The Capital Gains Tax Exemptions You Should Know

Introduced on the 20th of September 1985, CGT is basically the tax payable on the difference between what it cost you to purchase an asset and the amount you received when you disposed of it. In the case of an investment property, this is the difference between the original purchase price of the property including any capital buying costs and the price the property is sold for plus any selling costs.

When you sell an asset such as a property, this triggers what is called a ‘CGT event’ and the owner will either make a capital gain or loss on the property. However, there are four rules provided by the Australian Taxation Office (ATO) which may mean an investor is exempt or will receive a CGT discount as outlined below:

Principal place of residence

Property that is owned by someone who resides, occupies or lives in the property is exempt from CGT so long as the dwelling is used mainly as residential accommodation and is located on land under two hectares in size.

Only one property can be classed as a principal place of residence and therefore exempt from CGT at any one time. However, there are exemptions as outlined below under the six month rule.

Six month rule

Under the six month rule the ATO allows you to hold two primary places of residence. An exemption from CGT is available if a new home is acquired before a purchaser disposes of the old one. In this instance both dwellings are treated as the primary place of residence for up to six months if:

  • The old property was the owner’s primary place of residence for a continuous period of at least three months in the twelve months before it is sold
  • The owner did not use the old property to provide an assessable income in any part of the twelve months when it was not the primary place of residence
  • The new property becomes the owner’s primary place of residence

If you dispose of the old dwelling within six months of acquiring the new one, both dwellings are exempt for the whole period between when you acquire the new one and dispose of the old one.

Six-year rule

If the owner of a primary place of residence chooses to move out of their home and rent it out, a CGT exemption is available for up to six years after they vacate. The ATO list some reasons for when this may occur such as if the owner accepts a job interstate or overseas is staying with a sick relative long term or is going on an extended holiday. There is currently no limit to the number of times a property owner can reset the exemption rule so long as each absence is less than six years. If you make this choice, you cannot treat any additional dwelling you own as your main residence for that period.

Fifty per cent discount for property investors

Individuals or small business owners who hold an income-producing investment property for more than twelve months from the signing date of the contract before selling a property will receive a fifty per cent exemption from CGT.

An Accountant can also provide advice on how claiming depreciation deductions will impact CGT.

Article provided by BMT Tax Depreciation.


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