Capital Gains Tax (CGT) is one of the many tax obligations faced by investors in Australia. KR Peters Director Peter Nicolls explains how CGT works and why you should take it into consideration if you are thinking of selling an investment property.



In a nutshell, CGT is the tax you pay on profits from selling assets such as property. You report capital gains and capital losses in your income tax return and pay tax on your capital gains. If you have a capital gain, it will increase the amount of tax you need to pay.



Mr Nicolls says CGT does not apply to your private residence or any property that was acquired prior to 20 September 1985. However, CGT may apply if you rent out part of the private residence, use it for business, or it comprises more than 2 hectares of land.



"To calculate the amount of CGT that needs to be paid, you need to establish your capital proceeds. This is the amount you receive when you sell the property," explained Mr Nicolls.



"Work out your cost base. This is the amount it cost you to acquire the property plus certain other costs you incurred as a result of acquiring, holding or disposing of the property. If you make a gain on the property and acquired it prior to 21 September 1999, you can index the cost for inflation up to that date instead of using the CGT discount to reduce your capital gain.



"This may give you a lower net capital gain in some circumstances, such as if you also have capital losses. By subtracting your cost base from your capital proceeds, if the amount is more than zero, you have a capital gain for the property. If the amount is less than zero, you then have a capital loss."



Mr Nicolls added that in the event that you have carry over losses you are allowed to deduct these losses first.



"The amount of CGT you pay will depend on how long you have owned the property," he explained.



"Provided you are an Australian resident and you have owned the property for more than 12 months, you can apply for a 50% discount for individuals and trusts. For super funds the discount is 33.33%. Companies cannot use the discount.



"If you acquired the property before 21 September 1999 and chose to index the cost base you cannot use the discount."



Mr Nicolls said the net capital gain or loss needs to be reported on your income tax return.



"If you have a net capital gain, you pay tax on the gain at your marginal income tax rate. If you have a net capital loss you cannot deduct it from your other income, but you can carry it forward to reduce capital gains you make in future years."



Mr Nicolls said the current CGT charges are one of the major reasons that potential sellers do not proceed with the sale of their property.



And the government is unlikely to tamper with the tax as it brings enormous amounts of revenue into federal coffers.



"The massive price increases that have occurred since the introduction of CGT in 1985 has seen the CGT increase significantly," concluded Mr Nicolls.



For more information and advice regarding CGT, contact Mr Nicolls and his team at KR Peters.