Are you looking for ways to minimise capital gains taxes on your investment?
As an Australian taxpayer, it is important to understand how to reduce your capital gains tax (CGT) burden.
This blog outlines some of the practical strategies to help you minimise your capital gains tax burden and retain more of your money.
CGT can be complex with rules and regulations to learn, from using capital loss offsets to deciding which capital gains to allocate to offset first. Here’s everything that you need to know about CGT in Australia.
Understanding Capital Gains Tax in Australia
Before diving into strategies to reduce capital gains tax, it is important to grasp some basics.
Capital Gains Tax is charged from the profit made when disposing of an asset like stocks, buildings or stamp collection.
CGT in Australia is not an individual tax but an addition to a taxpayer’s income tax. The cost of each depends on your marginal tax rate and time held in the asset.
Are There Exemptions to Capital Gains Tax?
- Capital Loss: There is no CGT if you sell the property for less than its purchase price.
- Principal Place of Residence (PPOR): The main home qualifies for exclusion if it satisfies factors like being used as a primary living place, contains personal goods, and is linked to utilities.
- Change from PPOR to Rental: If you rent out your home and sell it within the next six years, you may be exempt from CGT, unless you have another home in the meantime. Multiple Uses: For those working from home, CGT may only apply to the area of the home used for income generating.
- Pre-1985 Properties: If you’ve purchased a property before the implementation of CGT (1985), you cannot claim a loss for them.
5 Strategies to Minimize Your Capital Gains Tax
1. Understand the Power of Long-Term Holding
Real estate assets appreciate over time. This means that the longer you wait to sell your properties, the higher you stand to gain from capital appreciation.
A property that has been disposed of after 12 months of holding, has a 50% capital gains tax allowable reduction on any gain from the sale.
Long-term holding encourages stable investments. It enables one to pay CGT at a lower rate and even provides a steady income for retirees with lower taxable income.
This method of CGT discounting encourages long-term investment, emphasising growth, taxes, and consistaency compounded by cyclical fluctuations for optimal gains.
2. Utilise Capital Losses for Strategic Offsetting
The Australian Taxation Office (ATO) allows you to offset current financial year capital losses against your net capital gain in the financial year – reducing your taxable income.
To minimize CGT, you should begin by offsetting losses against amounts gained that cannot be exempted from the capital gains tax discount.
Start applying carry-forward losses from previous fiscal years against the current fiscal year’s capital gains to maximize savings.
3. Record Keeping and Compliance
To claim CGT reductions effectively, maintain records and ensure proper documentation to enable the maximum claim.
This entails processes of recording the purchase and sale of assets, expenses associated therein, and records of operating loss brought forward.
Detailed records will enable you to estimate your CGT liability and come in handy in case of an audit by the ATO.
4. Lower Gains with an Optimised Cost Structure
According to the Australian Taxation Office (ATO), your profit is the difference between the property’s selling price and the “cost base” of your property.
The cost base is the total cost for a Capital Gains Tax (CGT) asset. This is the cost of initially buying the property as well as other property-related expenses like buying and selling of the asset.
The extra costs include:
- costs of owning the asset
- Any other costs incurred while acquiring the assets like legal expenses and stamp duties
- Capital costs to enhance or maintain the asset’s value, and
- Any depreciating assets associated with the property, which may impact the cost-base calculation
5. Timing Your Sale for Tax Efficiency
Want to get the most tax breaks from selling your home? It is advised to do so when your income is lower, for instance when you switch jobs or opt for fewer working hours.
Capital gains taxes can be lower in some years depending on your total income and you might consider selling your home in such years.
In retirement, you have more control over when you shall be receiving income.
This means you can select the years that are preferred when it comes to selling the properties, especially CGT.
Key Takeaways
Minimizing capital gains tax requires meticulous planning and a detailed understanding of the Australian tax laws and regulations.
By implementing these strategies, you can save thousands of dollars in the CGT. Make sure you maintain a detailed record of all your investments and expenses and stay informed of the latest changes in tax legislation.
Do you need professional assistance? Hire Above Advisory today!
