What is Capital Gains Tax (CGT)?
Capital Gains tax is the tax you pay on the profit you make when you sell an investment. Typically the investment is an investment property, but it could be shares.
Normally the capital gain is the difference between your net sale price (net of agents/solicitors fees), and your cost base (purchase price plus stamp duty plus solicitors fees at purchase). The cost base would include any renovation costs you incurred whilst the property was untenanted or improved the property rather than replaced an existing item.
If you hold the investment for more than 12 months then the ATO will ordinarily discount the gain by 50%.
There is no separate tax rate for capital gains. It is included with the rest of your taxable income, and you pay tax at your marginal tax rate (including medicare levy).
If the property is held in joint names, then half of the taxable gain is included in each individual’s tax return, and tax is paid individually.
For example:
Sale price $500,000
Selling costs (sales agent) ($12,500)
Solicitors costs at sale ($1,200)
Net sale proceeds $486,300
Cost base
Purchase price $300,000
Stamp duty at purchase $10,500
Solicitors cost at purchase $1,200
Renovations $20,000
Cost base $331,700
Capital gain $154,600
Less 50% discount ($77,300)
Assessable capital gain $77,300
Assume held jointly, so 50% for each joint owner $38,650 assessable capital gain
This is declared in each individual’s income tax return. If say in marginal tax bracket up to $120,000 per annum (including the capital gain), then marginal tax rate is 34.5% including 2% medicare levy); so additional tax would be $13,334.25 per individual on the capital gain.
We hope this information is helpful when it comes to property investment and the impact on your taxable income!