08 May 2017

What is a Capital Gain and What is Capital Gains Tax

Planning to enter the investment property market? Then you really need to know the definition of a capital gain and what Capital Gains Tax (CGT) is.

A capital gain is an increase in the value of a capital asset which gives it a higher value than the purchase price.
To put it simply, a capital gain is equal to:

Sale price - associated sale transaction costs - original purchase price + associated purchase transaction costs.

Further to this, if an investor does any capital works on the structure of the building, capital works deductions may apply also.

The opposite of a capital gain is capital loss. A capital loss occurs when what you sell an asset for is lower than what you paid for it. A capital gain and a capital loss both take into consideration any costs associated on the purchase and sale of the asset, such as stamp duty, solicitor's fees and agent fees etc.

According to the ATO, assets that are generally exempt from CGT include your home, your car and depreciating assets used solely from taxable purposes. Furthermore, if you sell your investment property within 12 months of buying it, it is likely that you will be required to pay tax on the  full capital gain. Individuals generally can discount a capital gain by 50% if they hold a property for more than 12 months. Likewise a capital gain may be deferred to a different tax period.

Also, you should know that if you’re an Australian resident, Capital Gains Tax applies to your assets anywhere in the world. If you’re a foreign residents, you make capital gain or captain loss if your asset is a taxable Australian property.

There are also different methods that a capital gain can be calculated on an investment and this will depend on a number of conditions such as the date the property was purchased and the entity that owns the property. The two methods of calculating a capital gain is the discount method and the indexation method. Both are outlined on the ATO website.

With these points in mind, it is therefore important to speak to your tax adviser prior to purchasing and disposing of an investment property as any capital gain made out of the sale of a property is likely to result in the payment of CGT.

It is important for any property investors to understand the ins and outs of Capital Gains Tax. The Australian Taxation Office has a lot of useful information about Capital Gains Tax, which will help you calculate your capital gain and better manage your assets.

For more information: https://www.ato.gov.au/General/Capital-gains-tax/