Skip to main content Skip to search

Archives for Real Estate

The thing that every property investor should know about is that if you are holding an investment property eventually you will likely have to pay Capital Gains Tax (CGT)

 

In this post, we will find out:

  1. WHAT IS THE CAPITAL GAINS TAX?
  2. HOW MUCH IS IS THE CAPITAL GAINS TAX?
  3. HOW TO CALCULATE YOUR CAPITAL GAIN?

 

What is Capital Gains Tax?

Capital Gains Tax was introduced in Australia in 1985 and applies to any asset you’ve acquired since that time unless specifically exempted.

 

According to the Australian Tax Office, a capital gain or capital loss on an asset is the difference (the gain) between what the property was the cost to you (we call this Cost Base) and what you receive when you dispose of it (we call this sale to proceed).

 

Tax is levied on again made as a result of the sale proceed, which forms part of your income tax and is NOT considered a separate tax – though it’s referred to as CGT.

 

In most of the cases if an asset is held for 12 months or more, then any gain is first discounted by 50% for individual taxpayers and most Trusts or by 33.3%for superannuation funds.

 

Capital loss from one asset can be offset against capital gains from other assets,  and net capital losses in a tax year may be carried forward indefinitely.

 

However, if there is a capital loss, then it will be either used to offset other capital gains in the financial year or carried to later financial years forever until it is offset up.

 

According to the ATO, most personal assets are exempt from CGT, including your home (main resident property), car, and most personal use assets such as furniture. CGT also doesn’t apply to depreciate assets used solely for taxable purposes, such as business equipment or fittings in a rental property.  

 

Foreign residents only pay capital gain tax if a gain is made on an asset that is ‘taxable Australian property’.

 

If you’re an Australian resident for tax purposes, CGT applies to your assets no matter which country it is located.

 

When you sell off an asset it’s called a CGT event, which is the moment when you make a capital gain or capital loss. Therefore the timing of a CGT event is important because it tells you in which income year to report your capital gain or capital loss, and may affect how you calculate your tax liability.

 

In the case of real estate, for example, the CGT event generally occurs when you enter into the contract (contract signed and exchange) – that is, the date on the contract, not when you settle.

 

How much is Capital Gains Tax?

The vast majority of people pay Capital Gains Tax on a rental property when they sell, or dispose, of it, so it’s important to understand how CGT is calculated.

 

CGT can be a little tricky to calculate, that’s why it’s so important to have a good accountant on your side – BOA & Co. is CGT specialist to safeguard your investment return.

 

Remember CGT is only payable in the financial year in which you sell or dispose of your rental property.

 

For most CGT events, your capital gain is the difference between your capital proceeds and the cost base of your CGT asset – that is, where you receive more for an asset than it cost you.

 

According to the ATO, the cost base of a CGT asset is largely what you paid for it, together with some other costs associated with acquiring, holding and disposing of it.

 

If the rental property or asset was acquired before 1985, then no CGT is payable, however,  major improvements to a property since that time may be subject to CGT.

 

There are two main measures to calculate your CGT

The two different calculations are:

  • CGT discount method

 

For assets held for 12 months or more before the relevant CGT event. Allows you to reduce your capital gain by:

  • 50 per cent for individuals (including partners in partnerships) and trusts
  • 33.33 per cent for a complying Self-managed Super Fund.

 

This is generally not available to companies.

  • Indexation method

 

For assets acquired before 11.45 am (by legal time in the ACT) on 21 September 1999 (and held for 12 months or more before the relevant CGT event).

  • Allows you to increase the cost base by applying an indexation factor based on the consumer price index (CPI) up to September 1999.

 

An example of using the CGT discount method is:

Justin purchased a rental property on 1 June 2016 for $300,000 and sold it for $350,000 on 15 July 2018.

 

As she owned the asset for more than 12 months she is entitled to the 50 per cent CGT discount.

 

She would need to also subtract the cost base from the capital proceeds, deduct any capital losses, then reduce by the relevant discount percentage.

 

There is a Capital Gains Tax calculators available on our website so you can work out how much CGT you might have to pay if you sell a rental property.

 

It’s important, of course, to speak to our taxation accountant when it comes time to decide on selling off or before lodging your income tax return so ensure you did it right. 

Read more

Do You Want to Retire in Comfort? Investing in Property then

 

After you retire, you need a plan to generate income. As per the Australian Bureau of Statistics, only about 10% of Aussies who retired from the labor force will earn $1,500 or more every week. It is essential to plan how you will supplement your income via other investments. Investing in property is one of the ways you can get passive income with ease.

According to research, most Aussies rely on the accumulation of based savings. This is not wise and advisable because most financial goals will be met via retirement. The better alternative is to earn money from assets, i.e. high-interest savings accounts, term deposits, direct shares, property investments and contributions. With real estate property, you can have peace of mind expecting money every month or relying on the appreciation of your property with time. However, if you are not patient, you can end up selling your property at a loss or before it appreciates. Finally, it is vital to consult professionals before investing in any property. Professionals offer not only advice but also opinions on whether to buy a particular property or not. Wealth planning is crucial if you want to have asset protection in the future. 

 

Currently, the retirement age is 66, but it is set to increase to 67 by mid-2023. By 2035, the retirement age is set to be 70 years, and this shows that there will be more time for investments to grow. However, there will be less time to enjoy investments. Ergo, being smart and planning earlier in advance is vital.

 

What do you need to be comfortable?

In Australia, singles need $43,601 annually while couples aged around 65 need $61,522 yearly according to the Association of Superannuation Fund. To earn about $80,000 annually, you need to be mortgage-free and have at least $2,000,000 in investments. However, if you cannot get such kind of money, it is wise to start small and develop with time.

Read more

Negative gearing ‘scalpel’ will cool apartment demand: experts

The changes mean owners of any property not bought brand new will no longer be able to depreciate items like air-conditioners, cooktops and dishwashers, or shared equipment such as lifts and gyms in apartment complexes. Quantity surveyors and analysts said these form up to 50 per cent of depreciation deductions for investors.

If these changes were legislated, investor demand would fall or flatline and result in a cooling in the up until now resilient Sydney and Melbourne markets, SQM Research’s Louis Christopher said.

So far, federal Treasurer Scott Morrison has confirmed the deduction benefits of those who owned secondary properties before budget night would be grandfathered.

To prevent “double dipping” in depreciation, only the first investor of each new investment property can claim these deductions.

The federal government has also confirmed to that subsequent investors of residential investment properties would not be able to claim depreciation to existing plant and equipment even if that equipment had not reached the end of its effective life.

Investors could only claim depreciation on plant and equipment they had bought subsequent to purchase.

It was the implications to future demand from these changes that could soften the market, experts agreed.

Investors who own current properties, particularly newly built ones, would be hard pressed to find future buyers and might have to agree on lower selling prices. Supply of investor-type products like apartments could slow because developers depend on depreciation benefits as a selling point, they said.

With less rental dwellings, rents, which were already rising above the consumer price index, could rise even more, affecting tenants, Mr Christopher added.

“This change will have a major impact on investors, essentially reducing the annual deductions they can claim therefore reducing their cash return each year. This could lead to investors being in a tighter financial position and may discourage future investors from purchasing a second hand residential property,” according to quantity surveyor BMT chief executive Bradley Beer.

“It’s irrelevant if the properties are positive and negatively geared properties. For the second hand market there will be definitely be less demand.”

“The risk areas are those one-year old properties which will have a perceived lower value…this could have a negative impact on housing approvals and investors especially in the short term,” property advisory firm AllenWargent director Pete Wargent said.

“The investors [in housing] with the lowest rental yields will be affected by this change. This is a horrible change fo the industry.”

“The budget speech championed the role of investors in keeping rents down and providing accommodation to millions of Australians. This measure will increase the after-tax cost of holding a residential property and that cost will either be passed on to renters, or the supply of affordable rental properties will drop placing upwards pressure on rents due to demand,”  director Mike Mortlock said.

Quantity surveyor Washington Brown has even gone as far as saying the rules would affect off-the-plan investors who cannot depreciate plant and equipment purchased originally by the developer.

“I suspect that the legislation will be worded such that if the plant and equipment was in situ at the time of purchase, you can no longer claim it,” director Tyron Hyde said in his note to clients.

Read more