Accounting

Capital gains tax (CGT) applies to the profit you make from the sale or disposal of property. Any sale or disposal of property can trigger what is known as a CGT event. If you sell a property for more than your purchase price, the difference is your capital gain, and this amount is subject to tax. At the end of the financial year, you can use this guide to help you prepare your tax return or to have an informed discussion with a tax advisor. We strongly recommend seeking professional guidance for your individual tax situation. CGT Property Not all property is subject to capital gains tax. The most common exemption is a family home. The Australian Taxation Office (ATO) maintains a list of properties that are subject to and exempt from CGT. Common examples of properties that can give rise to capital gains or losses include: Investment properties Shares Collectibles What Are Capital Gains And CGT? Capital gains are profits made on the sale of investments. For example, if you buy an investment property for $450,000 and sell it five years later for $520,000, your capital gain would be $70,000. The property you live in is usually exempt from CGT, as it is not considered an investment. Capital gains tax is a tax paid on profits from investments. It is important to note that CGT is not a separate tax. Instead, any capital gains are included in your regular income tax. These gains are added to your assessable income in the year you sell the property, just like the property. This means that your capital gains are taxed at your marginal tax rate, rather than a separate CGT rate. How Much Is Your Capital Gains Tax? Many factors affect your remaining CGT, including the length of ownership, your marginal tax rate and whether the transaction results in a profit. To calculate capital gains or losses, subtract the original purchase price and associated costs – such as stamp duty, conveyancing fees, valuation reports and building inspections – from the sale price. The result is your capital gain or loss. Length of ownership is important because if you have held the property for more than 12 months, you are eligible for a 50% CGT discount. If you have owned the property for less than 12 months, you pay full CGT on any gains. The Australian Taxation Office (ATO) levies this tax. It is advisable to consult an accountant to estimate your capital gains tax before selling an investment property. How Is The Capital Gains Tax Rate Calculated? CGT is triggered by a CGT ‘occurrence’. This usually happens when you sell an asset, but can also happen if the asset is gifted, destroyed, lost, or when you cease to be an Australian resident. CGT applies by taxing the increase in value from the time you acquired or created the asset. Capital gains are calculated in the year in which the contract for the sale of the asset is signed. If there is no contract, it is determined from the date the asset changes ownership. The taxable amount changes, but the resulting capital gain is included in your income and taxed at your applicable marginal rate. This additional amount to your assessable income is called the ‘net capital gain’. Your capital gain is calculated as follows: Step 1 Subtract the cost basis from the sale proceeds. The cost basis includes the purchase price of the property, any costs involved in buying or selling it and other incidental expenses. This gives the total capital gain. Step 2 Deduct any eligible capital losses. Step 3 Apply any applicable discounts. Resident individuals can claim a 50% discount, while superannuation fund holders get a 33 1/3% discount. The property must have been held for more than 12 months to qualify. Companies are not eligible for this discount. Step 4 The resulting figure after deductions and discounts is your net capital gain. Key Points The capital gains tax calculator helps you estimate the CGT liability for a property sold by taking into account the purchase cost, sale proceeds and taxable income. The CGT payable depends on the period of ownership, the type of entity and your marginal tax rate. You can manage CGT through exemptions, concessions or strategic planning, particularly for primary residences, but accurate record-keeping is essential. Given the complexity of the CGT rules, it is highly recommended to seek advice from a qualified tax professional. Further Reading: Sole Trader vs Limited Company in Australia: Key Differences & Which Is Better Frequently Asked Questions Q1. How much CGT will I pay? The CGT you pay depends on your property, your marginal tax rate and how much capital loss you can claim. Your marginal tax rate is important because it is the capital gains that are added to your assessable income in the financial year. Holding a property for more than 12 months allows eligible individuals to claim a 50% discount on capital gains. Q2. What is a CGT event? A CGT event occurs when you sell or transfer an asset, such as shares or investment property. It marks the point at which you make a capital gain or capital loss. Other events include the distribution of capital gains from managed funds. More details are available on the ATO website. Q3. What happens if I make a capital loss? A capital loss occurs when you sell an asset for less than its cost. You can only offset a capital loss against other capital gains; it cannot reduce tax on other types of income. Excess capital losses can usually be carried forward to offset gains in future years.

The tax-free threshold determines how much income you can earn in a financial year before you start paying tax. For Australian residents, the current tax-free threshold is $18,200, which means you don’t pay tax on the first $18,200 of your income. Any income earned above this limit is taxed at a progressive rate. This forms the basis of Australia’s progressive tax system, where higher income attracts higher tax rates. What Is The Tax-Free Threshold? If you are an Australian resident for tax purposes for the whole financial year, you will not pay any tax on the first $18,200 you earn. This amount is known as the tax-free threshold. Adjusted Tax-Free Threshold If you become an Australian resident for tax purposes during part of the financial year, your tax-free threshold will be adjusted accordingly. In this case, your threshold will be lower than the full amount available to residents for the whole year. Your adjusted tax-free limit is divided into two parts: A fixed base amount of $13,464 An additional $4,736, which is divided proportionally based on how many months you were in Australia during the income year, including any months you visited. The Australian income year runs from 1 July to 30 June of the following year. To calculate your adjusted limit, count the months from the date you became a resident to 30 June. How The Tax-Free Limit Works Australia operates a progressive tax system, which means that your tax rate increases as your income increases. The tax-free limit forms the starting point of this system. Here’s how it works: Any income over $18,200 is taxed at progressively higher rates. You pay no tax on your first $18,200 of income. For example, if you earn $30,000 in a year, the first $18,200 is tax-free, and you only have to pay tax on the remaining $11,800. This system ensures that people with lower incomes keep a larger share of their earnings, while those with higher incomes contribute a larger share of the country’s tax revenue. Eligibility For The Tax-Free Threshold To claim the full tax-free threshold you must be an Australian resident for tax purposes throughout the financial year. If you become or cease to be a resident during the year, you are eligible for a pro-rata tax-free threshold. For part-year residents, your threshold is calculated as follows: A flat amount of $13,464 Plus up to $4,736, adjusted for the number of months you were an Australian resident. This proportional system ensures that people who live in Australia for part of the year still receive a fair share of tax-free benefits. How to Claim Your income can come from one or more sources, such as an employer, a government agency, or work done under an Australian business number. If you are an Australian resident for tax purposes, you can claim the tax-free threshold each financial year. You can decide whether to claim the tax-free threshold on the Tax File Number (TFN) declaration you provide to your payer (including Centrelink). If you choose to claim it: Your payer will withhold tax when your income exceeds $18,200. You won’t pay tax on income up to $18,200 Find out what to do if you have multiple jobs or change jobs during the financial year. You may also like: Non-Commercial Losses: What Are & How to Defer Them? (A Guide) If You Are an Australian Resident For Part of The Year If you are an Australian resident for part of the financial year, you can claim the part-year tax-free threshold. The part-year tax-free threshold has two components: A flat rate of $13,464 An additional amount of up to $4,736, which is calculated pro-rata based on how many months you were in Australia during the financial year, including the months you were in. If you are a non-resident for the whole financial year, you cannot claim the tax-free threshold. This means you pay tax on all income you earn in Australia. Find out more about the tax-free threshold for newcomers to Australia. Your Income And The Tax-Free Threshold You can have income from multiple payers at the same time. Payers can include employers, government agencies, or work done as a sole trader. You can choose whether or not to claim the tax-free threshold ($18,200) on your earnings. If you claim the tax-free threshold: You won’t pay tax on income up to $18,200 Your payer will withhold tax when you earn more than $363 per week, $726 per fortnight, or $1,573 per month. When to Claim The Tax-Free Threshold If you have more than one payer, you usually claim the tax-free threshold from only one payer. Typically, you claim it from the payer that pays you the highest salary or wages. You can claim income from two or more payers if you: Have a second or multiple jobs Work part-time and also receive a taxable pension or government allowance Operate under an ABN as a contractor, sole trader or other business structure. Tax Is Withheld From All Sources of Your Income When you file your tax return, we review all earned income and the tax withheld. Sometimes, the total tax withheld may be different from your year-end tax liability if: Your income is $18,200 or less, so you can claim the tax-free limit If you had too little tax withheld, you may owe a balance. If you had too much tax withheld, you may get a refund Depending on your situation, you can request a change to the tax withheld from your income. This helps align it more closely with your year-end tax liability. Conclusion Understanding and claiming your tax-free allowance can have a big impact on your tax liabilities and the money you take home. By following the right steps and constantly reviewing your finances, you can avoid unexpected tax problems, maximize your take-home pay, and reduce the likelihood of paying a tax bill at the end of the year. For advice customized to your individual circumstances, consider consulting a registered tax agent or