How Much is Capital Gains Tax in Australia: The Key Facts
When it’s time to start thinking about paying tax as an Australian expat who lives abroad, capital gains tax is one of those financial phrases that you will start noticing during financial discussions in Australia. Tax time is a critical part of finance, and can be difficult to understand if you need to brush up on the Australian taxation rules.
But since it’s something that you might have to think about when purchasing certain items, assets, or properties and selling them, it’s critical that you understand how much is capital gains tax in Australia.
That is exactly what this article will share with you. Read until the end to find out the answers.
What is Meant By Capital Gains Tax (or CGT) Event?
There’s a term that you’ll hear as an Australian expat looking to sell assets or property in Australia: a capital gains tax event or CGT event defines the instant you sell an asset, a share or a property and hand them to a buyer.
When the transfer has been made, and you benefit from a net capital gain or a capital loss, this is a CGT event.
Which Calculations are Used to Work Out How Much Capital Gains Tax is in Australia?
When you enter into a CGT event, you can use different methods to calculate how much is capital gains tax in Australia, which depends on different factors. The methods fall into three different categories:
- If you’ve owned the asset for less than 12 months, run a sales price minus the cost calculation.
- If you’ve owned the asset for more than 12 months, deduct ownership costs from the net gain and apply a 50% discount.
- If the asset belonged to you after the 20th September 1985, but was yours prior to 21st September 1999, use the marginal tax rate, multiply this by the indexation factor and multiply this by the capital gain.
Take a look at the next sections to find out the factors that affect capital gains tax and an example calculation of how much capital gains tax is in Australia.
Which Factors Affect How Much Capital Gains Tax is in Australia?
If you’re wondering how much is capital gains tax in Australia in terms of the percentage you’ll pay on your net capital gains, the amount will be determined by several factors, including:
- The length of time that asset or property or asset has belonged to you
- Whether your property is used for business
- Your income tax rate
- The capital losses you make
- The costs of legal services
- Fees for estate agent services
- Stamp duty on the property
Although it is normally valued at a similar rate as your yearly income tax rate, the actual end percentage you pay in capital gains tax rate can vary.
Which Example Can I Use to Calculate How Much is Capital Gains Tax in Australia?
The following example will help you calculate how much is capital gains tax in Australia.
Say you have an investment property that you purchased for $250,000 in the year 2000 and have sold it for $500,000 in 2017. You might have also incurred ownership costs of $75,000.
You’ll therefore pay tax on the difference between the cost of the purchase price and the sale price, minus the ownership costs at your marginal tax rate for example 45% + 2% Medicare Levy if your taxable income is over $180,000. So you’ll pay 47% tax on $175,000, which is $82,250.
In relation to property, in situations where you’ve been the owner for over 12 months, you are eligible for a capital gains tax discount of 50% so the net capital gains in above scenario would be $175,000 divided by 50%, equals to $87,500.
Capital Gains and Costs for Shares: How Does this Affect How Much is Capital Gains Tax in Australia?
The answer to the question “how much is capital gains tax in Australia?” for shares are affected by the price you sell the shares at, your income tax rate, and the price you bought the shares for when the CGT event is created.
For instance, say you purchased a share of an organization and made a $20,000 capital gain when you created a CGT event and sold it. You’ll pay tax on the difference between your sale price and the purchase price. The percentage you will pay depends on your taxable income rate; if you are taxed 37%, you will pay $7,400 in capital gains tax in this scenario.
How Much is Capital Gains Tax in Australia If I Make a Loss When Selling an Asset?
In the event you make a capital loss i.e., you sell an asset for less than the purchase price, and you’re not sure how much is capital gains tax in Australia, you shouldn’t make any payments in capital gains tax. This is like a capital gains tax exemption. The sum can be deducted from a capital gain that you earn in the next financial year.
What Income Threshold Value Applies for CGT in Australia?
There is an income threshold of $18,200 for capital gains tax in Australia. This means that if you sell a property and earn $18,200 or less, which includes your salary income or other income and want to know how much is capital gains tax in Australia, you wouldn’t be expected to pay capital gains tax.
How Much is Capital Gains Tax in Australia if My Properties are Investment Properties?
The amount you will be expected to pay in capital gains tax in Australia if your Australian-based property is an investment or rental property will depend on your income. Here’s another example:
- Your income is $75,000 and your annual tax rate is 32.5%
- You purchased your rental property for $350,000
- You sell the rental property for $600,000
- Your expenses are $70,000
- You make a capital gain of $180,000
- Add your net capital gains to other income: $180,000 + $75,000 = $255,000
- Therefore, your annual tax rate rises to 45%
- The amount you pay in capital gains is $85,417
How Much is Capital Gains Tax in Australia If I Rent Out a Room in My Home?
Say you’re living abroad temporarily and have rental properties in Australia, it’s possible that a capital gains tax will apply to you if you sell the property. Keep in mind that selling real estate is only classed as a capital gains tax exemption if it’s your family home. Also, remember that with home ownership you can only have one residential property.
But, here’s a quick example of a scenario where you’ll have to pay capital gains tax for renting a room in your property:
- You purchase a property for $750,000
- You sell the property for $1.5 million
- You make a net capital gain of $750,000
- You rented out a space for half of the duration of ownership (the total being 10 years), and the space you rented was equal to 7.5% of the entire property space
- Of your net capital gain of $750,000, you must pay 7.5% in capital gains tax, which is $56,250
- You must then work out five-tenths of the capital gains tax, which is $28,125
- You mustn’t forget that a 50% discount applies because you owned the property for more than 12 months, meaning your net taxable capital gains will be equal to $14,062.5
- Add this $14,062.50 to your total taxable income. This total will be taxed at the marginal tax rate.
In the same way that capital gains tax applies if you’re renting out a property in Australia, you might also be expected to pay capital gains tax if you use your main residence located in Australia for business purposes.
You might choose to produce income from your former home and treat it as a rental property. This is possible, but it’s worth noting that the six-year rule applies, meaning it can only be classed as the main residence for six years after you stop living there.
Capital Gains Tax: The Critical Facts You Need to Remember
Remember, a capital gains tax rate will apply to those assets that you have sold for a greater price than the cost of the asset.
Even though paying capital gains tax is not exactly the nicest present to receive when selling assets or property, keep in mind that taxes on capital proceeds go to a good cause!
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