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Capital gains tax (CGT) and property

Capital gains tax (CGT) and property. Objective. The aim of today's session is to provide you with an overview of capital gains tax (CGT) and property The intention is to provide you with general information, and you should seek professional advice in relation to your specific circumstances.

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Capital gains tax (CGT) and property

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  1. Capital gains tax (CGT) and property

  2. Objective • The aim of today's session is to provide you with an overview of capital gains tax (CGT) and property • The intention is to provide you with general information, and you should seek professional advice in relation to your specific circumstances

  3. Outline of session • Fundamentals of CGT • Main residence exemption • Marriage breakdown • Deceased estates • Compliance focus 2005-06

  4. Fundamentals of CGT

  5. What is capital gains tax? • Tax paid on capital gains you make during the income year • Forms part of your income tax • Declared in your income tax return • Taxed at marginal tax rate

  6. What is capital gains tax? • Capital gains or losses arise when certain types of transactions or events occur • This is known as a capital gains tax (CGT) event • CGT events commonly involve a CGT asset

  7. Examples of CGT events • You sell an investment property • Your investment property is destroyed by fire • You give someone a right to reside in a house • You grant an option to a person to purchase your land within 12 months for a set price

  8. Land and buildings Shares, options, etc Depreciating assets Paintings, sculptures, etc Jewellery, books, antiques Boats, furniture etc Leases Goodwill Licences Contractual rights. Examples of CGT assets

  9. What is capital gains tax? • Capital gains tax can still apply even if: • you did not buy the CGT asset • you disposed of the CGT asset without selling it.

  10. Main residence exemption

  11. Main residence exemption • Capital gains tax generally does not apply to the sale of your main residence • To be exempt: • the dwelling must have been your home • the dwelling must not be used to produce income • the land must be 2 hectares or less. • No exemption for land sold separately from the dwelling

  12. Example – main residence • Frank purchased his house in 1999 • He used the house as his main residence • The house and land are situated on less than 2 hectares • He sold the house in 2005 • The capital gain can be ignored under the main residence exemption

  13. Part exemption • Home not your main residence during the whole time it was owned • Part of the home was used to produce assessable income • Special rules apply which may still allow full exemption

  14. Example – part exemption • Thomas acquired a home in July 1997 and used it as his main residence • He rented out one bedroom which is 20% of home • Thomas and the tenant also used the living room, kitchen, bathroom and laundry which is 30% of the home • Sold home in June 2005 and made $120,000 capital gain • $42,000 capital gain is not exempt

  15. Moving from one main residence to another • Purchase a new home before selling the old home • Both homes treated as main residence if: • the old residence was your main residence for at least 3 months in the12 months before selling it • you did not use your old home to produce income in the 12 months it was not your main residence • your new home becomes your main residence.

  16. Example – moving from one main residence to another • Jill and Norman bought a house on 1 January 2005 • They moved into the home immediately • They sold the old home on 15 April 2005 • Both homes are treated as their main residence from 1 January to 15 April 2005

  17. Continuing main residence status • You can choose to treat a home as your main residence after it ceased being your main residence • The period of time it can be treated as your main residence is: • unlimited if your home is not used to produce income • for a maximum of 6 years if your home is used to produce income.

  18. Example – continuing main residence status • Lisa bought a house in 1992 and moved in • She moved out in 1995 • She rented out the house for 3 years • Left the house vacant for 2 years • Rented out again for next 3 years • Sold the house

  19. Constructing, renovating or repairing a home • If you build, renovate or repair your home, you can treat the land as your main residence for up to 4 years before the home becomes main residence • Must move into the home as soon as practicable • Must continue to use the home as your main residence for at least 3 months

  20. Having a different home from your spouse or child • If you and a dependent child have different homes for a period, you must choose one home as your main residence for both of you for the period • If you and your spouse have different homes for a period: • you must choose one home as your main residence for both of you for the period, or • nominate different homes as main residence for the period.

  21. Major improvements to pre-CGT assets • Major capital improvements made to a dwelling bought before 20 September 1985 may be taxable • Capital gain relates only to the improvements and not the entire property

  22. Example - major improvements to pre-CGT assets • Martin bought a home in 1984 • Undertook major capital improvements worth $100,000 (indexed cost base is $112,200) on 1 December 1993 • Sold home for $500,000 on 1 December 2004 • $120,000 of the proceeds attributed to improvements • Is cost base of improvements > 5% of $500,000? • Is cost base of improvements > threshold of $106,882?

  23. Inherited main residence – full exemption • Any dwelling deceased acquired before 20 September 1985, or a dwelling acquired by the deceased on or after 20 September 1985 that was their main residence just before they died and was not being used for income producing purposes at that time if: • sold within 2 years of death, or • occupied by spouse or someone with a right to occupy under the deceased’s will.

  24. Example – inherited main residence • Rodrigo bought a house in April 1990 and lived in it • Rodrigo passed away in January 2004 • Petro (Rodrigo’s son) inherited the house • Petro rented out the house • Sold the house in March 2005 • Capital gain can be ignored

  25. Marriage breakdown

  26. Marriage breakdown • Conditions for marriage breakdown rollover • Consequences of rollover • If there is no court approval

  27. Deceased estates

  28. Deceased estates • Capital gain or loss on death is disregarded for assets which pass to the beneficiary or legal personal representative • Choosing the indexation or discount method • Joint tenants • Unapplied net capital losses

  29. Compliance focus for 2005-06

  30. Compliance program for 2005-06 • Capital gains tax continues to be a priority • Non-compliance still a concern • Refining data matching capabilities • Letters to be sent to certain taxpayers • Will continue to help and educate • Review and audit program continues

  31. Compliance program for 2005-06 • Data matching residential property and share sales • Undisclosed capital gains • Claims for CGT discount and CGT SB concessions • Reviewing SB retirement exemption claims • Reviewing significant capital losses

  32. Compliance problems • Incomplete records of cost base and capital loss calculations • Using unsubstantiated capital losses to offset a capital gain • Asset valuations - not using market values • Complete omission of a gain or CGT event • Not meeting thresholds for small business CGT concessions • Pre-CGT status

  33. Tips for capital gains tax • Report net capital losses carried forward from earlier income years • Keep comprehensive records • Know which costs are deductible and which are included in the cost base • Report capital gains and losses from inherited assets • Declare your share of capital gains on jointly-owned assets

  34. Tips for capital gains tax • Deduct any capital losses before applying a discount • Calculate a capital gain or loss when giving away property • Use the contract date not the settlement date for acquisition and disposal • Overseas investment • Capital gain from non-assessable distribution

  35. Summary • Capital gains tax is tax paid on capital gains you include on your income tax return • Capital gains arise when a CGT event happens • There are three methods to work out your capital gain • Keep good records

  36. Where to get help

  37. For more information www.ato.gov.au Website 13 28 61 Personal tax enquiries 13 28 60 Order a fax 1300 720 092 Publications distribution service

  38. Questions

  39. Our commitment to you • The information in this presentation is current at November, 2005. • If you feel this information does not fully cover your circumstances, please seek help from the Tax Office or a professional adviser. • Since we regularly revise our information to take account of any changes to the law, you should make sure this information is still current before relying on it. The easiest way to do this is by checking with us.

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