What is Capital Gains Tax?
Capital gains tax (CGT) is a tax you pay on any profits you gain from selling assets such as properties.
Most property is subject to CGT, including vacant land, business premises, rental properties, holiday houses, hobby farms and intangible assets (e.g. leases). However, Australians who have owned their asset for 12 or more months get a CGT discount of 50%.
There are situations where properties are exempt from CGT. For example, CGT generally does not apply to:
- your home (main residence), when the home is owned by individuals (i.e. not a company or trust)
- assets acquired before 20 September 1985, or
- depreciating assets used solely for taxable purposes, such as items in a rental property.
However, your main residence may attract CGT in some circumstances, for example if you rent out part of it, use it for business purposes or if it sits on more than two hectares of land.
With properties bought before 20 September 1985, CGT also may apply to property improvements made after that date.
How Capital Gains Tax works
You make a capital gain or loss (a CGT event) when you sell an asset that is subject to CGT. CGT events can also occur with the loss or destruction of an asset, or with the creation of some contractual rights or other rights.
You report capital gains and losses in your income tax return and pay tax on your capital gains.
Relationship Breakdowns
CGT is a factor in relationship breakdown property settlements. Generally, where properties that are subject to CGT are held by the former spouses or partners as joint tenants, then the capital gain or loss is split equally. If they are tenants in common, the capital gain or loss reflects the percentage of share value each owner holds.
Property that is transferred due to a separation or divorce may qualify for the CGT relationship breakdown rollover. The rollover essentially defers the CGT until the asset is later sold and applies to the person who received the asset. The rollover of CGT only applies if assets are transferred under a court order or other formal agreement. It does not apply under private or informal agreements.
The CGT event occurs when the asset is transferred under a contract, which can include a binding financial agreement. If the asset is transferred because of a court order or arbitral award the CGT event happens when the asset is transferred.
Under the relationship breakdown rollover, CGT assets owned by small superannuation funds can also be transferred to a complying superfund. Assets transferred by a company or trust require different accounting treatments using a market valuation.
When a rollover asset is disposed, CGT is calculated as though you had owned it since your former spouse acquired it.
When you need to get your property assets valued for CGT
A market valuation is the estimated amount for which a property would exchange between a willing buyer and willing seller in an arm’s length transaction after proper marketing and is based on the highest and best use of the asset.
For CGT purposes, any market valuation has to be objective and supported with appropriate sales evidence. According to the ATO:
“Valuations undertaken by professional valuers are more credible than those provided by someone who is not a professional valuer.”[1]
This material is produced by Opteon Property Group Pty Ltd. It is intended to provide general information in summary form on valuation and property advisory related topics, current at the time of first publication. The contents do not constitute advice and should not be relied upon as such. Formal advice should be sought in particular matters. Opteon’s quantity surveyors and valuers are qualified and experienced in providing depreciation schedules of your property. Opteon does not provide accounting, specialist taxation or financial advice. Liability limited by a scheme approved under Professional Standards Legislation.
[1] https://www.ato.gov.au/Individuals/Capital-gains-tax/Market-valuation-of-assets/
