Navigating the complex regulations of capital gains tax can be challenging - especially during a separation where the process is compounded by emotional stresses.
To ease the burden, we have compiled some useful information which explains the intricacies of capital gains tax on property assets during relationship breakdowns.
The team at Acumentis work alongside solicitors, accountants, and clients to support them with unbiased property valuations during settlements, helping reduce confusion and uncertainty.
What is capital gains tax?
Capital Gains Tax (CGT) on property assets is a tax on the profit made from the sale of investment real estate. Most personal homes (principal place of residence) are exempt from this, however other real estate including investment properties, vacant land, business premises and holiday homes are subject to CGT.
The tax applies to the difference between the purchase price of the property and the selling price, after accounting for various expenses such as closing costs and improvements made to the property.
e.g. an investment property was bought for $500,000 and was then sold for $750,000. Capital Gains Tax is due on the $250,000 profit made.
What property types are exempt from capital gains tax?
There are specific situations where properties are exempt from capital gains tax (CGT)*.
CGT does not generally apply to:
- Your main residence if it is owned by individuals (not a company or trust)
- Properties purchased prior to 20th September 1985
- Depreciating assets that are only used for taxable purposes, such as items in a rental property.
*CGT may still apply to a primary residence if the property is partially rented out, used for business purposes, or if it sits on more than two hectares of land. While CGT may not apply to properties bought before 20th September 1985, it can still apply to property improvements made after this date.
How is capital gains tax calculated?
In Australia, the Capital Gains Tax (CGT) on property is calculated as follows:
- Determine the capital gain
The capital gain is calculated by subtracting the original purchase price plus any associated costs, from the sale price of the property.
- Adjust for any CGT discounts
Eligible taxpayers may be entitled to a CGT discount of 50% on their capital gains if they have held the property for more than 12 months.
- Include the capital gain in taxable income
The capital gain is reported in your taxable income for the financial year in which the property was sold.
- Pay tax on the capital gain
The tax payable on the capital gain is calculated based on the taxpayer's marginal tax rate. The CGT rate in Australia is currently the same as the individual's marginal tax rate, up to a maximum of 47%.
Are there any CGT discounts and who is eligible?
Yes, there is a capital gains tax (CGT) discount in Australia. The discount applies to individuals, trusts, and complying superannuation funds. It is not available to companies or other types of entities.
To be eligible for the CGT discount, you must have owned the property asset for more than 12 months. The discount is calculated as 50% of the capital gain, effectively reducing the taxable portion of the gain by half.
When do you need property assets valued for capital gains tax?
Property assets are generally valued for capital gains tax purposes when they are sold or transferred.
Often property owners may have rented out their home after living in it as a primary residence, converting it to an investment property, or vice versa. If you start renting your property it is worthwhile having it valued at this time. If the property is sold in the future, the capital gain would be calculated based on market value at the date it became income producing, not the date it was purchased. This would likely reduce the capital gain.
Tip: If a valuation was not undertaken at the time it became/ceased being used as an investment property, the Acumentis team can undertake a retrospective valuation to determine market value of the property at this time.
For CGT purposes, any market valuation must be objective and supported with appropriate sales evidence.
Relationship Breakdown and Capital Gains Tax
In the case of a relationship breakdown (separation or divorce), CGT may be applicable when one party transfers ownership of the property to the other, as part of the settlement. There are some exemptions and options that can provide tax relief including the Main Residence Exemption and Relationship Breakdown Rollover.
What is the CGT Main Residence Exemption in relationship breakdowns?
In Australia, the Capital Gains Tax Main Residence Exemption may apply to the transfer of a property in a relationship breakdown, which would mean that no CGT is payable. This relates to property assets that (at some point in time) was the home and main residence of you and/or your spouse.
If the main residence exemption does not apply, the individual who transfers (forfeits/sells) the property may be liable for CGT on the profit made at the time of the transfer. The CGT calculation considers the cost of acquiring the property, any improvements made, and the sale price.
What about CGT for the individual who has fully acquired the property?
That's when CGT Rollover comes into play...
What is the CGT Relationship Breakdown Rollover?
The Capital Gains Tax Relationship Breakdown Rollover is a provision that allows an individual to defer paying capital gains tax, when transferring property. This is only available when the transfer is due to the breakdown of a relationship resulting in divorce or legal separation.
In these circumstances, you can "roll over" the gain that would normally be due when ownership of a property takes place, without incurring immediate capital gains tax liability. (Basically, you can pay your portion of the CGT later!)
The rollover of CGT will apply to the person who received the asset and will be paid when they eventually sell it, plus any additional CGT if the property has been income producing again.
The relationship breakdown rollover only applies if property assets are transferred under a court order or formal agreement. It does not apply under informal and private agreements.
This option is aimed at providing some tax relief to people undergoing significant life changes.
Understanding capital gains tax on property assets during relationship breakdowns can be complex, but it is important to be aware of the regulations to ensure proper compliance and avoid any potential penalties.
It is recommended to seek professional guidance from your tax expert to ensure a clear understanding of the relevant laws and regulations. Visit ATO for more information.
The team at Acumentis is available to provide unbiased property valuations to support individuals and families during settlements, helping to reduce confusion and uncertainty.