With the recent increase in property prices, many clients are deciding to "cash-in" and sell their rental property. This raises many questions regarding the tax treatment of the capital gain on their rental property. Section 115.25 deals with how the 50% Capital Gains Discount can be applied.
In order to qualify for the 50% Capital Gains Discount, you must hold an asset for longer THAN 12 months. For many this is often overlooked and taken to have been satisfied, however when timing/length of ownership is in question, sale contracts should be examined.
CGT & Cost Base
Determining the cost base of an asset is probably the most crucial and time consuming part of calculating a CGT liability. The cost base of a CGT asset is generally what it cost you to buy it, plus other costs you incur to hold and dispose of it.
To work out the cost base of a CGT asset yourself, add these 5 elements:
Money paid or property given for the CGT asset
Incidental costs of acquiring the CGT asset or that relate to the CGT event
Costs of owning the CGT asset
Capital costs to increase or preserve the value of your asset or to install or move it
Capital costs of preserving or defending your title
These expenses can be included in the cost base only if they are not deductible. For example, you do not include the cost of capital works for which you can claim a deduction.
New cost base
Less sale price
Capital Gain (Sale price - cost base)
Apply 50% CGT Discount
Assume marginal tax rate = 47%
In some cases, a deduction you have claimed on a CGT asset can be partly or wholly 'reversed'. Examples of this are common when Division 43 depreciation has been claimed.
Amounts claimed for Division 43 depreciation must reduce the cost base. This is also the same for capital works expenses that have been claimed as a deduction. These will need to be deducted from the cost base.
While this sounds bad, if you have kept the property for longer than 12 months, you will only be adding back half the cost due to the 50% CGT discount, where as you have received the full tax benefit in the years you claimed the deduction.
Note: Your main residence (your home) is generally exempt from capital tax. This is called the 'main residency exemption'
If you have any questions, as always please feel free to get in contact with us. We always welcome enquires and are happy to help.