Capital Gains Tax – Australia

Successful property investors understand how taxes impact their investments, because after finance costs, taxes will be the next largest expense. Whilst Capital Gains Tax (CGT) is not an operational tax, because it is only incurred when the property is sold, investors should be aware of this because it can impact a decision to sell or refinance a property.

When investors dispose of their property any capital gain they have made is typically, subject to a Capital Gains Tax (CGT). How the gain is calculated varies between countries. Additionally, the tax charged varies between countries and whether or not the investor is domiciled in the country of the property.

In this article, we focus on Capital Gains Tax in Australia.  But please take note, we are not tax advisors, this is article is written for general information and should not be relied upon. For detailed independent tax advice you should seek advice from a tax consultant. 

Capital Gains Tax in Australia

In Australia, a capital gain (or capital loss) is the difference between the property’s purchase price and the amount it is sold for. These are measured from the point at which the contract was entered.

Rental properties are considered a Capital Gains Tax (CGT) asset in Australia and therefore are subject to Capital Gains Tax. Although CGT is referred to as a separate tax, the gain is taxed as part of your income, and therefore it is added to your income tax costs in the year the sale is recorded. This date is referred to as a “CGT event”.

Residents and Non-Residents

There is a difference between the way in which residents and non-residents are treated with respect to Capital Gains Tax:

  • Australian Residents – if the asset is held for more than 12 months before the CGT event occurs then the calculated capital gain is reduced by 50%.
  • Non-Australian residents: pay CGT on 100% of the calculated capital gain regardless of how long they have owned the property

Working out the capital gain

Every time a CGT event occurs the capital gain or loss needs to be determined. To establish what the actual capital gain is, investors need to determine what the cost base for the asset is. The cost base of a CGT asset is the cost of the asset when it was purchased plus certain other costs associated with acquiring, holding, and disposing of it.

The Cost Base for most property includes the following:

  • Original Purchase Price
  • Stamp Duty
  • Legal Fees
  • Cost of depreciation (if it was claimed)

However, investors cannot include any of the following:

  • Council rates
  • Insurance
  • Land tax
  • Maintenance cost
  • Interest on money borrowed to buy or improve the property
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Comparing CGT for domestic and international buyers

In this example, we compare how CGT applies to a domestic buyer and an overseas buyer. We have assumed the following for both buyers:

  • The property is held for 5 years and sold on the first day of the 6th year and no other income is generated in the 6th year.
  • The property value has grown to $AUD 1,021,025, assuming the value grew by 5% p.a. over the period it was held.
  • An agent sold the property and was paid a fee of 2%.
  • Legal fees of $ 2,000 were paid.

First, we need to calculate the cost base:

ItemDomestic BuyerInternational Buyer
Purchase Price800,000800,000
Stamp Duty40,72095,720
Legal Fees2,0002,000
   
Less   
Building Depreciation32,50032,500
   
Adjusted Cost Base810,220865,220

The total capital gain is then the net proceeds for the sale less the adjusted cost base. This is simply calculated as the following:

Sale Price =$AUD 972,405
Agent Commission =$AUD 19,448
Legal Fee = $AUD 2,000
Net Sale Proceeds = $AUD 950,957

We can work out the calculated capital gain for both buyers.

Buyer 1
Net Sale Proceeds = $AUD 950,957
Adjusted Cost Base = $AUD 810,220
Capital Gain = $AUD 140,737
Buyer 2
Net Sale Proceeds = $AUD 950,957
Adjusted Cost Base = $AUD 865,220
Capital Gain = $AUD 85,737
Buyer 1

Buyer 1 made a taxable gain of $AUD 140,747, however, because they are an Australian resident and have owned the property for more than 12 months, they receive a 50% reduction in capital gain. Therefore, their actual taxable gain is $AUD 70,374.

Buyer 1 earns an Australian Income of $AUD 100,000 p.a. and therefore, all of the taxable gains sit within two tax brackets, up to $AUD 120,000 is taxed at 32.5% ($AUD 20,000) and $AUD 50,374 is taxed at 37.0%. So, the tax on the capital gain will be $AUD 25,138, and Buyer 1 will receive $AUD 115,609 after tax.

Buyer 2

Buyer 2 made a taxable gain of $AUD 85,737. Because they are not a resident of Australia, they do not receive a 50% discount on the capital gain.

For buyer 2, their taxable gain is $AUD 85,737, subject to the foreign tax rates, and is taxed at 32.5%, equating to $AUD 27,865.

So, Buyer 2 will receive $AUD 57,872 after tax.

What does this mean for buyers?

As this example shows, the performance of a property can be significantly impacted depending on whether you are domiciled in the same country as your property.

It also demonstrates, that for offshore investors who’s strategy is for short term capital appreciation, Australia may not be the ideal place to invest, where Stamp Duty and CGT are relatively high. BUT, if you a foreign investor who is buying for yield, then Australia could be a great place to invest because you can depreciate your assets.

To succeed in property investment, make sure that you always have a thorough understanding of taxes and how they will apply to you and your specific circumstances. Make sure you thoroughly run investment appraisals on any property before you commit to buying, so you make informed investment decisions that help achieve financial freedom for you and your family.

Important notice:  Proptech Pioneer and its associated companies seeks to provide investors with guides, information and tools, but we cannot guarantee this information to be accurate or perfect.  You use the information at your own risk and we accept no liability if you rely on this information.   Proptech Pioneer is not a tax advisor, accountant conveyancer, lawyer, financial advisor or mortgage advisor.  You should seek independent advice from independent professionals before making any investment decision