How to Minimise Capital Gains Tax
How to Minimise Capital Gains Tax

For investors who don’t understand it, capital gains tax can be a bit of a “boogey man”. But with a bit of knowledge and planning, it’s possible to substantially reduce how much of it you pay – or even negate it altogether.

While it is always best to seek professional advice on how the law relates to your specific situation, this guide provides some handy information to set you on your way.

When do you have to pay capital gains tax on a property?

Generally, if a property is sold for a gain, capital gains tax (CGT) will apply. But there are always exceptions. For example, no CGT applies if the property is a person’s main residence, i.e. their home. Another common exception is if the property was purchased before September 20, 1985. But keep in mind that any significant improvements or renovations made since that date may be treated as a separate asset under law and consequently subject to CGT. Meanwhile, small business concessions on CGT may also apply if the property is used in relation to a business and the taxpayer passes a variety of tests.

How is capital gains tax calculated on property?

CGT is calculated based on the amount of profit you make from a property’s sale, your marginal tax rate, and the tax deductions for which you’re eligible. Gross capital gain can be defined as the sale price, minus the purchase price and associated costs.

When a property has been held for more than 12 months, a 50 per cent discount is generally applied to the gain. However, companies are not entitled to this discount, nor foreign residents who bought their property after 8 May 2012, and self-managed super funds only get a discount of one third. You also need to factor into your CGT estimations any other income you earn during the year in which you sell your property, as your marginal tax rate will affect how much CGT you ultimately pay. This is because CGT is not really a separate tax, but rather part of your income tax considerations.

How to minimise capital gains tax on your property

There are a number of concessions and exemptions when it comes to paying capital gains tax, and numerous strategies designed to reduce your overall tax bill, too. Here are some of the main strategies used to minimise paying CGT:

  1. Main residence exemption - If the property you are selling is your main residence, the gain is not subject to CGT. However, the exemption may not fully apply if the residence has been used to produce income. In this case, a portion of the capital gain will be taxable.

  2. Temporary absence rule - An extension of the main residence exception, the temporary absence rule applies to a situation where you move out of your main residence. You can continue to treat the property as your main residence indefinitely, or for up to six years if you initially buy a property as your main residence and later rent it out. And if you move back into the rented property within the six years, the period is reset and can be treated as your main residence for another six years.

  3. Investing in superannuation - While self-managed super funds only attract a one-third discount for CGT, the standard tax rate for funds is only 15 percent, meaning the maximum CGT rate is 10 per cent. Which is lower than most people’s marginal tax rate. If a self-managed super fund member starts a full retirement pension from the assets of the fund, this applicable rate drops to zero.

  4. Timing capital gain or loss - A simple strategy to reduce CGT is to consider the timing of when you make a capital gain or loss. If you know your income will be lower in the next financial year, you can choose to delay selling until then, so that your lower marginal tax rate results in you paying less CGT. Timing loss can be beneficial, too. For example, someone expecting to make a capital gain from a sale, who also holds shares that are trading at an unrealised loss lower than the capital gain. This person may consider selling the shares before the sale, so they can deduct the loss from their capital gain.

  5. Partial exemptions - Holding a property for more than 12 months will attract a 50 per cent discount in CGT, and you can also receive a partial exemption if you move into a rental property.

You are still entitled to a reduction in CGT if you use your main residence as a place of business, too. Meanwhile, investing in affordable housing can attract a 60 per cent reduction in CGT – so long as the housing meets certain criteria and the rent is charged at a discounted rate.

As ever, though, make sure you seek professional advice to get the best outcome for your specific situation.

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How to Minimise Capital Gains Tax