A Complete Guide to Capital Gains Tax in Australia

Most people are familiar with capital gains tax (CGT), but do you understand what it entails when it is due and how it may impact you as a foreign resident or expat? If you’re engaging in purchasing or selling assets in Australia, you are bound to encounter CGT.

Keep reading to learn everything you need about CGT in Australia as an expat through a series of definitions, case studies and examples.

What Is Australian Capital Gains Tax (CGT)?

A capital gain is a profit you make when selling an asset. You can calculate the difference between the purchase and sale prices minus any associated selling costs. If you don’t make a profit, it becomes a capital loss.

This tax applies to high-value assets, such as shares, licenses, and properties, often the primary focus of CGT discussions.

What Is Meant by a CGT Event?

As an Australian expat seeking to sell assets or property in Australia, you may come across the term “capital gains tax event” or “CGT event.” It refers to selling an asset, a share, or a property to a buyer.

Following the transfer, a CGT event occurs when you either profit from a net capital gain or incur a capital loss.

A Complete Guide to Capital Gains Tax in Australia

How Is Capital Gains Tax Calculated in Australia?

The method of calculating capital gains tax varies from one country to another. In Australia, the Australian Taxation Office (ATO) considers net capital gains as a part of your taxable income rather than a separate tax.

For instance, suppose you earn $90,000 per year and sell a property you’ve owned for twenty years, making a profit of $100,000. In that case, you would add the $100,000 to your taxable income for that year, resulting in a total taxable income of $190,000. The tax rate that applies to you is the same as your individual income tax rate

In our example, assuming you fall in the $180,001 and above taxable income bracket, which attracts a 45% tax rate in the 2021-2022 fiscal year, you would owe $56,167 if you are an Australian resident for tax purposes.

Later, we will discuss calculating capital gains tax for foreign residents.

Which Factors Affect Capital Gains Tax in Australia?​

Suppose you’re wondering about the percentage of capital gains tax you’ll pay in Australia based on your net capital gains. In that case, several factors can influence the amount you owe. 

These factors include the following:

  • The length of time you have owned the asset or property
  • Whether you use the property for business purposes
  • Your income tax rate
  • Any capital losses you incur
  • Legal service costs
  • Estate agent service fees
  • Stamp duty on the property

While the ATO treats net capital gains similarly to your annual income tax rate, the actual percentage of capital gains tax you pay can vary depending on these factors.

Capital Gains Tax Exemptions

As a permanent resident, you are eligible for the main residence exemption, which allows you to avoid paying capital gains tax on your home. However, this exemption does not apply to investment properties.

Alternatively, suppose you are an Australian tax resident and have owned the asset for more than 12 months. In that case, you may be eligible for a 50% capital gains tax discount.

However, the 50% CGT discount is unavailable for foreigners and overseas residents.

Applying this discount to the previous example, we would halve the net capital gain and add $50,000 to our assessable income, resulting in a total income tax assessment payment of $36,867.

How to Minimise Capital Gains Tax

Although the 50% discount method can reduce the amount of capital gains tax you pay, it is still a substantial expense. The most effective way to minimise or eliminate your capital gains tax liability is by maintaining accurate cost-based records.

Any capital expenses, such as stamp duty, can be subtracted from your capital gain, reducing your taxable net capital gain.

A Complete Guide to Capital Gains Tax in Australia

Foreign Residents and Capital Gains Tax

The situation is different if you are not an Australian tax resident. Suppose you live overseas and have no intention of returning to Australia to work or live. In that case, you may be considered a non-resident for tax purposes.

While this status has advantages – you do not have to pay Australian tax on foreign income – it also has a downside regarding capital gains tax.

Firstly, foreign residents, including expatriates, are not eligible for CGT discounts or exemptions. Secondly, they must pay the Foreign Resident Capital Gains Withholding Tax (FRCGW).

When you sell a property in Australia worth more than $750,000, the purchaser must withhold 12.5% of the purchase price and remit it to the Australian Taxation Office.

How Much Is Capital Gains Tax in Australia?

To illustrate how much capital gains tax you may owe in Australia, let’s consider an example.

Suppose you bought an investment property for $250,000 in 2000 and sold it for $500,000 in 2017 while incurring $75,000 in ownership costs. Your capital gain would be the difference between the sale price and the purchase price plus ownership costs, which in this case, is $175,000.

If you’re in the highest tax bracket with a marginal tax rate of 45%, plus the 2% Medicare Levy, you’ll owe 47% tax on the capital gain, which amounts to $82,250.

However, if you’ve held the property for more than 12 months, you may be eligible for a 50% capital gains tax discount. In this scenario, the net capital gain would be reduced by half, from $175,000 to $87,500.

Not sure how to calculate your tax rate? Check out the Australian tax rate calculator to learn how to estimate your tax rates.

Case Studies: Capital Gains Tax

In the following three case studies, let’s analyse how expats in Australia owe a lot of tax.

Caitlin, an Australian native, relocated to Singapore in her mid-thirties, having purchased a four-bedroom house in Sydney ten years before her move.

In 2010, she bought the property for AU$594,000 and resided and worked in Sydney until 2020, when she decided to migrate to Singapore. Despite applying for non-residency, the ATO still requires her approval.

Consequently, she pays taxes on her Sydney property’s rent and Singapore earnings.

Presently, Caitlin works as an English teacher in Singapore and earns SG$ 36,000, approximately AU$ 37,080, annually. While searching for accommodation in Singapore, she rents her Sydney property for AU$ 450 a week, resulting in AU$ 23,400 annually. Additionally, her side business generates an extra AU$ 8,000 per annum.

Her current annual taxable income is AU$ 68,480, on which she pays an income tax rate of 32.5%, which amounts to approximately AU$ 12,723.

After spending two years in Singapore, Caitlin sells her investment property in Sydney, resulting at the end of her residency in Australia, as property prices have skyrocketed in the past two years. The sale nets her an astonishing AU$1,600,000.

Caitlin needs to determine her cost base, including various expenses, before calculating her capital gain and lodging her Australian tax return. These expenses, totalling AU$ 41,000, include transfer costs, stamp duty, borrowing expenses, advertising costs, valuation fees, and fees paid to professionals such as conveyancers, mortgage brokers, real estate agents, and accountants.

As an Australian citizen, she is exempt from paying the foreign resident stamp duty surcharge.

Caitlin’s regular Singapore income is AU$ 37,080, and she earns an additional AU$ 8,000 from her Australian side hustle. She also makes AU$ 11,700 from renting out her property for 26 weeks before preparing it for sale.

By selling her property for AU$1,600,000, she generates a capital gain of AU$1,656,780. After deducting her expenses of AU$41,000 and the original purchase price of AU$594,000, her net capital gains are AU$1,021,780.

Since Caitlin does not qualify for the main residence exemption, she faces a significant capital gains tax liability. However, she is still an Australian tax resident, which enables her to save 50% on capital gains tax payments despite paying higher income tax on her Singapore wages.

Caitlin can only apply the 50% reduction to the property sale proceeds, which are AU$1,006,000. Dividing this amount in two gives her a total capital gain of AU$ 559,780, and she must pay AU$ 222,568 in capital gains tax.

Finally, Caitlin lodges her income tax return, reporting her total capital gain of AU$ 559,780 and paying the corresponding capital gains tax amount.

Oliver, an Australian native, has permanently relocated to Hong Kong for work and surrendered his Australian residency. However, he still holds his property in Melbourne, which he has owned for five years.

Oliver initially purchased the property for AU$ 770,221, and its current market value is AU$1.038 million. The property generates AU$ 440 in weekly rent. In Hong Kong, Oliver works as an accountant and earns an annual salary of HK$291,188.

Since he is not a tax resident, he only pays taxes on his Australian taxable property. Thus, his income in Hong Kong is exempt from ATO tax.

After two years in Hong Kong, Oliver decided to expand his investment property portfolio. He took out an Australian home loan to purchase a unit valued at AU$ 467,500. The new property yields a weekly rental income of AU$ 3,320, resulting in a total taxable income of AU$ 39,520. Oliver’s non-resident tax rate requires him to pay AU$ 12,844 in tax each financial year.

While in Hong Kong, Oliver encounters financial difficulties and decides to sell the unit after owning it for only 18 months. Despite his negative gearing strategy, which previously allowed him to claim a tax deduction on his rental loss, he has been struggling to find tenants, and property values are plummeting. As a result, he incurs a capital loss on the property sale.

Oliver sells his unit for AU$ 450,000, and the buyer withholds 12.5% as FRCGW tax, which he later claims as a credit on his tax return. In the current financial year, Oliver earns AU$ 22,880 in rental income from his house and AU$ 3,840 in the unit before selling it. He also incurs capital losses of AU$10,000 for property costs and the unit’s initial cost, which is AU$467,500. Therefore, his total capital proceeds are AU$ 476,720.

After deducting his expenses, he ends up with a capital loss of AU$ 780. Still, as he is not an Australian resident, he is exempt from paying capital gains tax.

Oliver still reports his capital loss in his tax return. He can carry it forward indefinitely to offset any future capital gains.

The following year, he earns another AU$ 22,880 in rental income from his house but incurs expenses of AU$ 7,000. As a result, his capital gain is AU$ 15,880. He offsets his previous capital loss of AU$ 780, leaving him with a taxable capital gain of AU$ 15,100.

His capital gains tax liability is AU$ 4,907.50.

Bernie has been living in the United States for the past seven years. He has been renting out his property in Canberra since he left, which he purchased for AU$ 616,300.

The rental property generates AU$ 633 per week in income, but Bernie spends approximately AU$ 5,000 yearly on property management and maintenance fees. Since he is no longer an Australian tax resident, his US$80,000 in America is not considered taxable income in Australia.

In a typical year, Bernie pays AU$27,916 in capital gains tax. Still, as a foreign resident, he now owes AU$ 9,072.70 to the ATO annually.

However, Bernie plans to return to Australia and settle in New South Wales. He wants to purchase a new home in Sydney while also retaining his current property in Canberra, which only generates AU$ 13,843.3 in income per year after taxes and expenses. To achieve this, Bernie decides to sell his Canberra property, which has recently increased in value, for AU$1,015,900.

He incurs approximately AU$ 20,000 in real estate agent fees, advertising, and conveyancing fees. Bernie’s capital gains for the year amount to AU$1,034,890, consisting of AU$18,990 in rental property income (which he stopped renting out after 30 weeks) and AU$1,015,900 from the sale of his Canberra house.

On the other hand, he incurred capital losses of AU$639,300, which include rental property management fees of AU$3,000, selling expenses of AU$20,000, and an initial purchase price of his Canberra house amounting to AU$616,300.

As a result, Bernie’s total capital gain is AU$ 3,95,590, which he arrived at by deducting his expenses from his capital gains.

After selling his Canberra property, Bernie moved to a new home in Sydney, where he earns $65,000 annually.

He reports 22 weeks’ worth of salary on this year’s tax return, adding $27,500 to his capital gains. As a result, Bernie pays $161,507.42 in income and capital gains tax. Bernie bought a new house in Sydney for $1,800,000 using his profits as a deposit, and he had to pay AU$ 83,567 in stamp duty.

He avoided the foreign resident surcharge by not making his foreign spouse a joint borrower.

While the expenses related to buying his new house are not capital gains or losses, Bernie keeps precise records. In the future, he can use these expenses to offset his capital gains when he sells the property.

A Complete Guide to Capital Gains Tax in Australia

The Critical Facts You Need to Remember

Remember that you may be subject to a capital gains tax rate when you sell assets or property at a higher price than what you originally paid. While paying this tax may be challenging, it is essential to remember that the states use these proceeds for a good cause.

If you are an Australian expat looking for expert guidance on capital gains, stamp duty, tax advice, financial advice, or mortgages, speak to one of our professionals who specialises in catering to expats and foreign residents.

Frequently Asked Questions

The Australian Taxation Office (ATO) treats capital gains as a component of income tax. If you sell a property within Australia, you must add the capital gain to your tax return for that fiscal year.

If you don’t pay income tax in Australia, the purchaser will hold back 12.5% of the purchase price for the ATO. You’ll have to file a tax return to recover the withheld amount.

The main residence exemption allows Australian tax residents to escape capital gains tax on their primary residence. To qualify, one must pay income tax in Australia and have resided in the property for at least 12 months.

Expats can reduce their CGT liability by meticulously documenting their property-related expenditures.

The capital gains tax calculation in Australia for shares is determined by various factors, such as the sale price of shares, the individual’s income tax rate, and the original purchase price of shares that caused the CGT event. 

For example, suppose an individual purchased shares worth $20,000 and created a CGT event that resulted in a $20,000 capital gain upon selling the shares. In that case, the capital gains tax they would pay is calculated based on the difference between the purchase and sale prices. 

The amount of tax to be paid is calculated as a percentage of their taxable income rate. Assuming a taxable income rate of 37%, the individual would need to pay $7,400 in capital gains tax.

If you sell an asset for less than the purchase price, it results in a capital loss, and you won’t have to pay any capital gains tax in Australia.

In other words, it is like a capital gains tax exemption. You can offset the loss against any capital gains you make in the following financial year, reducing the amount of capital gains tax you must pay.

The capital gains tax rate in Australia for individuals depends on how long you hold the asset before selling it.

  • Held for 12 Months or More: You get a 50% capital gains discount, meaning you only pay tax on half of the net capital gain at your usual income tax rate. This effectively translates to a maximum tax rate of 18.5% for the top income bracket.
  • Held for Less Than 12 Months: You pay tax on the full net capital gain at your usual income tax rate. This can reach up to 39% for the top income bracket.

There are some exceptions and complexities to consider, such as the following.

  • Companies: They don’t receive the 50% discount and pay the full 30% tax rate on any net capital gains.
  • Complying with Super Funds: They receive a 33.33% discount.
  • Assets Acquired Before 21 September 1999: Different rules may apply.

For a more accurate picture, consult the ATO or seek professional advice from a tax accountant.

The amount of capital gains tax you’ll need to pay in Australia for your rental or investment property depends on your income. 

For instance, let’s consider the following scenario: 

Your income is $75,000, and your annual tax rate is 32.5%. You purchased your rental property for $350,000 and sold it for $600,000 with expenses totalling $70,000. Your total capital gain is $180,000. 

When you add your net capital gains to your other income, you get $180,000 + $75,000 = $255,000. As a result, your tax rate jumps to 45%, and you’ll need to pay $85,417 in capital gains tax.

Suppose you own rental properties in Australia while living abroad temporarily. In that case, you may be subject to capital gains tax if you sell them. However, keep in mind that selling your primary residence is exempt from capital gains tax.

Also, note that you can only have one primary residence. For example, if you bought a property for $750,000 and sold it for $1.5 million, making a net capital gain of $750,000, you would owe 7.5% in capital gains tax if you rented out a portion of the property for half of the ten-year ownership period.

That amounts to $56,250, and after factoring in the 50% discount for owning the property for over 12 months, your net taxable capital gains would be $14,062.50. This amount would be added to your total taxable income and taxed at the marginal tax rate.

Similarly, capital gains tax applies if you rent a property in Australia. You may also owe capital gains tax if you use your primary residence for business purposes.

It is possible to generate income from your former home by treating it as a rental property, but remember that the six-year rule applies, meaning it can only be considered your primary residence for up to six years after you stop living there.

Regarding how to avoid capital gains tax when selling investment property in Australia, please be clear that it may not always be possible. However, there are definitely strategies you can use to minimise or defer the amount you pay. Here are some key options.

  • Main Residence Exemption: This is the most significant strategy. If you can designate the property as your primary residence (PPOR) for at least one day during the ownership period, it becomes exempt from CGT when sold. Even if you haven’t lived in the property, you can choose to elect it as your PPOR for up to six years (non-consecutively) and still claim the exemption. This requires meeting specific criteria like having no other PPOR during that period.
  • Holding Period: Owning the property for at least 12 months qualifies you for a 50% capital gains discount. This effectively halves the taxable portion of your profit.
  • Cost Base Optimisation: Include all eligible expenses associated with the property in your cost base, such as acquisition costs, legal fees, stamp duty, repairs, and improvements. This will lower your taxable capital gain.
  • Capital Losses: You can offset capital gains from the sale of your investment property with any capital losses you’ve incurred from selling other assets in previous years. Consider “tax loss harvesting” by strategically selling losing assets around the same time.
  • Timing Your Sale: Consider the financial year in which you plan to sell. If your income for the year is likely to be higher, selling in the previous financial year might put you in a lower tax bracket, reducing your CGT liability.
  • Other Strategies: Contributing to a superannuation fund can offer tax benefits. Speak to a financial advisor about strategies like making concessional or non-concessional contributions. Renovating or extending the property before sale can increase its value and offset some of the capital gain.

Please note that these are just general strategies, and individual situations may vary. Tax laws can be complex, and it’s crucial to seek professional advice from a qualified accountant or financial advisor before making any decisions based on tax considerations. Minimising CGT is about planning and understanding your options. Consult with tax professionals to find the best approach for your specific situation.

Suppose the total capital gains from selling a property and any other income are $18,200 or less. In that case, you will not have to pay capital gains tax in Australia. This income threshold applies to individuals.

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