While tax avoidance is illegal and can cause you big trouble if caught, there are techniques that investors and property owners of all sizes can use to ensure they receive all the exemptions they are eligible for.
Understanding the rules is vital, both for making you are paying what is required, as well as to make sure you aren’t losing money. Knowing the CGT exemptions you are eligible for and how to use them is a vital factor in keeping your tax requirements as low as possible.
Manage your gains and losses
When you report a loss on the sale of an asset, this can be used to offset a gain further down the line. Any loss you incur can be used to mitigate the tax you pay in a subsequent tax year, lowering your capital gains tax obligations and saving you money.
Know your rate
In Australia, CGT is taxed at the same rate as income tax. This means that it is imperative to know exactly what you should be paying on your salary. Once you have factored in discounts and losses, your CGT is then calculated at the same rate that you would pay on your wages from regular employment.
Know the rules
A large part of avoiding unnecessary tax charges is knowing exactly what you’re entitled to. The ATO makes these rules available to everyone, but they can be written in ways that don’t immediately make sense. For example, you don’t have to pay CGT on your main place of residence, of which you can only have one. While this sounds like a simple enough concept, you can use it to your advantage as you are entitled to an overlap period of six months, giving you effectively two main residences.
This is to enable people to sell their main residence while they live in another house, without incurring CGT, but is also a key way to limit the about of tax investors pay as they sell on their properties. You cannot have used the property to make a profit in the preceding 12 months, so it requires careful planning and coordination to stay within the law.
In addition, if you own the property for 12 or more months, you are entitled to a 50% discount on the capital gain. Once again, understanding the rules and knowing the ones that will help you stay within the law, but prevent you from pay more than necessary is an important part of property investing and enabling you to make a profit from your investment.
Information is power
The key point to remember is that you can never know too much about the Capital Gains Tax process. The ATO is a great source of information and provides everything you need to ensure you can stay within the legal requirements of the law, while not over-paying.