How To Avoid Capital Gains Tax in Australia
We’ve written an extensive piece on the capital gains tax in Australia, which explains what it is and how much you may owe based on your circumstances. However, several legal and uncomplicated approaches exist to minimise the tax amount you pay, reducing the risk of spending a considerable sum on capital gains tax.
If you’re an expat looking to dispose of an asset, planning to sell your rental property, and wish to avoid capital gains tax in Australia, this article is for you.
Lowering capital gains tax: A viable alternative to avoiding CGT entirely
Avoiding capital gains tax may not always be feasible. There may be instances where you’re required to sell an asset without the option of accessing concessions.
However, the good news is that you can use a few strategies to minimise the amount of capital gains tax you pay when your capital asset generates a capital gain.
Therefore, do not lose hope if you cannot avoid CGT entirely and make sure to read this article in its entirety!
Ways to avoid or minimise capital gains tax: 9 legitimate techniques
We have listed nine methods to avoid paying the tax or reduce the amount payable when you profit below.
1. Property ownership and residency
As a property owner and resident, you can take advantage of several benefits that may help you avoid or minimise capital gains tax.
By designating your property as your main residence, you become eligible for the main residence exemption, which exempts you from capital gains tax when you sell the property.
It’s worth noting, however, that if the property was previously an investment property, you might need help to claim the main residence exemption. In this case, you’ll only be eligible for a partial exemption percentage from capital gains tax.
For instance, if you rented out an investment property for three years before moving in and living there for six years before selling it, you would only pay capital gains tax on the three years the property was classified as a rental property.
So if you sold the property for $200,000, you’d only pay capital gains tax on $66,000.
However, according to the ATO, foreigners and non-residents are not eligible for the main residence exemption.
2. Owning a property for a year
Delay selling your property until you’ve owned it for a year to reap its benefits. After one year of ownership, you can avail of a 50% reduction in the capital gains tax you owe.
So, if you’re wondering how to avoid paying capital gains tax, wait for more than a year before selling your property.
Here’s an example to illustrate this:
- Suppose you’ve owned a property for one year and eight months.
- If you sell it, you’ll have a capital gain of $200,000.
- You’ll pay tax on only 50% of your capital gain.
- Your capital gains tax will be $100,000.
3. Capitalizing on the six-year rule when you sell property
Under this rule, if you have rented out your property as an investment or rental property for a maximum of six years and there has been a tenant occupying the property during this period, you may be able to claim exemptions on your capital gains tax.
Here’s an example to illustrate how the six-year rule works:
- Assume you buy a property for $300,000 and later revalue it at $400,000 as an Australian expat.
- You rent the property for two years before returning and selling it after eight years for $700,000.
- To calculate the taxable gain, you multiply the original price by 2/8 because you rented it out for two years.
- You pay capital gains tax on 50% of $75,000 because you owned the property for more than a year.
- Your capital gains tax is $37,500.
This rule is valuable for Australian expats and anyone looking to avoid capital gains tax in Australia.
4. Getting a reassessment of your property
If you’re an expat in Australia and want to avoid capital gains tax, consider getting a property reassessment. Skipping this step when selling a rental property can cost you more in capital gains tax.
By getting a revaluation, your property’s cost base will change, significantly impacting your gains when you sell the property.
Here’s an example to show how a property reassessment can help you save on capital gains tax:
- You bought a property for $250,000 and lived there for ten years.
- You had the property revalued, and it increased to $450,000.
- After being an expat, you rented it for two years and sold it for $480,000.
- Your capital gain is $30,000, and you’ll only pay tax on this amount instead of the $230,000 you would have paid before revaluation.
Getting a property reassessment is crucial if you want to avoid paying more capital gains tax in Australia as an expat.
5. Using a self-managed super fund or SMSF loan
If you’re an expat looking to avoid capital gains tax when you sell property in Australia, consider using a self-managed super fund (SMSF) and SMSF loan to purchase the property. By doing so, you can take advantage of the benefits of an SMSF, which can help you avoid capital gains tax.
For instance, you can purchase the property using your SMSF upon returning to Australia after living abroad as an expat. You won’t have to pay capital gains tax when you eventually sell the property as a retiree.
However, remember that you can only live on the property once you receive your pension.
Using an SMSF and SMSF loan to purchase property can be a helpful approach to consider if you want to avoid paying more capital gains tax in Australia.
6. Earning a lower income for a year
Lowering your income for a year can help you reap tax benefits and reduce your capital gains tax payments.
Since the capital gains tax rate depends on income tax rates, the tax bracket you fall into can significantly impact how much you pay in capital gains taxes. You can reduce your capital gains tax by keeping your income low for a year.
It is an effective strategy to consider if you’re looking to avoid paying more capital gains tax.
7. Offsetting your gains in the future
You can keep track of your property expenses. In that case, you can reduce your capital gains tax by offsetting gains with outgoings. It can solve the question of how to avoid capital gains tax.
If you experience a capital loss, you can deduct it from other capital gains you make when you sell assets in the future.
- You sell shares worth $150,000, which you purchased for $100,000, resulting in a capital gain of $50,000.
- You also sell a property you owned for eight months, which you bought for $210,000, for $200,000, resulting in a capital loss of $10,000.
- You can offset the capital gain from selling shares by deducting the capital loss from selling the property, reducing your taxable capital gain to $40,000.
You can use this approach for any capital losses you make. If you only make a capital loss, you can carry it forward to offset future capital gains.
8. Choosing affordable housing options
Investing in affordable housing can reduce the capital gains tax you have to pay. The ATO introduced a rule in 2018 that offers a 10% discount on capital gains tax for those who invest in affordable housing.
You can add this to the discount you may receive for owning the property for more than 12 months.
By combining the two discounts, you may achieve a 60% reduction in capital gains tax payments.
9. Applying for home business assets exemption
Are you operating a small business from your home in Australia? If so, you may be eligible for CGT concessions on your business assets.
However, to qualify for these concessions, you must meet specific criteria, including the following:
- Having an aggregated turnover of less than $2 million
- Meeting the asset test criteria for your business asset
- The maximum net asset value test
A summary of the dos and don’ts
Avoiding capital gains tax can be challenging, particularly for Australian expats, as the taxation rules are complex.
However, reducing or eliminating the tax liability on your assets is possible. Here are some essential dos and don’ts to consider:
- Always seek professional advice from a tax advisor to understand your tax situation and the legal methods you can use to minimize your tax liability.
- Only use legal methods to avoid capital gains tax, as the Australian Taxation Office has strict rules and regulations to prevent tax evasion.
- Take advantage of the concessions available, such as the small business CGT concessions, the main residence exemption, and the affordable housing discount.
Before selling an asset, getting the right tax advice and educating yourself about capital gains tax is essential. Our team at Odin Tax can provide accurate information on mortgages, investment properties, paying taxes, and obtaining mortgage approval as an expat.
FAQs about minimising capital gains tax in Australia
Capital gains tax is not distinct from income tax. Instead, it is an integral component of the income tax system, subject to the same rate as your income tax.
If you realize any capital gains, your tax obligation for the year may rise accordingly, as noted by the Australian Taxation Office.
According to the Australian taxation office, there are circumstances in which you can be exempt from paying capital gains tax when selling your property, which includes the following:
- The property is your principal residence.
- The property has been your home since the purchase.
- You have yet to use it to produce assessable income.
- The property must be on at least two hectares of land.
Furthermore, suppose you purchased the property before September 20th, 1985. In that case, you won’t have to pay capital gains tax on any profits you make upon selling it.
However, you won’t have to pay capital gains tax if you inherited the property. Still, you might have to pay the tax if you sell it and it’s not your principal residence.
Suppose you earn assessable income from renting out, investing, or flipping a property as part of a renovation business, including running a business from your home.
In that case, you are subject to capital gains tax.
It is improbable to get a capital gains tax exemption if by reinvesting in your capital gains as an Australian expat.
Even if you promptly reinvest in another property after selling your current one, this strategy can only offer partial relief from capital gains tax.
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