For anyone in the property game – investor or not – capital gains tax can be a bit of a minefield.

Does it apply to you? How does it impact your income tax? And how will the latest capital gains tax legislation affect you if you’re an investor in Erskineville, Alexandria, or other parts of the inner city and inner west? Here, we share what you need to know.

What is capital gains tax?

Although capital gains tax (CGT) can seem a bit daunting to get your head around, it’s essentially a tax you pay when you dispose of or sell an asset. The ‘capital gain’ is the difference between what you paid for the asset and the price you sold it for (less any fees incurred during the sale), and the capital gains tax is the levy you pay on that amount.

Capital gains tax came into effect on 20 September 1985 and applies to a range of assets – such as shares or properties. The asset must have been purchased after 1985 for over $10,000. In terms of property, investments such as a rental property, holiday house or business premises may be subject to capital gains tax.

If you sell and make a gain on the asset (ie, you make more money on the asset than what you paid for it), the gain has to be declared on your income tax along with other income sources. To figure out how much you’ll have to pay in capital gains tax, try a CGT calculator like this one.

Is anything exempt from capital gains tax?

Your home is generally exempt if you’re living in it – that is unless it sits on more than two hectares of land or you’ve used it to earn rent or run a business.

Other exemptions, according to the ATO, include personal assets such as a car or furniture, or depreciating assets such as business equipment or fittings in a rental property. The ATO has a full list of CGT assets and exceptions here.

What are the CGT legislation changes?

There have been a number of changes to capital gains tax this year, and if you have assets you’re considering selling, you may be impacted.

One big change is for ex-pats who may be living offshore and decide to sell the family home in Australia.

Since the CGT was introduced in 1985, Australians living overseas have avoided paying capital gains tax on their main residence, as long as the home hadn’t been rented out for more than six years at a time. But as of 1 July 2020, ex-pats who sell their property while living and working overseas will no longer receive the exemption.

Who will the changes affect?

It’s thought the changes will affect thousands of Aussies living overseas who decide to sell up – as well as foreign nationals who come to Australia, purchase a home to live in while they’re here then decide to sell it when they return home. And if you’re an Australian ex-pat who’s not aware of the changes, you’ll be caught out if you decide to sell after the legislation comes into effect.

Something to be aware of is that the capital gains tax will date back to when you purchased the home, not the point at which you moved overseas – so if you bought your home in the 1980s and decide to sell after July 1, that could mean quite a large tax bill. You may also not have records dating back that far making it difficult to work out your cost base, so prior to selling it’s a good idea to seek advice from your financial planner, accountant or a lawyer.

Are there exceptions to the new laws?

There are a few limited exemptions for specific ‘life events’ such as divorce, death, a terminal medical condition.

But these only apply if you’ve been living abroad continuously for less than six years. You’ll find more info on the life events test here and it’s recommended you seek legal advice to determine if your circumstances are eligible.

How is this affecting the property market?

Many ex-pats and foreign investors rushed to sell their Australian homes prior to the CGT changes coming into effect on 1 July 2020, and that certainly brought some new properties onto the market.

Some experts predict the CGT changes may impact the property market long-term, making foreign residents more reluctant to invest here. That may mean more opportunities if you’re looking to invest locally – or buy a home to live in as your primary residence.

Of course, please do get in touch if you have any questions about Erskineville and Alexandria or how the changes have affected the local property market. We’d love to chat.

Brad Gillespie - Property Partner

View full profile