Capital Gains Tax

 

 

You may make a capital gain or capital loss when you sell (or otherwise cease to own) a rental property that you acquired after 19 September 1985. In the case of the sale or other disposal of real estate, the time of the event is normally when you enter into the contract (generally the date on the contract), not when you settle. The fact that a contract may be subject to a condition such as finance approval, generally does not affect this date. If there is no contract, the event takes place when the change of ownership occurs. You can also make a capital gain or capital loss from certain capital improvements made after 19 September 1985 when you sell or otherwise cease to own a property you acquired before that date. You will make a capital gain from the sale of your rental property to the extent that the capital proceeds you receive are more than the cost base of the property. You will make a capital loss to the extent that the property’s reduced cost base exceeds those capital proceeds. If you are a co‑owner of an investment property, you will make a capital gain or loss in accordance with your interest in the property.

The cost base and reduced cost base of a property includes the amount you paid for it together with certain incidental costs associated with acquiring, holding and disposing of it (for example, legal fees, stamp duty and real estate agent’s commissions). Certain amounts that you have deducted or which you can deduct are excluded from the property’s cost base or reduced cost base. From 1 July 2017, travel expenses you incur relating to your residential rental property are also excluded from the property’s cost base or reduced cost base. Your capital gain or capital loss may be disregarded if a rollover applies, for example, if your property was destroyed or compulsorily acquired or you transferred it to your former spouse under a court order following the breakdown of your marriage.

 

 

 

 

If the sale of your rental property includes depreciating assets, a balancing adjustment event will happen to those assets.

You should apportion your capital proceeds between the property and the depreciating assets to determine the separate tax consequences for them. From 1 July 2017, you can make a capital loss (or in some circumstances, capital gain) when you dispose of a depreciating asset to which the new rules about deductions for decline in value second-hand depreciating assets apply. This is because plant or depreciating assets purchased in a contract to acquire, or otherwise acquired, at or after 7.30 pm on 9 May 2017, or used or had installed ready for use for any private purpose in 2016–17 or earlier income years, for which you were not entitled to a deduction for a decline in value in 2016–17 (for example, depreciating assets in a property that was your home in 2016–17 that you turned into your residential rental property in 2017–18): is treated as capital works.

 

If you cease to hold or use a depreciating asset, a balancing adjustment event may occur. If there is a balancing adjustment event, you need to calculate a balancing adjustment amount to include in your assessable income or to claim as a deduction. A balancing adjustment event occurs for a depreciating asset when: • you stop holding it, for example, if the asset is sold, lost or destroyed • you stop using it and expect never to use it again • you stop having it installed ready for use and you expect never to install it ready for use • you have not used it and decide never to use it, or • a change occurs in the holding or interests in an asset which was or is to become a partnership asset. A balancing adjustment event does not occur just because a depreciating asset is split or merged.

However, a balancing adjustment event does occur if you stop holding part of a depreciating asset. Expenses of a balancing adjustment event (such as advertising or commission expenses) may be included in the second element of the cost of the depreciating asset.

You work out the balancing adjustment amount by comparing the asset’s termination value (such as the proceeds from the sale of an asset) and its adjustable value at the time of the balancing adjustment event; see Termination value on page 19. If the termination value is greater than the adjustable value, you include the excess in your assessable income. If the termination value is less than the adjustable value, you can deduct the difference.

If the market value of the depreciating asset is low or close to zero say after 10 years use then you can claim the income loss where the termination value is less than the adjustable value. This income loss offsets the capital gain you made in which you deduct the capital works deductions you have claimed throughout the income generating life of the investment property from the cost base.

For example if you acquire a rental property on 1 July 1998 for $200,000. Before disposing of the property on 30 June 2022, you had claimed $10,000 in capital works deductions. At the time of disposal, the cost base of the property was $210,250. You must reduce the cost base of the property by $10,000 to $200,250. The cost base of $200,250 is deducted off the re-sale price on 30 June 2022. However, the depreciating assets or plant will have a market value of zero by the re-sale on 30 June 2022 & the income loss from deducting the termination value taken as market value of zero from the closing adjustable value of the plant or depreciating asset at 30 June 2022 using the diminishing value method can offset the capital gain made on the re-sale of the property.

 

If a depreciating asset has been partly used for a non-taxable purpose, the balancing adjustment amount is reduced to reflect only the taxable use. Additionally, a capital gain or capital loss can arise to the extent that the depreciating asset was used for a non-taxable purpose;

Similarly, if the depreciating asset is a leisure facility or a boat and your deductions for the decline in value of the asset have been reduced, the balancing adjustment amount is reduced and a capital gain or capital loss can arise.

 If a depreciating asset is a second-hand depreciating asset in your residential rental property and your deductions for the decline in value of that asset have been reduced, the balancing adjustment amount is reduced to account for the proportion you have not been able to deduct. Additionally, a capital gain or a capital loss can arise.

 

Hence, you can further offset the capital gain made on the re-sale of an investment property by deducting the capital loss made on the depreciating assets or plant when the investment property was not income generating.

Capital gains tax (CGT) implications for damaged or destroyed assets

If you receive an insurance payout, it may need to be considered when calculating your capital gain or loss. A capital gain arises if the insurance payout is more than the asset’s cost base if the insurance payout is less than the reduced cost base you have a capital loss.

You choose to rebuild or replace your rental property

You may be entitled to roll over any capital gain you make and delay paying the gain until later. To defer the gain, you must incur expenditure within one year after the end of the income year the property was destroyed. For more information, see Involuntary disposal.

You choose not to rebuild your rental property

You need to calculate your capital gain or loss.

Any insurance payout you receive must be counted as capital proceeds when calculating your gain or loss.

If you don’t receive an insurance payout there are no capital gains tax consequences until the property is sold. The CGT event occurs when the property is sold at a future date.

Main residence exemption

If the property was previously your main residence, you can treat it as your main residence for up to 6 years after you move out, even if the property is destroyed. Your main residence is exempt from CGT, but you generally only have one main residence at a time and can’t treat any other property as your main residence for the same period.

Important things to remember

Timing of a CGT event

If your CGT asset is lost or destroyed, a CGT event happens on the date you receive compensation for the loss or destruction.

If you don’t receive any compensation, the CGT event happens when the loss is discovered or the destruction occurred.