A Complete Guide to Capital Gains Tax in Australia
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We’ve all heard of capital gains tax CGT – but do you know exactly what it is, when to pay it, or how it affects expats and foreign residents? If you’re buying or selling assets in Australia, you will inevitably come across capital gains tax. Read on to find out everything you need to know about capital gains tax in Australia as we explore several case studies.
What Is Australian Capital Gains Tax (CGT)?
A capital gain is the profit margin when you sell an asset. Put simply, it’s the difference between what you paid for the acquisition and what you sold it for, minus the costs incurred by selling. If you do not make a gain, you make a capital loss.
Capital gains tax is the amount you pay on the gains during the tax year you sold the asset. It applies to shares, licences, and other high-value assets. However, it’s most often discussed with the property market. There are a few exceptions to capital gains tax, which we’ll get into later.
How Is Capital Gains Tax Calculated in Australia?
Every country calculates capital gains tax differently. So, how does the Australian Taxation Office calculate capital gains tax? Net capital gains are treated as part of your taxable income – it’s not a separate tax.
Say you earn $90,000 annually. If you were to sell a property you’ve owned for twenty years for a profit of $100,000, add this sum to your taxable income. You pay tax on the entire $190,000 in that year.
The actual rate you’re taxed is the same as your individual income tax rate. We’re above the $180,001 and over taxable income bracket in our example. Therefore, we would have to pay 45% in 2021-2022, which equals $56,167. That is if we’re Australian residents for tax purposes.
We’ll discuss how to calculate foreign residents’ capital gains tax later.
Capital Gains Tax Exemptions
You’re eligible for the main residence exemption if you’re a permanent resident. This means you don’t have to pay capital gains tax on your home. You cannot use the exemption on an investment property.
Alternatively, you might get a 50% capital gains tax discount for your asset if you have owned it for more than 12 months and are an Australian tax resident. If we apply the discount to the above example, we half the net capital gain and add $50,000 to our assessable income. Therefore, our total income tax assessment payments are $36,867.
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How to Minimise Capital Gains Tax?
Even with the 50% discount method, paying capital gains tax is a hefty expense. The best way to reduce or avoid capital gains tax is to keep accurate records of your cost base. Any capital costs, such as stamp duty, are offset against your capital gain. Accordingly, you reduce the net capital gain taxable.
Foreign Residents and Capital Gains Tax
The situation is slightly different if you’re not an Australian tax resident. If you reside overseas with no intention to return to Oz to live or work, you might be a non-resident for tax purposes. While this has its benefits – you don’t have to pay Australian tax on foreign income – it’s a disadvantage for capital gains tax.
Firstly, a foreign resident (including expatriates) cannot claim CGT discounts or exemptions. Secondly, they must pay the foreign resident capital gains withholding tax (FRCGW). When you sell a property in Australia worth more than $750,000, the buyer must withhold 12.5% of the purchase price and hand it over to the Australian Taxation Office.
Case Studies
Let’s take a closer look at how much tax expats have to pay in Australia in these three case studies.
Scenario One: Australian Tax Resident in Singapore
Caitlin was born in Australia and decided to move to Singapore in her mid-thirties. She had bought a property in Sydney ten years before moving abroad. In 2010, she paid AU$594,000 for a four-bed house. Caitlin lives and works in Sydney until deciding to pack up and move to Singapore in 2020.
She rents out her Sydney home when she leaves Australia while looking for somewhere to live in Singapore. She applied for non-residency, but the ATO has not yet approved it. Therefore, she pays tax on her Australian rental property and Singapore income.
In Singapore, Caitlin works as an English teacher and earns SG$36,000 annually. With today’s exchange rates, this is about AU$37,080 a year.
Caitlin rents out her Sydney property for AuU$450 a week, equating to AU$23,400 in a whole year. She has an Australian side hustle that earns her about AU$8,000 a year. In a typical year, Caitlin’s current taxable income is AU$68,480. She pays an income tax rate of 32.5% – about AU$12,723.
However, after two years in Singapore, she sold her Sydney investment property to cease residency in Australia entirely. After all, property prices have risen significantly in the last two years. She sells the property for an incredible AU$1,600,000.
Now, she needs to work out her cost base before calculating her capital gain and lodges her Australian tax return. Net capital losses include:
- Transfer costs
- Stamp duty
- Borrowing expenses, such as loan application or mortgage discharge fee
- The amount paid for the asset
- Advertising costs to find a buyer or tenant
- Valuation fees
- Professionals, such as conveyancers, mortgage brokers, real estate agents and accountants
Caitlin’s expenses add up to AU$41,000. As she is an Australian citizen, she does not need to pay the foreign resident stamp duty surcharge. When the time comes to lodge a tax return, she deducts her capital losses from her other capital gains.
So, her usual Singapore income is AU$37,080. Plus, she earns AU$8,000 for her Australian side hustle. She earns 26 weeks’ worth of rental income on her property before preparing it to sell, equalling AU$11,700. Caitlin makes a capital gain selling her property AU$1,600,000. Her net capital gains equal AU$1,656,780.
Now, she needs to deduct the AU$41,000 expenses, plus the AU$594,000 she originally paid for the property. Her new net capital gains are AU$1,021,780.
Considering Caitlin isn’t eligible for the main residence exemption, she’s looking at a hefty sum to pay. Fortunately, she is still an Australian tax resident. While this means she pays extra income tax on her Singapore wages, she can save 50% when paying capital gains tax.
Only Caitlin’s property sale proceeds are eligible for the 50% reduction. So, we divide the AU$1,006,000 profit in two, equalling AU$503,000. Finally, Caitlin lodges her income tax return with a total capital gain of AU$559,780. She pays AU$222,568 in capital gains tax.
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Scenario Two: Expat in Hong Kong
Oliver, like Caitlin, is Australian born and bred. However, he decides to move to Hong Kong to live and work permanently. Oliver gives up all work in Australia and ceases his Australian residency. He still owns his property in Melbourne, which he’s held for five years.
When Oliver first bought his property in Melbourne, he paid a purchase price of AU$770,221. Since then, its market value has risen to AU$1.038 million. During that time, he earned AU$440 in rent a week.
He works as an accountant in Hong Kong, earning HK$291,188 annually. However, as he is not a tax resident, he only pays tax on his Australian taxable property. His earnings in Hong Kong are safe from ATO – he won’t have to pay tax on it in Australia.
After living in Hong Kong for two years, Oliver wants to expand his investment properties portfolio. He applies for an Australian home loan to buy a unit worth AU$467,500. His new investment earns him AU$320 a week. Therefore, he has a total of AU$39,520 in taxable income. With a non-resident tax rate, he pays AU$12,844 in tax in a financial year.
While living in Hong Kong, Oliver runs into some difficulty. To help his financial situation, he decides to sell his unit. He’s only owned it for 18 months. However, he makes a capital loss. He’s struggled to invite tenants into his property, and house values are dropping now. Oliver was negatively gearing the property, but now he needs the cash.
The selling price is AU$450,000. When he sells, the purchaser withholds 12.5% as FRCGW tax. He claims it back in credit in his tax return. In this financial year, he has the following income:
- AU$22,880 rental income for his house
- AU$3,840 rental income for his unit for 12 weeks before selling
- AU$450,000 selling price
He has the following capital losses:
- AU$10,000 rental property costs, including maintenance, management, and advertising
- AU$467,500 initial cost of the unit
So, he adds his capital proceeds together to equal AU$476,720. Next, Oliver subtracts his expenses to determine if he’s made a capital gain or loss. Unfortunately for him, he’s made a loss of AU$780. However, as he’s not an Australian resident, he’s saved himself from paying capital gains tax.
Oliver still has to submit his return with his capital loss. Generally speaking, individual losses can be carried forward indefinitely. However, he must still claim it at the first opportunity. In the following year, Oliver earns another AU$22,880 rental income for his house. He spends a further AU$7,000 in expenses.
Therefore, his capital gain is AU$15,880. He offsets his previous capital loss of AU$780. Consequently, he only has to pay capital gains tax on $15,100. His total capital gains tax bill comes to $4,907.50.
Get a free Australian mortgage assessment today.
Scenario Three: Expat Returning to Australia
Bernie has lived in the US for the last seven years. When he left Canberra, he kept his property there and rented it out. He bought it for AU$616,300. Bernie now earns AU$633 per week from his rental property. Each year, he pays around AU$5,000 in property management and maintenance fees.
He is now no longer an Australian tax resident. His US$80,000 in America is not taxable income in Australia.
In an average year, Bernie pays capital gains tax on AU$27,916. As Bernie now counts as a foreign resident, he must pay AU$9,072.70 to ATO each year.
Yet, Bernie is now looking to return to Australia. Specifically, he wants to move to New South Wales. He cannot afford to buy a new house in Sydney and keep his current property in Canberra. It can only produce income of AU$13,843.3 a year after expenses and tax.
So, with the recent housing prices shooting up, he sells the property for AU$1,015,900. He spends around AU$20,000 on real estate agents, advertising costs, and conveyancing fees.
Bernie’s capital gains for the year:
- AU$18,990 rental property income (Bernie stops renting it out 30 weeks into the year)
- AU$1,015,900 Canberra house sale
Total: AU$1,034,890
Capital losses:
- AU$3,000 rental property management fees (he doesn’t pay the full sum as he stops renting it before the year is up)
- AU$20,000 selling expenses
- AU$616,300 initial purchase price of his Canberra house
Total: AU$639,300
So, to calculate capital gains tax, Bernie adds up his capital gains and subtracts his expenses. His total capital gain is AU$395,590.
Meanwhile, after selling his Canberra property, he moves into a new home in Sydney. When he lodges his capital gains, he must tick that he is an Australian tax resident. Even though he lived in the US for 30 weeks, he returned and became a tax resident part way through the year.
In Sydney, he earns $65,000 annually. He must put down the 22 weeks of his salary for this year’s tax return. So, he adds $27,500 to his capital gains. In total, he pays $161,507.42 income and capital gains tax.
Bernie’s a new house in Sydney worth $1,800,000. He uses his profits as a deposit. He needs to pay AU$83,567 stamp duty. Fortunately, Bernie doesn’t put his foreign spouse as a joint borrower. Otherwise, he would have to pay the foreign resident surcharge.
However, as this is not a capital gain or loss, it does not go on his tax return this year. But he keeps precise and accurate records. When he sells the property in the future, he can use these expenses to offset his capital gains.
Key Takeaways
- Capital gains tax is not a separate tax to your income tax rate. It’s added together in the year you sold the CGT asset.
- Australian tax residents get the main residence exemption or 50% off paying CGT.
- Keep accurate records of your capital gains to minimise the amount you pay.
- You can find a capital gains tax calculator online.
Frequently Asked Questions
How Is Capital Gains Tax Calculated in Australia?
Capital gains is treated as part of your income tax. If you sell a house in Australia, add the capital gain to your tax return for that financial year. If you do not pay income tax in Australia, the purchaser will withhold 12.5% of the purchase price for ATO. You will need to complete a tax return to claim it back.
How Do I Avoid Capital Gains Tax in Australia?
Australian tax residents can avoid capital gains tax on their primary address. This main residence exemption is only for those who pay income tax in Australia and have lived in their property for 12 months. Expats can minimise CGT by keeping track of all their property-related expenses.
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