Contributed by Owen Accounting
The new tax season is only a few weeks old and already it is apparent that our local buoyant property market is having an impact on tax returns this year.
For many people, the tax impact is expected and planned for part of their property ‘deal’, these well-prepared people have often already had a consultation with their tax advisor and maybe taken the sort of steps that can legally minimise the pain of extra tax…
But, for others, it comes as a rude shock, often because they have sold a property that was once their main residence, and they have the incorrect idea that it is not taxable.
Put simply Capital gains tax (CGT) is a tax on the ‘profit’ from having bought, and later sell an asset. If you don’t make a gain, then there’s no tax to pay.
The way capital gains work is that a gain is added to your assessable income, and then taxed at your marginal rate.
Sadly, a capital loss does not reduce your assessable income (it has to be carried forward to later years until you have another capital gain and then it can be used to reduce the capital gain before being taxed).
You can imagine that when it comes to property sales with the recent high prices, sometimes the capital gain alone can be as much or more than your usual income so the tax sting can be significant.
So how is the gain or loss calculated?
Again, put simply it’s a matter of adding receipts and deducting expenses, the concepts here are called ‘Cost Base’ and ‘Capital Proceeds’.
The main tip here is to keep (or take steps to recover) all the records of expenditure.
The thing is it is only rarely that simple, and there are lots of traps and tricks that can catch out the unwary or uninformed.
As I started out talking about property and main residence, I will limit the comments to some of the issues we commonly deal with.
The first is that a general rule applies for an exemption from CGT.
This is good news, but this “main residence exemption” has a number of limitations.
Three common situations which you might face can lead to some CGT liability when it’s time to sell your home are:
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1. If you ever used your home to generate income
For example, you either rented it out or conducted a business from it. This can lead to many different permutations with the options to choose between different outcomes, depending on your specific circumstances.
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2. If your home is on more than two hectares of land
More common in our region than in the capital cities (don’t get me started on tax policy!). Adjacent land used primarily for private or domestic purposes in association with your dwelling will be taxable to the extent that it exceeds two hectares. Again this can lead to some different choices that can produce more or less favourable outcomes.
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3. More than one “home” at a time that you’ve lived in or are living in
The CGT laws generally only allow an exemption for one property in a given period.
If my short essay has given you reason to stop and think about your situation, that’s great.
It isn’t meant as specific advice but the best takeaway is to see a competent tax professional to help navigate these situations.
