There’s been talk about possible changes to how capital gains tax (CGT) works in Australia, and while nothing has been decided yet, it’s worth understanding what it is and why property investors are paying attention. Adam Pasquill, Partner at our Frankston office explains why understanding CGT and planning ahead can help property investors manage their tax liability and make smarter decisions when selling.
What is capital gains tax?
Capital gains tax (CGT) is the tax you pay on the profit you make when you sell an investment, such as a rental property, for more than you paid for it. In Australia, if you’ve held the property for more than 12 months, you usually only pay tax on half of the profit. This is called the CGT discount and has been part of the tax system since 1999.
Importantly, your family home is not included. You do not pay CGT when you sell your own home.
Why are people talking about change?
Recent reporting has revived speculation that the Government might reduce the generous CGT discount specifically for investment properties. The current 50% discount is a very large tax break, costing the government around $22 billion each year, and most of the benefit flows to people with higher incomes. Any changes would aim to make property investment a bit less tax-advantaged.
What could a change look like?
Nothing has been finalised, but some of the ideas being discussed include:
- Reducing the CGT discount for investment properties, for example cutting it to 25–33 percent instead of 50 percent, meaning more of the profit is taxed.
- Keeping the family home excluded from any changes, so homeowners are unaffected.
At this stage, the Government has said it has not made a final decision and is still considering options ahead of the federal budget.
Real-life example – David’s rental
David bought a rental property for $500,000 five years ago and sold it for $650,000, making a $150,000 profit. With the 50% discount, he only pays tax on $75,000.
If the CGT discount drops to 25%, he would pay tax on $112,500, potentially costing him thousands of dollars more depending on his income level.
Why it matters to property investors
If you own investment property, or looking to get into the investment property market, possible CGT changes are worth paying attention to because they could affect your tax bill when you sell. For most Australians who are not property investors, nothing immediate is changing.
This topic will likely evolve over the coming months as the budget process unfolds. If you have investment property you plan to sell in the next few years, it’s worth keeping an eye on the CGT rules and talking to your Accountant or Financial Adviser about the best strategy for your situation.
