Question 1: Hi, I’m wondering what rate of capital gains tax one pays (if at all) if, in the year of the sale of a property, one’s income is below $18,200? Thank you.
Capital Gains Tax (CGT) is not a separate tax.
Any capital gain you make from the sale of your investment property, shares or managed funds, is added to your assessable income for that financial year, and tax is paid at your marginal tax rate via your normal income tax return.
The ATO has a list of individual income tax rates here.
As the assessable capital gain will increase your total assessable income, it sometimes means that you move up to a higher marginal tax rate.
In relation to the capital gain, the following steps should be undertaken:
- Deduct the ‘cost base’ from the process of the sale. This includes the price you paid for the investment property (or shares), as well as any costs incurred in buying and selling the asset and other incidental costs. This calculation will give you your gross capital gain
- If you have made a capital loss from the sale of another asset during the financial year, or carried forward a loss from a previous financial year, it can be deducted from your gross capital gain
- If you have held the asset for at least 12 months, then you can discount the capital gain by 50 per cent*. Note that super funds are only eligible for a 33.33 per cent discount, and if the property was held in a company name, then no discount is permitted. The resulting figure is your net capital gain that is added to your income tax return.
*This is known as the discount method and is the most common approach by far. For assets purchased before September 1999, you have the choice of using this method or the indexation method.
Let’s look at an example.
Let’s say your taxable income for the financial year is $15,000, which would result in no tax payable.
You then decide to sell your property for $450,000.
It has a cost base of $380,000 (purchase price plus costs), and you have no capital loss to offset this.
Your gross capital gain is $70,000. But, because you have held the property for more than 12 months, you take advantage of the 50 per cent discount.
This reduces your net capital gain to $35,000, which you then add to your other income of $15,000 to get a total assessable income of $50,000 for your income tax return.
This $50,000 is then taxed at normal individual income tax rates.
As you can see from the table below, the $35,000 from the property sale will have bumped you from the tax-free income bracket to the middle-income tax bracket.
You will still pay no tax on the first $18,200 earned, and only 19 cents per dollar of income earned between $18,201 and $45,000.
But on the last $5000, you will pay 32.5 cents in tax for every dollar of income.
Question 2: I’m selling a house co-owned with my spouse. The sale price is $315,000. I’m retired and self-funded. Can I put the proceeds into super accounts?
There are eligibility requirements, and caps, in relation to downsizer contributions into super.
If you are 67 or older, you must meet a ‘work test’ before contributing to super. This is for both pre-tax (concessional) or after-tax (non-concessional) contributions.
Note that the government is proposing to increase this age threshold to 74 for salary sacrifice and non-concessional contributions from July 1, 2022. But this change has yet to be legislated.
Generally speaking, the work test requires you to work, for financial gain, for a minimum of 40 hours over a consecutive 30-day period during a financial year, before you are able to make a voluntary contribution into super.
But for those 67 or over who don’t meet the work test, there are a couple of exceptions to this rule if you want to make a contribution to super.
One exception is the ‘work test exemption’.
This allows people aged 67 to 74, with a total super balance below $300,000 on June 30 of the previous financial year, to make voluntary superannuation contributions over the 12 months following the financial year in which they last met the work test.
The other exemption which may be applicable in your situation is the ‘Downsizer Contribution’ rule.
If you are 65 years old or older, you may be able to make a downsizer contribution into your superannuation of up to $300,000 each from the proceeds of selling your home.
Again, the government has announced they intend to lower the minimum age threshold of this contribution to 60, but this has yet to be legislated.
The $300,000 is not counted in the regular caps on concessional and non-concessional contributions.
The other eligibility requirements are listed below:
- Your home was owned by you or your spouse for 10 years or more before the sale
- Your home is in Australia and is not a caravan, houseboat or other mobile home
- The proceeds from the sale of the home are either exempt or partially exempt from capital gains tax (CGT) under the main residence exemption – i.e. it was not an investment property for the entire period
- You have provided your super fund with the ‘Downsizer contribution into super‘ form
- You make your downsizer contribution within 90 days of receiving the proceeds of sale (the tax office can provide an extension on request)
- You have not previously made a downsizer contribution to your superannuation account from the sale of another home.
Craig Sankey is a licensed financial adviser and head of Technical Services & Advice Enablement at Industry Fund Services
Disclaimer: The responses provided are general in nature, and while they are prompted by the questions asked, they have been prepared without taking into consideration all your objectives, financial situation or needs.
Before relying on any of the information, please ensure that you consider the appropriateness of the information for your objectives, financial situation or needs. To the extent that it is permitted by law, no responsibility for errors or omissions is accepted by IFS and its representatives.
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