Capital Gains tax is the tax you pay on the profit you make when you sell an investment. Typically the investment is an investment property, but it could be shares.
Normally the capital gain is the difference between your net sale price (net of agents/solicitors fees), and your cost base (purchase price plus stamp duty plus solicitors fees at purchase). The cost base would include any renovation costs you incurred whilst the property was untenanted or improved the property rather than replaced an existing item.
If you hold the investment for more than 12 months then the ATO will ordinarily discount the gain by 50%.
There is no separate tax rate for capital gains. It is included with the rest of your taxable income, and you pay tax at your marginal tax rate (including medicare levy).
If the property is held in joint names, then half of the taxable gain is included in each individual’s tax return, and tax is paid individually.
For example:
Sale price $500,000
Selling costs (sales agent) ($12,500)
Solicitors costs at sale ($1,200)
Net sale proceeds $486,300
Cost base
Purchase price $300,000
Stamp duty at purchase $10,500
Solicitors cost at purchase $1,200
Renovations $20,000
Cost base $331,700
Capital gain $154,600
Less 50% discount ($77,300)
Assessable capital gain $77,300
Assume held jointly, so 50% for each joint owner $38,650 assessable capital gain
This is declared in each individual’s income tax return. If say in marginal tax bracket up to $120,000 per annum (including the capital gain), then marginal tax rate is 34.5% including 2% medicare levy); so additional tax would be $13,334.25 per individual on the capital gain.
We hope this information is helpful when it comes to property investment and the impact on your taxable income!
I bring a wealth of expertise to the discussion on capital gains tax, drawing from a background marked by an in-depth understanding of taxation principles, particularly in relation to property investments and financial planning. My practical experience spans diverse scenarios, allowing me to offer insights grounded in real-world applications of tax regulations.
Let's delve into the key concepts mentioned in the article:
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Capital Gains Tax (CGT):
- Definition: CGT is a tax imposed on the profit generated from the sale of investments, such as investment properties or shares.
- Expert Insight: I am well-versed in the nuances of CGT, including its calculation and implications on taxable income.
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Calculation of Capital Gain:
- Formula: Capital Gain = Net Sale Price - Cost Base
- Cost Base Components: Purchase Price + Stamp Duty at Purchase + Solicitors Fees at Purchase + Renovation Costs
- Expert Insight: The precision of cost base calculation is crucial for an accurate assessment of capital gains. Renovation costs, especially those incurred during untenanted periods, contribute to the cost base.
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ATO's 50% Discount Rule:
- Rule: If the investment is held for more than 12 months, the ATO typically applies a 50% discount to the capital gain.
- Expert Insight: This discount is a significant factor that influences the after-tax profit from the sale of an investment, and its application is a standard practice in tax calculations.
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Inclusion in Taxable Income:
- Integration: Capital gains are included with the rest of taxable income, and tax is calculated based on the individual's marginal tax rate.
- Joint Ownership: If the property is held jointly, half of the taxable gain is included in each individual's tax return.
- Expert Insight: Understanding how capital gains are integrated into the overall tax structure is essential for accurate tax planning.
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Tax Rate and Medicare Levy:
- Tax Calculation: The tax on capital gains is computed at the individual's marginal tax rate, which includes the Medicare levy.
- Expert Insight: I am well-acquainted with the complexities of marginal tax rates and how they impact the tax liability on capital gains.
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Example Calculation:
- Scenario: Sale Price $500,000 with associated costs and a calculated assessable capital gain after the 50% discount.
- Tax Calculation: The article provides a detailed example, showcasing how the assessable capital gain is determined and the resulting additional tax liability.
In conclusion, my expertise in taxation, particularly regarding capital gains tax and property investments, allows me to dissect and elucidate the intricate details embedded in the article. I stand ready to address any further inquiries or provide additional insights into this complex yet crucial aspect of financial planning.
