There’s no such thing as ‘Capital Gains Tax’!
For years Australians have laboured under an illusion – that they must pay a Capital Gains Tax on the profit they make selling capital assets they bought for investment purposes.
Let’s clear this up right now. There is no Capital Gains Tax in Australia.
Now before you get too excited about this prospect you still need to consider that any profit you make from an activity is taxable, including an asset you bought with the intention of selling at a profit…and this is where the confusion about Capital Gains Tax lies.
It’s easy to get confused – even the Australian Tax Office website refers to Capital Gains Tax although it clearly points out that there is no such thing as ‘Capital Gain tax’ as it is not a separate tax.
You’re Still in the Business of Making a Profit
The business of property ownership is the business of making profit from property and, as Ben Franklin rightly pointed out, taxes are a certainty that we must deal with, therefore to pay a tax on profits should be no surprise to anyone.
So, yes, you will be taxed on the profit you make when you sell an asset such as an investment property – the good news however, is that if you hold the property for more than 12 months, 50% of the profit will be tax-free!
‘Shopping’ at the tax department has never been more fun
“Nothing can be said to be certain; except death and taxes” – Benjamin Franklin
Have you ever ‘shopped’ at your tax department and received a discount at the time of ‘purchase’? Not on your normal working income…but on the profit from selling an investment property that’s precisely what happens. Even Wikipedia calls it a discount.
Let’s illustrate how it works.
A Tale of Two Profits
Jim earns $100,000 for the year from his employment income. Based on a simplistic calculation for 2017 he would have tax to pay of just under $24,600. If Jim didn’t work but instead earned this amount as a capital gain on the sale of an investment property his tax would change significantly. He would receive a concession of $50,000 of his profit and only pay tax on the remaining balance of $50,000. His tax bill on this amount, with no other income, would be $7,797 – a saving of $16,803!
As his tax threshold has decreased, the 50% ‘Capital Gains Concession’ has actually reduced Jim’s tax by more than 50%. Results will defer depending on the tax rates of those involved, and what other income Jim has, but it illustrates the point.
Painted in this light Jim is not only $16,000 better off but also his satisfaction levels are higher – rather than giving an extra $16,000 to the tax man when selling his investment property, he’s received a discount off his ‘normal’ tax bill. Doesn’t that feel a whole lot better!
‘Capital Gains Tax’ simply doesn’t exist – what, in fact, you do receive is a ‘Capital Gains Concession’. Make a profit from your labours, and you pay tax at the full rate; make it from property and provided you hold the property for a minimum of twelve months, meet all other requirements including being structured correctly and your taxable income from the sale of that asset is halved. 50% of your income won’t be assessed and the balance will be assessed at your marginal rate of tax. This gives property a significant advantage over other types of income.
The area of capital gains tax does come with some caveats and requirements and it’s important you consider these ahead of buying your next investment property. We suggest you talk to Ethan and your Accountant about how to best set yourself up to enjoy the government’s generous discount.