» Capital Gains Tax

Capital loss schedules explained

BMT team — Mon, 12 Dec 2022 06:04:23 +0000

In 2017, the Government brought in legislation that meant depreciation can no longer be claimed for existing plant and equipment assets within a second-hand residential investment property. Capital works deductions which usually make up 85-90 per cent of the claim is still claimable in all scenarios. So, what happens if a second-hand property contains assets that are no longer eligible for depreciation deductions but still hold value? This is where a capital loss schedule can come into play. In this article we explore what a capital loss schedule is and in which scenarios they are used. What is a capital loss schedule? While investors purchasing second-hand investment properties can no longer claim depreciation on existing plant and equipment assets annually, the closing value of these assets can be used to either: reduce a capital gain in the event of selling or create a capital loss when scrapping. A capital loss schedule outlines the items in an investment property that are no longer eligible to be claimed as a depreciation deduction, but which still hold value. A capital loss schedule assists accountants to calculate the potential capital gain event. Every depreciation schedule prepared by BMT Tax Depreciation including previously used depreciable assets includes a capital loss schedule. Depreciation schedules for brand new rental properties don’t contain capital loss schedules as all assets in new properties are eligible for full depreciation entitlement. How is capital gains tax calculated? Under the new legislation a capital loss, or capital gains tax Event K7 as explained under section 104-235 of the Income Tax Assessment Act of 1997, can be claimed when an asset is disposed of for less than its original cost and depreciation claims for the asset were denied because of the amended depreciation legislation. Whilst the method of calculating capital gains tax has not changed, it has become imperative for investors to be aware of the implications of CGT from the outset of their purchase, particularly when they are investing in a second-hand property. For properties affected by the legislation changes, a specialist Quantity Surveyor should include a capital loss schedule of previously used plant and equipment assets which can’t be claimed as depreciation during ownership. Accountants can use this information to help determine the asset’s opening and termination value. The scenarios where the capital loss schedule becomes crucial include: when an asset is scrapped during ownership, CGT Event K7 can be used to establish a capital loss in that year, even if the property was not sold where there is a partial or full CGT main residence exemption. Even though the property was a main residence they may still be eligible for a CGT Event K7 when the contract date and settlement date for the sale of the property occur in separate financial years. The normal capital gain or loss from the property (CGT Event A1) is calculated in the financial year of contract exchange, where as the CGT Event K7 is calculated in the year of settlement Although the capital loss schedule is needed for capital gains tax calculations, some scenarios result in a nil effect because the value of plant and equipment is separated out of the purchase price to show an amount attributed to the property. Any difference identified due to a reduced termination value of plant and equipment increases the portion of purchase price attributed to the property when the property is sold. Investors can rest assured their property depreciation needs are taken care of as a BMT Tax Depreciation schedule maximises deductions while remaining fully compliant with current Australian Taxation Office rulings. To learn more about the depreciation deductions within an investment property call BMT on 1300 728 726 or Request a Quote. We recommend consulting your accountant for advice on how to navigate capital losses.

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TR 97/23 – Repairs and maintenance vs capital improvements

BMT team — Wed, 25 May 2022 06:05:48 +0000

Taxation Ruling TR 97/23, released in December 1997, outlines the tax deductibility of expenses incurred on repairs to premises, plant, machinery, tools and articles. Investment property repairs, maintenance and capital improvements are distinct from each other in the eyes of the Australian Taxation Office, as outlined in TR 97/23. Costs to repair or maintain an investment property can typically be claimed as an immediate tax deduction in the year that the expense was incurred, while capital improvements are not immediately deductible and must be classified as either a capital works deduction or as plant and equipment depreciation. Given that these things are not always clear cut, judgment often needs to be exercised when determining whether something falls under repair, maintenance or capital improvement. This can be difficult, so we provide some simple guidance here. Repair Maintenance Initial repair Capital improvement Answers to common questions Repair Under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 97), repair means ‘the remedying or making good of defects in, damage to, or deterioration of, property to be repaired (being defects, damage or deterioration in a mechanical and physical sense).’ For the most part, repair is simply to replace or correct something that has become worn out or dilapidated. It involves restoring to former appearance, form, state or condition without changing character. Works can fairly be described as ‘repairs’ if they are performed to fix: deterioration that has occurred by ordinary wear and tear, or accidental or deliberate damage, or the operation of natural causes (whether expected or unexpected) over time. For example, fixing a crack in plaster would be considered a repair. When determining whether work constitutes repairs, it is important to consider whether the work restores the efficiency of function of the property without changing its character. A minor degree of improvement, addition or alteration can be a repair, however, if substantial, it is not a repair and not deductible under section 25-10 of ITAA 97. According to TR 97/23 ‘renewal, replacement or reconstruction of the entirety (i.e., the whole or substantially the whole) of a thing or structure is an improvement rather than a deductible repair’. Maintenance According to TR 97/23, if work is in anticipation of, or to prevent, damage or deterioration, it is considered maintenance. Some examples include routine preventative work such as repainting faded walls, maintaining plumbing and deck oiling. Repairs and maintenance often go together, in that repairs will frequently include maintenance work. And some kinds of maintenance work are ‘repairs’ in terms of section 25-10, for example, painting premises to rectify existing deterioration and to prevent further deterioration Initial repair There is also a difference between a ‘repair’ and an ‘initial repair’. While a repair is performed to restore an item, an initial repair is to fix damage which was pre-existing when the property was purchased (whether known to the buyer or otherwise). Initial repairs are of a capital nature, so are not deductible under section 25-10 of ITAA 97. Capital improvement Any works that improve a property beyond its original state are classed as capital improvements. According to TR 97/23, an ‘improvement ‘provides a greater efficiency of function in the property – usually in some existing function. Some indicators that the work performed is an improvement include whether the work will: extend the property’s income-producing ability significantly enhance its saleability or market value, or extend the property’s expected life. A capital improvement will be classified as either a capital works deduction or as plant and equipment depreciation. Capital works deductions Capital works refer to the deductions available for the building’s structure and permanently fixed items. If the property owner is replacing an entire structure that is only partially damaged or is renovating or adding a new structure to the property, it is likely to be capital works. The rate of deduction for capital works is typically 2.5% per year for 40 years from the date of construction. An increased rate of 4% can be used for some property types. Plant and equipment depreciation Plant and equipment assets are items which are mechanical in nature or can be easily removed from the property. If the property owner is installing a brand-new asset such as an appliance, curtains or floor covering, then it is likely to be a depreciating asset. Each asset’s condition, quality and effective life determine the allowances available. Plant and equipment assets can be depreciated using either the diminishing value or prime cost method. Example Let’s consider the example of a rental property that is undergoing a kitchen renovation. Retiling splashbacks and installing a new marble benchtop would be deemed as capital improvements and be claimed as capital works deductions at a rate of 2.5 per cent over 40 years. A new rangehood would be claimed as a plant and equipment asset and be deducted based on the asset’s effective life. If the rangehood was purchased and installed for less than $300 it would be 100 per cent tax deductible in the year the expense was incurred. And if a crack in a cabinet was fixed, it would be considered a repair as a damaged asset is being restored. The expenses involved would then be claimed as an immediate deduction. Answers to common questions How can I tell if the work constitutes a repair, maintenance or capital improvement? It can get complicated when work falls under more than one category. For example, repair work doesn’t stop being a ‘repair’ if it is also maintenance i.e. the work is performed to prevent – or in anticipation of – defects, damage or deterioration. Repairs can also take place at the same time as capital improvements. The best rule of thumb when determining something is a repair, is to consider whether the work restores the efficiency or function of the property without changing its character. As mentioned previously, a minor degree of improvement can still be a repair, but if the change is substantial it is not a repair and therefore not deductible under section […]

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Here is what you need to know about inheriting an investment property

BMT team — Mon, 11 Oct 2021 22:44:08 +0000

People who find out they are inheriting an investment property have important decisions to make. In this article we look at two of the options – to keep using the property as an investment before selling it or to live in it before selling it. Each scenario has its own unique factors to consider, including taxation implications. Scenario one: Continue to use property as an investment before selling This could be a good way to either grow an existing investment property portfolio or get a step on the property investing ladder. But it’s important to understand the tax implications. Firstly, any rental income received from the property will be taxable income for the new owner. Tax deductions associated with the property, such as interest repayments, insurances, council rates, maintenance costs and property management fees, will also be deductible for the new owner. To claim the costs associated with the property at tax time, property owners are required to keep records of the costs. But how do they claim depreciation, which doesn’t require a financial outlay? Depreciation is the natural wear and tear of property and assets over time. Owners of income-producing properties can claim this depreciation as a tax deduction each financial year. To do this, they need a tax depreciation schedule prepared by a specialist quantity surveyor. This is a report that outlines every depreciable item of the property, which an accountant uses to determine the depreciation deduction. The new owner also needs to be aware of the capital gains tax (CGT) implications at the time of sale. Paying CGT when inheriting an investment property is complicated and largely depends on how the property was used and how long the new owner held the property before it was sold. These are the main contributing factors of whether the property will be fully or partially CGT exempt, or not at all. If the property was purchased before 20 September 1985 (the date that CGT was introduced) and the new owner sold it within two years, then the property is fully exempt from CGT. It gets slightly more complicated where a property was purchased after this date. If the property was purchased after 20 September 1985 , and if the new owner acquired the investment property after 20 August 1996, then a full CGT exemption won’t be available. However, they may be able to get a partial exemption and the individual’s accountant will assess this when it comes time to calculate any CGT. Scenario two: Live in the property before selling it The first thing to know in this scenario is that a current fixed lease must be honoured. This means the present tenant can stay at the property until the lease period ends or an earlier date is agreed to by all parties. It’s important that the new owner remembers that while the property is still leased, they can claim tax deductions even if it’s not for a full financial year. Pro-rata deductions can be applied to any type of tax deduction including interest repayments and depreciation. If the property is the new owner’s main residence prior to sale, they will be partially CGT exempt. The only scenario where a full CGT exemption would apply would be if the property was the previous owner’s main residence and it hadn’t been rented out. For more information on how to make the most out of an inherited investment property, contact BMT on 1300 728 726 or Request a Quote.

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Understand the small business CGT concessions

BMT team — Tue, 02 Jun 2020 23:45:27 +0000

No two investments are the same and this is highlighted when we talk about capital gains tax. There are several small business capital gains tax (CGT) concessions that owners must be aware of before they consider selling their commercial property or any assets used by the business. In this article we will look at: What is capital gains tax? Small business and CGT Basic conditions of the small business capital gains tax concessions The small business CGT concessions 15-year exemption 50% active asset reduction Retirement exemption Rollover Capital gains tax and depreciation for small businesses What is capital gains tax? When you sell any investment, you need to pay a tax on the capital gain made from that sale. This tax is called capital gains tax, or CGT. Any income-producing asset such as property, a business vehicle or shares will have an assessable capital gain if they sell the asset at a profit. This capital gain is used to calculate the payable CGT by the business or individual for the same financial year. Small business and CGT The Australian commercial industry encompasses many small businesses. The Australian Taxation Office (ATO) recognises that small businesses are in a unique position, in comparison to larger companies. This results in four small business CGT concessions for any asset the business owns and eventually sells, including property. Basic conditions of the small business capital gains tax concessions Before we cover the concessions, it’s important to understand the four key steps involved in determining whether the asset’s owner meets the basic conditions set out by the ATO. If the owner meets the conditions, the small business concessions will apply for the CGT event of the asset. The four steps look at several factors such as the aggregated turnover of the business, whether the asset is an active asset as determined by the ATO, if the asset in question is a share in the business or trust and conditions around membership interests in a partnership. Each step must also be considered in their set order. The requirements for each test can be complex, and we always recommend that small business owners consult with their accountant to determine whether they meet each step. The small business CGT concessions Once the basic conditions are met, the owner can apply any relevant small business CGT concessions to the sale of the asset in question such as property or any other asset the business owns for operations. 15-year exemption When a small business has owned an active asset for 15 years and the owner is aged 55 or over, retiring or permanently incapacitated, any capital gain is exempt from CGT. If the 15-year exemption is met, any need to assess a capital gain is totally removed and the owner won’t need to apply for further concessions. 50% active asset reduction If the small business is not eligible for the 15-year exemption and still meets the basic conditions, they may look to active asset reduction. Small businesses can reduce the capital gain on an active asset by 50 per cent. If eligible, this can be applied on the remaining value once the capital gain has had any capital losses offset and the 50 per cent CGT discount applied. Retirement exemption The retirement exemption can be used in addition to or instead of the 50 per cent active asset reduction if certain conditions are met. Under this exemption, capital gains from the sale of active assets are exempt up to a lifetime limit of $500,000. However, if the small business owner is under 55, the exempt amount must be paid into a complying super fund or retirement savings account. Rollover A small business can defer all or part of a capital gain from the sale of an active asset for two years or longer if; they acquire a replacement asset or incur expenditure on making capital improvements to an existing asset. Further CGT events can happen if certain conditions are not met by the end of the replacement asset period. There are many intricacies of CGT events, and we recommend consulting with your accountant as only they can provide advice on CGT events. Capital gains tax and depreciation for small businesses When a small business owner owns their commercial property and they claim property depreciation, it can impact their cost base. Given that the property’s cost base is used when calculating any capital gain made from a sale, this can increase the payable CGT. All small businesses that either own the property or are a tenant can benefit from thousands in depreciation deductions. Unlike residential tenants, commercial tenants can claim depreciation on any fit-out they install. Common examples include carpet, desks and shelving. BMT Tax Depreciation has completed thousands of tax depreciation schedules for all types of commercial properties. BMT understands that every property is different and has helped thousands of small business owners maximise their cash flow with depreciation deductions. For more information on commercial property depreciation, contact the expert team at BMT on 1300 728 726 or Request a Quote.

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Legislation changes affect eligibility of the main residence exemption for foreign residents

BMT team — Tue, 31 Mar 2020 22:05:09 +0000

Your main residence, being your home, is generally exempt from capital gains tax (CGT). Due to recent legislation changes, many foreign residents may now be ineligible for the main residence exemption. In this article we will explore: What is the main residence exemption? Changes to the main residence exemption Depreciation and your main residence Key points: Your main residence is generally exempt from CGT Legislation changes mean foreign residents are no longer eligible to claim the main residence exemption on their home in Australia You can only claim depreciation on your main residence if part of the property is income producing What is the main residence exemption? CGT is a form of tax that’s payable on the capital gain made from the sale of an investment, and your main residence is generally exempt from CGT. The Australian Taxation Office (ATO) has several requirements that must be met for a house to be considered a main residence. Changes to the main residence exemption Since the mid-1980s, foreign residents have claimed the main residence exemption on their home that is used as an investment for no longer than six years at a time. However, this policy was flagged in the 2017-18 federal budget, with recent legislation changes impacting the eligibility of the exemption for foreign residents. Following a lengthy policy review, the legislation change was passed through the Senate in early December 2019. The date of purchase determines when the change applies to the specific residential property. If the property was purchased on or after 7:30pm 9 May 2017, the CGT main residence exemption no longer applies for disposals from that date. Meanwhile, if the property was held prior to this date, affected owners can only claim the exemption up until 30 June 2020. Owners who satisfy the ATO’s life events test will not be impacted by the change. This change only affects the property owner if they aren’t an Australian resident for tax purposes at the time of residential property’s disposal. In the case where the property owner returns to Australia, becomes a resident for tax purposes and sells the property, they will be eligible for the exemption. Depreciation and your main residence Both capital works and plant and equipment depreciation can only be claimed for income-producing properties. Therefore, you can’t claim depreciation on your main residence. If the owner uses part of their home for income-producing purposes, such as renting a room through Airbnb or using part as a home-based business, some depreciation deductions are available. In this scenario, depreciation can only be claimed at a pro-rata basis, based on the income-producing percentage of the property. It’s important to note that when part of your main residence becomes income-producing, you could be ineligible for the full CGT main residence exemption. Furthermore, any depreciation claims on the property can decrease your cost base, which affects the payable CGT. Calculations of CGT are very complex, and we recommend speaking with your accountant before the sale of your property. To learn more about depreciation and how it can affect your property’s cost base, contact the expert BMT Team on 1300 728 726.

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Is stamp duty a tax-deductible expense for property investors

BMT team — Mon, 20 Jan 2020 00:41:44 +0000

Stamp duty for property transfers is a large expense, and property investors often ask if it is tax deductible. Unfortunately for property investors, you can’t claim a deduction for stamp duty straight away. However, it can reduce the capital gains tax liability when you sell the property. Key points: Stamp duty is a form of tax charged by State and Territory Governments Stamp duty is a capital cost and isn’t immediately tax deductible When selling an investment stamp duty can decrease your capital gains tax (CGT) liability through increasing the property cost base. Contents What is stamp duty? Is stamp duty tax deductible? What does it mean for property investors? What is stamp duty? Stamp duty, also known as transfer duty, is a form of tax that State and Territory Governments charge for certain documents and transactions, including the transfer of a property. Each state and territory have different stamp duty calculation methods. Therefore, the amount of stamp duty charged for a property sold in Victoria may be different for a similarly priced property in New South Wales. The timeframe of when stamp duty is payable also varies across states and territories. Is stamp duty tax deductible? Capital costs associated with acquiring a property, such as stamp duty, can only be used to offset capital gains. The exemption is when an investment property is acquired in a Territory under a crown lease. Stamp duty and costs to incur the crown lease are immediately tax deductible. Capital costs may also include legal fees, conveyancing and pest inspection fees incurred when acquiring the property. As a property investor, it’s important to understand what your capital costs are and how they form a part of your property cost base. Your property cost base and CGT The good news for property investors is that as stamp duty forms a part of your cost base, it can reduce the CGT liability when you sell the property. Your ‘main residence’ (your home), as defined by the Australian Taxation Office, is generally exempt from CGT. Fundamentally, CGT is a tax you pay on the profit made from the sale of a property. CGT is a complex topic for property investors and many factors come into play when paying CGT on the sale of your investment property such as discounts, depreciation and exemptions. The basic formula for calculating CGT is as follows: (Selling price – transaction costs) – (original purchase price + associated transaction costs) = capital gain (or loss) The amount paid in stamp duty positively affects the CGT formula for the investor by increasing the cost base value as a capital cost. What does this mean for property investors? As a property investor, stamp duty can work favourably for you in the long term. When you decide to sell your investment property, stamp duty forms a part of the cost base and can reduce the amount of CGT payable. It’s important to understand how your investment circumstances, capital costs and depreciation claims impact CGT liabilities to help best guide your investment strategy. For more information on available tax deductions and capital costs, visit our website at bmtqs.com.au or contact our specialist team on 1300 728 726. Related articles: When do you pay capital gains tax on investment property? Does depreciation affect capital gains tax?

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Does depreciation affect capital gains tax?

BMT team — Mon, 11 Nov 2019 22:57:07 +0000

Capital Gains Tax can seem complicated, especially when considering the implications of property depreciation and applicable discounts. It’s unsurprising then that many property investors ask, does depreciation affect capital gains tax? In this article we explore capital gains, when and how it applies and the role of tax depreciation. In this article, we will answer the following questions: What is capital gains tax? Does depreciation affect capital gains tax? Did 2017 legislation changes affect capital gains tax? How does depreciation benefit investors? What is capital gains tax? Capital gains tax (CGT) is a tax you pay on the profit or capital gain made from the sale of an investment property. A capital gain is the difference between what you paid for the property (your cost base) and what you sold it for. It’s included in your assessable income in your annual tax return and taxed at your marginal rate. A net capital gain is your total gain minus your total loss for that financial year. It can also include any previous unapplied net capital losses and any CGT discounts or concessions. To find out when the tax applies, read When do you pay capital gains tax on investment property? Does depreciation affect capital gains tax? Depreciation can change your cost base and therefore affects CGT. Depreciation deductions can be claimed under two categories – plant and equipment deductions and capital works depreciation. Both can affect your cost base in different ways. Plant and equipment assets are items which are easily removable from the property such as carpet, hot water systems and blinds. These assets have a limited effective life as set out by the ATO and can generally be depreciated over time. When a property is sold, plant and equipment assets are removed from both the purchase and selling price and calculated separately. The value of the plant and equipment at sale and the depreciation claimed in some circumstances can affect the capital gain or loss. Capital works deductions refer to the building’s structure and items considered to be permanently fixed to the property such as kitchen cupboards, doors and sinks. This type of depreciation is claimed as a loss and reduces your cost base, as the amount gets smaller and smaller each year. This loss adds to the capital gain and increases the amount of CGT applicable. Keep in mind that although claiming depreciation can increase CGT, the 50 per cent CGT discount is available to those who hold an asset for 12 months or more. Because of this, the deductions claimed throughout ownership are 50 per cent more valuable than the potential increased CGT liability when the property is sold. There is also an added opportunity to invest that extra money or to reduce loans throughout ownership. Did 2017 depreciation legislation changes affect capital gains tax? In July 2017, plant and equipment depreciation deductions were limited to only those outlays actually incurred by residential property investors. Under current legislation, owners of second-hand residential properties who exchanged contracts after 7:30pm on 9th May 2017 cannot claim deductions for previously used plant or equipment assets. It’s important to note that new properties are unaffected by the changes. Capital works deductions for structural assets are also unaffected and can still be claimed by owners of income-producing properties. These deductions typically make up 85-90 per cent of a total depreciation claim. A capital loss can be calculated when a plant and equipment asset is disposed of for less than its original cost, and depreciation claims were denied because of the changes. Examples of asset disposal can include when an item is scrapped or sold as part of the sale of the property. Under CGT rules, a capital loss can generally be offset against a capital gain. If there is no capital gain in the current year, the capital loss can be carried forward and offset against a future capital gain. In order to calculate a capital loss on disposal, the original cost of the asset as well as the asset’s end value will need to be determined. Given that CGT is very complex and there can be a variety of outcomes for investors depending on their specific circumstances, it’s important to consult with your accountant. How does depreciation benefit investors? As the owner of a residential investment property, claiming maximum depreciation deductions can make a big difference to your cash flow. The Australian Taxation Office (ATO) allows owners of income-producing properties to claim depreciation deductions for the natural wear and tear that occurs to a building and its assets over time. Any income-producing property may be eligible for thousands of dollars in depreciation deductions. A tax depreciation schedule is the best way to ensure every deduction is found and maximised. A BMT Tax Depreciation Schedule covers all deductions available over the lifetime of a property and provides accountants with the necessary information to calculate capital gain or loss. A BMT schedule has a one-fee and is 100 per cent tax deductible. During the FY 2018/19, BMT found residential property investors an average first year deduction of almost $9,000. For more information, Request a Quote or speak with one of the expert team at BMT Tax Depreciation on 1300 728 726.

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When do you pay capital gains tax on investment property?

BMT team — Sun, 20 Oct 2019 22:13:40 +0000

Capital gains tax is an area of taxation that often confuses property investors. The legislation can appear complex, however it’s important for all investors to have a good understanding of it before selling an asset. Capital gains tax is the fee you pay on any profit made from the sale of an investment property. This profit is referred to as a capital gain and is the difference between what you paid for the property (your cost base) and what you sold it for. It’s included in your assessable income and taxed at your marginal rate. In this article, we will cover: When do you pay capital gains tax on investment property? How to calculate capital gains tax Capital gains tax methods Capital gains tax exemptions Depreciation and capital gains tax When do you pay capital gains tax on investment property? A capital gains tax (CGT) event occurs when an asset is sold. The timing of this is important as it determines the income year the tax will be applied. For property investors, a CGT event is triggered when you enter into a contract of sale and therefore stop being the owner of the property. The CGT is then applied in the same financial year you sold your property. It’s important to keep thorough records of this process so you can correctly calculate the amount of capital gain or capital loss you make. Property investors are required to keep these records for five years after the CGT event occurs. This is particularly important when you make a capital loss, as the amount can be carried forward as part of unapplied net capital losses. A capital loss does not reduce a taxpayer’s assessable income. Instead, taxpayers are able to offset the loss against a capital gain in the current or future financial years. How to calculate capital gains tax A basic formula for calculating CGT is: Selling price – transaction costs – original purchase price + associated transaction costs = capital gain (or loss) If you have bought and sold an investment property within 12 months, your net capital gain will be added to your taxable income for that year. However, if you have owned an investment property for more than 12 months, there are two methods to calculate your net capital gain – discount and indexation. Depending on eligibility, you can choose whichever method reduces your capital gain the most. Capital gains tax discount method Property investor who have owned an investment property for more than 12 months are entitled to specific concessions when calculating CGT. If you’re an Australian resident and have held the property for more than one year, you’re eligible for a 50 per cent discount on your net capital gain. This reduces your assessable income and therefore the amount of tax you will pay. Capital gains tax Indexation method If you are an Australian resident who purchased an investment property before 21st September 1999, you are eligible to use the indexation method. The indexation method accounts for inflation and therefore calculates your net capital gain based on what your property would be worth in today’s property market. The calculation divides the consumer price index (CPI) at the time you sold your property by the CPI at the time you bought the property. As a result, your initial purchase price is likely to be increased, and your capital gain reduced. Capital gains tax exemptions There are certain circumstances in which CGT can be exempt. CGT exemptions include 50 per cent discount, principal place of residence, six year rule and six month rule. 50 per cent rule: As previously mentioned, property investor who have owned an investment property for more than 12 months are entitled to a 50 per cent discount on CGT. Primary place of residence: This refers to when a person resides, occupies and lives in a property as their home. If a property is considered an owner’s primary place of residence, they are entitled to a full CGT exemption. Six year rule: If a property owner moves out of a primary place of residence and rents it out, they can claim an exemption from CGT for a period of up to six years. If a property owner moves back into the property and afterwards moves out again then a new six year period commences from the time they last moved out. Six month rule: There are exemptions from CGT if a property owner considers more than one property to be a primary place of residence within a six month period. The property owner must meet one of the below conditions: The old property was the owner’s primary residence for a period of at least three months in the twelve months before they sold it An owner did not use the property to provide assessable income in any part of the twelve months prior to selling Depreciation and capital gains tax Capital gain is your profit minus your cost base. Depreciation impacts your cost base and therefore affects CGT. Depreciation deductions can be claimed under two categories – plant and equipment deductions and capital works depreciation. Both can affect your cost base in different ways. To find out more, read Does Depreciation Affect Capital Gains Tax?

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Australian expats and foreign investors to face tax reforms and CGT exemption lift

Chan Naylor Team — Tue, 03 Oct 2017 23:54:44 +0000

Under the proposed housing affordability laws, Australian expats might see an increase in tax liability when they sell their Australian homes. While living overseas, they could lose the Capital Gains Tax (CGT) exemption on a home which used to be their main residence to give Australian buyers an opportunity to purchase properties. The reform is part of the policy changes in property investment aimed to improve housing affordability. Currently, Australian residents are fully exempt from CGT on the sale of their main residence throughout the ownership period. The capital gain is included in an individual’s taxable income and calculated as part of income tax. Australian residents are also partially exempt if the house was their main residence for only part of the ownership period. The absence rule allows them to treat a home as their main residence for CGT purposes for an unlimited period of time as long as they don’t rent it out. Meanwhile, Australians living abroad for work can qualify as non-tax residents, which removes their Australian tax liability while they live abroad. However, the new policy will no longer grant them the absence rule or offer a partial exemption for the period when their home was their main residence. Foreigners who live and own property in Australia, on the other hand, are exempt from CGT as long as they are not foreign residents when they dispose of the home. There is, however, the new ghost house levy for foreign owners of Australian property in case it is unoccupied or available for rent for at least six months of the year. Their non-final withholding tax upon disposal of a taxable Australian property has been increased to 12.5 per cent of the sale value as well. Its threshold was also lowered to $750,000. The proposed changes apply to properties bought from 7:30pm on the 9th of May 2017, while those who have purchased their properties before that would have until 30 June 2019 to sell before losing the exemption. Investors who own a home for over twelve months, which is not their main residence, get a 50 per cent deduction on their CGT as well. However, non-residents are not entitled to the discount. Others believe tax incentives are higher than incoming rent and that the housing affordability crisis will remain as long as the government does not reform the CGT exemption and negative gearing. However, some people believe the reform will only affect foreign investors who do not vote. A fairer approach could be to tax the capital gain based proportionately on the period of non-residency of the ownership period, instead of just determining whether the person is a resident or not at the time of sale. What can you do? It is important to seek professional advice in navigating the different market conditions in Australia. Chan & Naylor does not sell properties so it remains unbiased. We would love to help you whether you are a beginner or seasoned property investor. Click here to schedule a chat or call any of our local offices near you. If you like what you are reading, subscribe to our newsletters now at www.chan-naylor.com.au. Disclaimer To view the original article, click here.

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We’re going back… back to the future

BMT team — Wed, 21 Oct 2015 00:44:15 +0000

In honour of Back to the Future Day, we’re taking you on a radical journey through time to take a look at some of the key dates from 1985 which have impacted Australian history and influenced land ownership and property investment in this country right up until today. I wonder what Marty McFly and Doc Brown would have thought if they arrived on October 21st 2015 after travelling from 1985 to find out how some of the decisions made in that year would affect the course of Australia’s history? It’s Saturday, October 26, 1985 in Australia and Bob Hawke is the Australian Prime Minister. This may have been the day in which Doc Brown first discovered his time machine could transport Einstein, Marty and himself to any time throughout history, but in Australia this was a date in which we paid recognition to some of the traditional owners of this land by handing back ownership of Uluru to the local Pitjantjatjara Aboriginals. Recognition of Australia’s traditional land owners continues be a very important part of our national discourse still today. At the time when Doc first realised the invention of his time machine had been a success, Australia had only just recently introduced new tax legislation that would affect the ownership and sale of a rental property and the deductions which investors could claim. On the 18th of July 1985, legislation was introduced which allowed property investors to claim capital works allowance on a residential property. At the time of its introduction, investors were entitled to claim capital works deductions on the building structure at a rate of 4 per cent over twenty five years for any building in which construction commenced after this date. This legislation was later changed on the 15th of September 1987 and from this date onwards, investors could claim capital works deductions at a rate of 2.5 per cent for forty years. While changes to depreciation legislation have meant that owners of properties in which construction commenced prior to the 15th of September 1987 may no longer be eligible for capital works deductions (the twenty five year period in which investors could claim the 4 per cent has now past), this does not necessarily mean that owners of properties constructed prior to this date will not benefit from depreciation. In 2015, owners of both new and old investment properties still take advantage of depreciation. Today we continue to see thousands of investors maximise depreciation deductions by obtaining a BMT Tax Depreciation Schedule and the numbers are growing. However, many owners of older properties in particular fail to maximise their deductions because they assume they are ineligible to claim depreciation. While the above legislative rules apply, they don’t necessarily mean that there will be no depreciation available to claim. Older properties have often undergone renovations and any work completed within the legislated dates could entitle its owner to claim capital works deductions. “Great Scott!” There are also significant deductions available for the plant and equipment assets contained within the property. It is the individual effective life and depreciable value which determines what an investor can claim for these items. It is as important now as ever before to make the call to find out what depreciation deductions are available for the future. On the 20th of September 1985, the government introduced the Capital Gains Tax (CGT) One of number of key tax reforms originally introduced by the Hawke/Keating Government in 1985, CGT is basically the tax payable on the difference between what it cost you to purchase an asset and the amount you receive when you dispose of it. In the case of an investment property, this is the difference between the original purchase price of the property including any capital buying costs and the price the property is sold for plus any selling costs. When you sell an asset such as a property, this triggers what is called a ‘CGT event’ and the owner will make a capital gain or loss on the property. Legislation surrounding CGT changed significantly after the 21st of September 1999. From the 2000-2001 income year individuals or small business owners who held an investment property for more than twelve months from the signing date of the contract before selling the property were entitled to a 50 per cent exemption from CGT. This rule, and other CGT exemptions that become relevant if a property is a primary place of residence, still exist today. An Accountant can help by providing financial advice for your future to prepare for any capital gains tax implications should you decide to sell your property. 1985 median house prices compared with 2015 According to data from Australian Bureau of Statistics, the average median house price across the capital cities in Australia during 1985 was $70,782. This was led by Canberra with an annual median house price of $90,625 and followed by Sydney with an annual median house price of $88,350. Perth was the capital city with the lowest annual median house price recorded at the time at just $52,050. Fast forward in time to the Domain House Price Report released for the June 2015 quarter and prices have increased significantly. The national average median house price is now sitting at $701,827 with Sydney leading the way on house prices with a median of $1,000,616. It’s Wednesday 21st October, 2015 in Australia and Malcolm Turnbull is the Australian Prime Minister Based on the above increase in prices over time, it’s little wonder that housing affordability has become a hot topic for our government. What happens next, we’ll have to wait and see… that is, unless someone get’s a hold of a DeLorean and tells us where we will be thirty years from now…

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