Everything you need to know about Capital Gains Tax
As the Federal Election approaches, the possibility of a change in government has many investors considering the potential impact legislative changes, and taxation changes in particular, could have on their investment portfolio. Amongst other things, Labor’s election promises include a change to current negative gearing policies and a reduction in the Capital Gains Discount – both of which will hold implications for both the individual investor and the wider property market. In this article, we look at current capital gains rules, when these apply, and how this will change under Labor’s proposal.
What is a capital gain?
A capital gain occurs when you make a profit from the sale of an asset such as an investment property or shares, and is calculated by the value for which you sell the asset minus its cost base (i.e. the initial price you paid for the asset, plus additional costs such as stamp duty, purchase-related costs and disposal costs). Should you sell a property for less than you acquire it, this is known as a capital loss, and could be used to reduce your tax obligations on the gain you make from other investment assets.
What is Capital Gains Tax (CGT)?
When you make a capital gain on an investment property or asset, the profit you make from the sale will be classified as part of your income for that financial year, and will be subject to capital gains tax (note: this is still part of your income tax). For instance, if you earned $115,000 in salary income during the financial year and then sold your investment property at a $100,000 profit after deducting your cost base and weren’t eligible for a CGT discount, your total taxable income for that financial year would increase to $215,000, which would also place you in a higher tax bracket.
This tax applies to any asset you’ve acquired since 20 September 1985. However, there are also a number of instances in which your property may quality for a CGT discount or exemption. It’s also important to note that if you have made a capital loss elsewhere in the same financial year, you can use this loss to reduce your capital gain. Alternatively, if you make a loss but no capital gain, you will generally be able to carry this forward and deduct it against future capital gains.
What is the current CGT legislation?
The amount of CGT you pay depends on a number of different factors, including how long you have owned the asset, how you use it and your marginal tax rate. Under current legislation, if you have owned an investment property for longer than 12 months, you will typically be entitled to a 50% discount on any capital gain you make from the sale. Taking the same example as above, this means that you would only be taxed on $50,000 of the gain from the sale, meaning your total taxable income would reduce to $165,000 and you would remain in the same tax bracket.
However, if the property is nominated as your principal place of residence, you may be exempt from CGT altogether. Only one property can be nominated as your PPOR at one given time (unless you are selling your main residence to purchase another), meaning this typically won’t apply to investors selling an investment property. However, if the property was previously used as a principal place of residence before it was rented out, you may still be partially exempt from CGT. In this instance, the tax will be calculated based on the time for which the property was used for income-producing purposes.
What are the proposed changes?
Should they be successful in the May 2019 election, Labor intend to halve the capital gains discount for all assets purchased on or after January 1 2020. This will reduce the CGT discount for assets that are held longer than 12 months from 50 per cent to 25 per cent, meaning investors will be liable to pay tax on 75 per cent of the capital gain they make from the sale of a property. If we take our previous example, this means that as opposed to a taxable income of $165,000, you would now face a total taxable income of $190,000, which would again set you in the higher tax bracket. However, it’s important to note these changes only apply to properties bought on or after January 1 2020, and any assets purchased before this date will be fully grandfathered.
Find out how these changes will impact your investment strategy
If you would like insights into how changes to capital gains might impact your investment strategy, our Perth buyer’s agents would be happy to discuss your concerns in an obligation-free consultation. However, for tax advice relating to your specific situation, we strongly recommend seeking the assistance of a qualified tax professional.
Momentum Wealth and its affiliated entities are not Accountants or Financial Planners. While all information is provided in good faith, you should seek your own independent advice in relation to all tax matters.