festival (mainly for kids but fun for all ages!) and later in the month the Boardwalk Country Music Festival is on at Chateau Warrenheip (probably more for the grown-ups).
In Torquay we will be hosting our biggest event of the year by far – of course that’s the Rip Curl Pro Bells Beach. It’s actually the 60th anniversary this year.
Did you know that it’s the longest running comp on the World Surf League’s championship tour? Running from early to mid-April, just down from road from our Torquay office. Gnarly dude.
What Is Capital Gains Tax?
Capital Gains Tax (CGT) is essentially tax which is payable when you sell assets. Typically, this relates to real estate and often it will involve an investment property.
In these cases, CGT needs to be calculated very carefully, as ascertaining the capital gain achieved needs to take into account the cost of the purchase initially, along with purchase and sale expenses.
Sometimes people make a loss when selling an investment property (yikes, we hope this doesn’t happen to you), and in these situations, there’s a capital loss.
CGT influences your overall taxable income, so you should be taking it into consideration when you buy or sell investment property. CGT is fairly tricky and is something you really want to be discussing with your trusted local tax accountant.
The History Of CGT
It’s interesting to understand the history of CGT (our accountants assure us it is anyway, so we’re including this bit to keep them happy – when they’re unhappy there is bedlam in the office – calculators, cussing, glasses cases and tie clips flying around the room!).
CGT is a new kid on the block, introduced in 1985 by the Hawke and Keating government. They wanted to tax profits on investments as part of people’s taxable incomes. When the Howard government got in, they watered it down with concessions.
It’s possible that the new Federal Government could be looking at making a few more tax dollars out of CGT, seeing as they have already got their eye on our super.
It is very important to note that CGT generally does not apply to family homes. There are some exceptions however, you don’t have to pay tax on any profit made from selling that.
There’s ongoing debate about this area of taxation – in particular ‘negative gearing’ for rental properties.
Nothing much has changed as yet, but might well do in the future. There’s a big push to make things easier for first home buyers, which is a good thing, and part of the policy has been to make it more difficult for non-Australians to buy investment property here.
There’s a fair bit to understand with all this, which is why we suggest talking to a registered tax accountant first, if you’re thinking of investing.
How Does CGT Affect The Average Investor In A Nutshell?
Firstly, if you have an investment property and you sell it, you’ll cop CGT. This applies whether you sell it within months or decades, there’s no avoiding this one, although depending on the timeframe, the rate will vary (see below for more detail on this).
The benefits of negative gearing are great while it lasts, but as soon as it becomes positively geared – when the revenue from rent outdoes the costs involved – you’ll be up for CGT.
However, there’s a bit more room to manoeuvre, hence the recommendation you get advice from an accounting firm.
When you invest in property, obviously the objective is to get a steady income from it over a long period, without too much hassle (and hopefully all the while your property is going up in value).
CGT will apply to your actual overall income. It’s not separate. And it’s not straightforward to figure out exactly how much you are required to pay, as it involves various calculations.
The ATO website has lots of information and a calculator on its website, but really, if you want to keep CGT to a minimum, let an accounting professional do this for you, unless you enjoy pain.
What Types Of Property Is Affected By Capital Gains Tax?
• Investment properties
• Commercial properties
• Business and office equipment
• Business vehicles
• Shares
• Cryptocurrency
What Stuff Is CGT Exempt From?
• Assets acquired prior to 1985 (!)
• Your main/primary/family residence
• Private vehicles
• Depreciating assets in an investment property (sometimes called ‘plant’, such as fixtures and fittings, things that need to be replaced regularly etc.)
What Rate Does CGT Run At?
As mentioned above, it is not fixed for most investors and depends on a number of factors. Self-Managed Super Funds are taxed at 15% while individual taxpayers are taxed at their own marginal tax rate on their assessable Capital Gain.
What Are The Best Ways To Minimise CGT? The Layman’s Version Please!
• Hold on to your asset. For at least a year. That’s not too hard, is it? If you sell an investment property or shares within 12 months, you’ll cop the full brunt of CGT. So don’t do that. After 12 months, discounts kick in. Unless you’re a company. SMSF’s discounts are not quite as good as individuals’.• Offset gains with losses. Get a CPA to explain to you how this works.
• Revalue before renting. If you convert your residence to investment property, get it valued prior to renting it out. CGT will only apply after this point, not from when you initially purchased the place.
• Use small business concessions. There are a number of concessions available for small businesses. Speak to an expert in small business accounting to learn more.
Really CRAP CGT!
You are actually supposed to report on the formal gifting of significant assets like jewellery, which have gone up in value whilst in your possession. Such giving is technically viewed by the tax office as ‘disposal at market value’, akin to selling. Over time jewellery and other quality items can appreciate a lot in value. This is considered subject to CGT, officially.
If it is willed and subsequently inherited, there’s no problem, but if gifted – and it has increased in value – that amount is considered fair game by the tax office.
The same goes for other valuable assets such as some varieties of cars and boats which improve in value, artworks, collectible antiques and wines etc.
The onus is on the taxpayer to report on these things and it’s very difficult for the ATO to police, so in reality it’s not much of a revenue avenue for government.
Our Conclusion On The Complexities Of CGT
CGT is a rather complex aspect of taxation laws. Many people find CGT the most annoying tax of all ¬– as it is a levy on profits from wise investments – surely that should be ours to keep! Not so unfortunately, but you can certainly keep it to a minimum with a bit of help from tax agent services.
