Many of us find the prospect of doing and lodging our own regular tax return daunting enough – and that’s without considering Capital Gains Tax. However, regardless of how complex and out-of-your-depth it may seem, if you’re managing multiple assets for personal or business purposes, it is absolutely crucial that you understand what Capital Gains Tax is.
Having an understanding of how Capital Gains Tax functions can help you maximise your revenue and keep everything comprehensively above board. Here at Property Returns, we specialise in Quantity Surveying for investment properties and tax depreciation schedules to track your costs and maximise your profit. As such, understanding, advising and educating on what is Capital Gains Tax is one of our many capabilities.
In this article we will break down:
- What Is CGT?
- How Is CGT Calculated? How Much Is CGT? Understanding What Is Capital Gains Tax in Relation to Your Taxable Income
- How Is CGT Calculated If I Own the Property Longer Than 12 Months?
- What Is Capital Gains Tax If You Have No Gains?
- How Is CGT Calculated If I Have Multiple Assets?
- What Is Capital Gains Tax to Us? How We Can Help
- What Is Capital Gains Tax in Relation to A Quantity Surveyor
- What Is A Tax Depreciation Schedule?
What Is CGT?
So, what is Capital Gains Tax? According to the Australian Taxation Office, (ATO) “If you sell a capital asset, such as real estate or shares, you usually make a capital gain or a capital loss. This is the difference between what it cost you to acquire the asset and what you receive when you dispose of it.” Note that this does not apply to your home, which is considered your primary place of residence.
This capital gain is added to your personal income and taxed accordingly. This tax applies to the sale of property and assets such as foreign currency, shares, licenses, and leases.
So, what is Capital Gains Tax? How Is CGT calculated? And how much is CGT? Let’s start with breaking down what is capital gains tax in relation to your taxable income.
Understanding What Is Capital Gains Tax in Relation to Your Taxable Income
Capital Gains Tax is a tax on the profit when you sell an asset that’s increased in value. It’s the gain made that is taxed, not the amount of money that you receive. Once you understand what is Capital Gains Tax, it’s understandable that you will want to know how is CGT Calculated.
A basic formula for calculating your capital gain is:
Selling price – transaction costs – original purchase price + associated transaction costs = capital gain (or loss)
For example, if you purchase a property for $350,000 and sell it for $800,000 10 years later, your total capital gain would be (disregarding transaction costs):
800,000 – 350,000 = $450,000
The sale of this asset is also known as a CGT Event.
This amount would then be added to your taxable income for the financial year in which this asset was sold. The below example is demonstrated to show what is Capital Gains Tax going to do to your taxable income.
If John earned a salary of $70,000 and experienced a capital gain of $30,000 that year from the sale of assets, his total taxable salary would be $100,000. This $100,000 would then be taxed according to the current ATO tax tables. The estimated total tax on this income would be $24,497.00, leaving a net total of $75,503.
If you are an Australian resident, Capital Gains Tax applies to your assets anywhere in the world. If you are a foreign resident of Australia, capital gain or loss is applied if a CGT event occurs on an asset that is ‘taxable Australian property’.
How Is CGT Calculated If I Own the Property Longer Than 12 Months?
If you are an Australian resident and have maintained ownership of the asset for at least 12 months before selling it, you would be entitled to a 50% reduction on your Capital Gains Tax. If you sold it before this time, the full amount of your capital gain would be taxable.
Ownership of the asset for more than 12 months is the easiest method to reduce a substantial amount of Capital Gains Tax; however, it is also important to keep track of all your costs associated with it. These can include stamp duty, borrowing expenses, advertising costs, professional services, renovations and other charges incurred to increase the property’s value.
Our quantity surveyors and registered tax agents assess the specific circumstances of each investor to optimise depreciation benefits. We will identify all plant and equipment assets and capital works deductions for the lifetime of your property, focusing savings in the first five years of your ownership.
Here at Property Returns, you can consult and access our specialists throughout your asset’s lifetime to ensure you maximise your tax benefits. Whether they are added capital expenses, pre- or post-renovation, we ensure to track costs and report changes to you. Our tax depreciation schedules are valid for 40 years or the lifetime of your ownership and have a 100% successful, audited track record with the ATO.
What Is Capital Gains Tax If You Have No Gains?
A thorough understanding of what is Capital Gains Tax is vital to maximising your cash flow and property investment returns. If you make a loss on your capital asset, you will not need to pay tax. This loss can be carried into the following year and used against future capital gains.
Consider this: you incur a capital loss of $40,000 in your first year. As this is a loss, you don’t have to pay any tax and can carry this loss with you into the following financial year. The following year, you experience a capital gain of $70,000. Your $40,000 loss incurred the previous would be placed against your gain from the current year to leave a total capital gain of $30,000 to be taxed.
How Is CGT Calculated If I Have Multiple Assets?
Another way to utilise this way of calculating Capital Gains Tax is to time the sale of one asset to balance each other out. If you have an asset in which you know you will make a loss, it can be useful to time its sale to coincide with other assets you know will make a gain. Therefore, your positively performing assets’ taxable total will be reduced with the losses you have made. By balancing both your losses and gains, you can more ensure you have a continual cash flow to utilise for other investments.
It is also important to note that the ATO has no limits on how long you can carry your capital loss; however, it is vital that you keep all relevant paperwork to leverage this rule.
What Is Capital Gains Tax to Us? How Property Returns Can Help
Property returns can help you maximise your property investment returns with our specialist quantity surveyors and tax depreciation schedules. Our qualified professionals will look at the full history of your asset and make the correct technical calculations, whether you purchased your property today, or ten years ago. Our team prides ourselves on quick turnarounds without any compromise to service and results. We can provide services in relation to residential property, commercial buildings and business purchases.
What Is Capital Gains Tax in Relation to A Quantity Surveyor?
Our Quantity surveyors are specialists in estimating the value of constructions costs and fees over the lifetime of your investment. We have a thorough understanding of the costs involved at all stages of your property, whether construction, sale or taxable. Our qualified professionals will help you claim the maximum legitimate deductions and increase cash flow.
We provide this through an analysis of your building’s footprint, the potential for renovation and extension to the original build as well as common property asset and building identification.
What Is A Tax Depreciation Schedule?
A Tax Depreciation Schedule is also known as a Quantity Surveyors Report, and is a document that lists out two different claims/allowances:
- The building capital (DIV43) which can be claimed as an allowance and
- The plant (DIV40) which can be claimed as a depreciation expense.
These reports will detail, but are not limited to costs such as:
- Immediate write-off assets
- Capital works deductions
- Structural improvements
- Low value pooled assets
- Common Property Assets
These reports schedule out both, in relation to the financial years that they are owned by the investor and will also provide a total annual depreciation claim. Essentially, these reports detail the impact of wear and tear on your property’s value which you can easily prepare with your tax return.
To claim depreciation on a capital asset, the investor or business owner must provide their tax professional with a tax depreciation schedule. This schedule covers the lifetime of your ownership and is tax-deductible. Although you do not need to obtain a new schedule each year, it is recommended that you consult with one of our professionals before making any changes to the property, pre-and post-depreciation schedule to maximise your potential tax deductions.
If you would like to more about how our tax depreciation schedules work with capital gains tax, you can learn more by talking to one of our expert quantity surveyors today. Industry leaders in exceptional tax depreciation reports, we at Property Returns are here to provide valuable, insightful and lucrative quantity surveying advice. To enquire about your depreciation schedule, get in touch with us today on 1300 829 221.