Q: How does the new Capital Gains Tax law work with regards to property?

A: Capital Gains Tax is assessed on property on the same basis as any other investment asset. Calculate the amount the property has gained in value since you bought it (your cost base), and then halve that figure if you’ve held the property for more than 12 months. This amount is then added to your assessable income and you pay income tax accordingly. If you have held the property for less than 12 months, all of the gain is added to your assessable income.

In order to calculate your cost base, you have to add on any expenses incurred in acquiring the property, money spent on capital improvements on the property, and subtract any depreciation amount for which a tax deduction was claimed. This can lead to your cost base varying markedly from the original purchase price. Accurate record keeping is essential.

You can exclude any increase in value that happened while the property was your main residence. This can become complicated if the property was sometimes your home and sometimes rented out. You will also need some method of determining the price at the appropriate times, so previous valuations help a lot here.

If the asset was purchased prior to 21 September 1999, you have two options in how to calculate the Capital Gain. You can apply the 50% discount as discussed above or you can pay tax on 100% of the gain with CPI indexation of the cost base. Please note the indexation of the cost base is frozen at 21 September 1999. So unless you have owned the asset for a considerable period of time prior to 1999, it is unlikely this method will deliver a lower tax outcome.

If you bought the property prior to 20 September 1985, things are a lot simpler, there is no Capital Gains Tax.

As always, you should check with your accountant before attempting to make any CGT calculations. Assuming your accountant has access to accurate records for the period of ownership, they should be able to provide an estimate of assessable income or tax payable based on an estimated purchase price that you nominate.

This article was published in The Australian on 15 August 2011. A direct link to the article can be found here.

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