How To Avoid Capital Gains Tax in Australia
We have written a detailed article on How Much Is Capital Gains Tax in Australia, outlining what capital gains tax is and how much you will have to pay in certain circumstances. But did you know that there are actually many ways to avoid capital gains tax?
Yes, it’s true. You can significantly minimise the amount you have to pay and the likelihood of paying thousands of dollars in capital gains tax, with a few strategies that are legal and straightforward!
This is the article for you if you’re about to sell your rental property and want to know how to avoid capital gains tax in Australia, or as an expat looking to sell an asset. Let’s quickly have a look at what capital gains tax is before we get started.
Capital gains tax: A quick definition
A definition of capital gains tax (CGT) is the following: it refers to the tax you must pay when you make a capital gain or make a profit on an asset you sell. The asset you sell might be property, such as an investment property or rental property. It might be a share of a company.
For example, in a financial situation where you have bought a share of a company for $3,000 and you sell it for $3,750 after six months, you will have to declare your $750 profit on the tax return declaration and pay tax on this profit.
The capital gains tax rate that you pay on your profits from sold assets will equate to your income tax rate.
For a capital loss, this will carry over to the following financial year and be deducted from any capital gains you make then.
Keeping capital gains tax low: The alternative to avoiding CGT altogether
It’s not always possible to completely avoid capital gains tax. You might be in a situation where you need to sell an asset without reaping the benefits of being eligible for concessions.
However, the great news is that in circumstances where your capital asset makes a capital gain and you must pay capital gains tax, you might be able to keep this low with a few tips.
So, don’t despair if you’re unable to completely avoid CGT and read this article until the end!
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How to avoid capital gains tax or keep it low: 9 legal methods
Now that you’re aware of capital gains tax, let’s get on to the professional advice. Here are the nine legal methods that you can use if you want to avoid paying it when you make a profit.
1. Reap the benefits of being a resident of the property and occupiership
Are you the owner of a property that is your main residence? If you answered yes and you’re wondering how to avoid capital gains tax, home ownership and residency is one of the first advantages you have as it can help you achieve this.
When your asset (the property) is listed as your primary place of residence, you are eligible for an main residence exemption in terms of capital gains tax when you sell the property.
Now, keep in mind that if your property was first a rental property or investment property and you then moved into the property afterwards, you might not be able to list this property as a primary place of residence and it won’t qualify for capital gains tax exemption.
What you will receive in this case is a partial exemption percentage from capital gains tax. Here’s a quick example.
If you decide to rent out an investment property for three years, and move into the property for up to six years, when you sell the property you must pay capital gains tax for the three years that the property was classed as a rental property. So, if you sell the property for $200,000, you’ll pay capital gains tax on $66,000.
2. Wait for the advantages of owning a property for a year
What’s beneficial about waiting to sell is that once you have owned a property for a year, you can receive a 50% discount in terms of the capital gains tax you pay! So, the answer to how to avoid capital gains tax is as simple as waiting until you’ve owned the property for more than one year.
The following example will clarify this:
- You have owned a property for one year and eight months
- When you sell the property, your capital gains are equal to $200,000
- You pay capital gains tax on 50% of your capital gains
- You pay capital gains tax on $100,000
3. Take advantage of the six-year rule when you sell property
The six-year rule can help you greatly if you want to know how to avoid capital gains tax in Australia. This rule stipulates that if your rental property is classed as an investment or rental property for six years (or less than six years), it’s possible to receive exemptions in terms of capital gains tax when you file your tax return.
The rule only applies to periods of time where you have a tenant in the property.
Here’s an example of the six-year rule in action.
- You purchase a property at a purchase price of $300,000
- You become an Australian expat and get the property revalued at $400,000
- You rent the property for two years
- You return home and sell the property after eight years at a selling price of $700,000
- The taxable gain you make is calculated with the following calculation: $300,000 x 2/8 because you rented the property for two years
- You pay capital gains tax on half of $75,000 because the property was yours for more than a year
- You pay CGT on $37,500
As you might notice, this is a key approach when answering the question how to avoid capital gains tax in Australia, even as an Australian expat.
4. How to avoid capital gains tax with a property reassessment
A property reassessment can help you if you want to know how to avoid capital gains tax in Australia as an expat. Instead of selling a rental property without getting it revalued, make sure you don’t skip this vital step, which can help you to make significant savings in terms of capital gains tax.
When you get your property revalued, the revaluer will give you a different cost base for your property. Using this cost base is the key to calculating the gains you will make when you sell the property.
This example will clarify how a property reassessment can help you save.
- You purchase a property for $250,000 and live in it for 10 years
- You get the property revalued, and it has increased in value to $450,000
- You return to Australia after being an expat, rent it out for two years and then decide to sell the property for $480,000
- You make a capital gain of $30,000 and pay capital gains tax on this amount, compared with the $230,000 you would have paid tax on prior to revaluation
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5. Get the benefits of a self managed superfund
A self managed superfund along with a self managed superfund (SMSF) loan can be used to purchase property in Australia, and this strategy is an option for you to consider if you want to know how to avoid capital gains tax.
Say you return to Australia after living abroad as an expat and use the SMSF to purchase your property. You can reap the benefits that come with this approach as you won’t have to pay capital gains tax when you sell the property as a retiree. Under these circumstances, however, you cannot live in the property before you begin to receive your pension.
6. Reap the tax rewards of earning a lower income for a year
What’s also key when trying to keep capital gains tax payments low is your income. Since capital gains tax rates on your capital gains are the equivalent of income tax rates, your income tax bracket will influence how much capital gains taxes you pay. So, it’s one potential answer to how to avoid capital gains tax and can help you retain more of your capital gains.
7. Offset your gains in the future
If you can retain and keep track of your outgoings and expenses that have gone towards the property, this can be a potential solution to the question of how to avoid capital gains tax and achieve your personal objectives at the same time. Offsetting gains with outgoings can help you to reduce the amount of capital gains tax you must pay.
In this sense, if you make any capital losses, these can be deducted from any other capital gains you make when you sell other assets for other income. Here’s an example.
- You own shares of a company worth $100,000
- You sell the shares for a selling price of $150,000
- You also sell your property for $200,000 after purchasing it for $210,000 and owned the property for eight months
- You have made a capital gain of $50,000 by selling your shares, but have made a capital loss of $10,000 after selling your property
- You can offset the capital gain you have made and the taxes you must pay on the shares by deducting the capital losses you have made on the property
It works like this for any capital losses you make, and in situations where you only make a capital loss, they can be carried forward to the next tax year or any future tax years where you might have made a capital gain when selling a new asset.
8. How affordable housing can help you avoid capital gains tax
One rule that can ease the taxation that you pay in terms of capital gains is the affordable housing rule introduced by the Australian taxation office in 2018. The rule is that if you invest in what is classed as affordable housing, you may be eligible for a 10% discount in capital gains tax.
Alongside the discount you can receive if you own the property for more than 12 months, you can add this affordable housing capital gains discount to your total, meaning that you could receive a 60% discount on capital gains tax payments.
9. Take advantage of the home business assets exemption that you might qualify for
Are you running a small business from your home? According to the Australian taxation office you might be able to qualify for some concessions when it comes to paying CGT on business assets. Now, there are certain criteria that you must meet to be eligible for these concessions.
- Your aggregated turnover must be less than $2 million
- Your business asset must meet the criteria of the asset test
- You qualify for the maximum net asset value test
How to avoid capital gains tax: A summary of the dos and don’ts
The question of avoiding capital gains tax can be tricky to answer because the Australian taxation rules aren’t always easy to follow–especially as an Australian expat. However, it’s not impossible to avoid capital gains tax.
So, if you’ve returned to Australia having been an expat for a few years and want to sell an asset and avoid capital gains tax, here’s a quick summary of the main dos and don’ts of achieving this:
- Always consult a tax advisor for professional advice on your tax situation
- Always follow legal methods when thinking of answers to how to avoid capital gains tax
- Take advantage of the many concessions you can gain
Avoiding paying capital gains tax with legal methods is crucial, so get the right tax advice and learn about capital gains tax before selling your asset.
Odinmortgage.com is the place to get the most recent, accurate facts and information about mortgages, investment properties, paying tax and facts on what it means to be approved for a mortgage as an expat, so explore the facts here!
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How To Avoid Capital Gains Tax FAQs
Is capital gains tax separate from income tax?
No, capital gains tax is not a separate tax from income tax. As stated by the Australian taxation office, capital gains tax is a part of the income tax that you are charged and is the same rate as your income tax rate. If you make any capital gains, this can cause the taxes that you must pay for that year to increase.
In which circumstances can I be exempt from capital gains tax when I sell my property?
The Australian taxation office states that you can be exempt from capital gains tax when you sell your property if the following circumstances apply to you: If your property is your principal residence, if it has been your home (and your dependants’ home) since you purchased it until now, if you haven’t used it to produce assessable income and if it’s located on less than two hectares of land.
It’s also the case that if you sell a property that you purchased prior to the introduction of capital gains tax on 20th September 1985 you won’t have to pay capital gains tax on any capital gains that you make.
If you have inherited the property, capital gains tax won’t apply, but it’s possible that you might have to pay capital gains tax if you sell it and it’s not your principal residence.
Which assessable income produced by my property means that I must pay capital gains tax?
If you earn certain assessable income, such as an income gained from a business run out of your home, an income gained from renting out the property or investing in it, or flipping the property as part of a renovation business, you must pay capital gains tax.
If I reinvest capital gains, can I avoid capital gains tax?
Unfortunately, it is unlikely that you can reinvest capital gains to completely avoid capital gains tax. So although you might consider reinvesting in another property immediately after selling yours, you cannot completely avoid capital gains tax using this approach.