Understanding the tax implications of selling an investment property is crucial for maximising financial returns. Key considerations include capital gains tax, goods and services tax, and strategic planning to navigate complex tax laws and optimise outcomes effectively.
Selling an investment property in Australia can be a lucrative venture, but it is crucial to understand the tax implications involved to avoid unexpected surprises. Various taxes such as capital gains tax (CGT) and goods and services tax (GST) might apply, each with specific rules and exceptions. here is an overview of the key tax implications you need to consider before selling your investment property:
Capital gains tax (CGT)
Capital gains tax is levied on the profit made from disposing of an asset, including investment properties and shares[i]. It forms part of your income tax, not a separate tax. The CGT event occurs when the sales contract is signed, not at settlement. This means your capital gain or loss must be reported in the tax return for the year of sale.
Calculating capital gains or losses
Your capital gain or loss is the difference between the property’s sale price and its cost base. This includes the purchase price and additional costs like stamp duty, legal fees, and improvements[ii]. Importantly, only costs that have not been previously claimed as deductions can be included in the cost base, including adding back any depreciation claimed.
Discounts and exemptions
The 50% CGT discount allows Australian residents to reduce their capital gain by half when selling an asset held for over 12 months[iii]. This benefit applies to individuals and trusts, but not companies, and is crucial for minimising tax liabilities on long-term investments. Assets purchased before September 20, 1985, are exempt from CGT, however, property improvements or additions made after that date may be subject to CGT[iv].
The 6-year rule
If you lived in your investment property before renting it out, the 6-year rule might allow you to treat it as your primary residence, exempting it from CGT for up to six years while it generates rental income[v].
Goods and services tax (GST)
Typically, GST does not apply to the sale of established residential properties in Australia. This exemption is because these properties are not considered “new” for GST purposes. However, sales of new residential properties, commercial properties, and vacant land are subject to GST, usually included in the sale price[vi].
GST on new properties
New residential properties, defined as those never sold or substantially renovated, attract a 10% GST. The seller is responsible for remitting GST to the Australian Taxation Office (ATO), often passing this cost to the buyer.
Commercial properties and GST
Sales of commercial properties generally include GST[vii]. If the seller is registered for GST, it must be included in the sale price. Buyers can claim GST input tax credits if they use the property for business purposes and are GST-registered. This does not include properties sold as part of an ongoing business.
Strategic tax planning
Strategic tax planning is essential when selling investment property to maximise financial returns and minimise tax liabilities. By carefully considering timing, seeking professional advice, and exploring tax-efficient structures, investors can effectively navigate complex tax laws and optimise their financial outcomes during property transactions:
- Timing the sale: With changes in CGT discounts, strategic timing can be crucial. Holding a property beyond 12 months provides significant tax benefits, and aligning the sale with lower income periods can minimise tax impact.
- Utilising professional advice: Given the complexity of tax laws, consulting with tax professionals or accountants is advisable. They can provide tailored advice based on your circumstances, ensuring compliance and optimising tax outcomes.
- Potential use of trusts or SMSFs: Investors may explore tax-efficient structures like trusts or Self-Managed Superannuation Funds (SMSFs) to manage their investment properties. These structures can offer tax benefits and flexibility in managing capital gains.
Understanding the tax implications of selling an investment property in Australia is essential. By being aware of CGT and GST, and using strategic planning, investors can make informed decisions. Consulting with professionals ensures that all aspects are considered, leading to effective tax management and optimised financial outcomes.
If you would like more information or further clarification on the tax implications of selling your investment property, or if you need help with your tax return, contact our office today.
DISCLAIMER: All information on Focus Wealth Advisers is general in nature and does not take into account your personal objectives, financial situation or needs. You should consider your personal circumstances and seek professional advice before making any decisions based on this information.
[i] ATO (2024) What is capital gains tax?
[ii] ATO (2024) Calculating your CGT
[iv] ATO (2024) List of CGT assets and exemptions
[v] ATO (2024) Treating former home as main residence
