Capital Gains Tax Exemptions

Introduced in September 1985 by the federal government of the time, capital gains tax (CGT) is the tax payable on the difference between what it costs you to purchase an asset and the amount received when you dispose of it. It can be quite complex, as legislation has been changed over time surrounding this issue.

It is worth noting there are a number of exemptions which may apply, meaning that investors may not always be liable to pay CGT. For example, under section 104-235 of the Income Tax Assessment Act of 1997, Event K7 – a capital loss can be claimed when an asset is disposed of for less than its original cost and depreciation claims were denied because of the recently amended depreciation legislation which relates to second-hand residential properties, preventing owners from claiming plant and equipment depreciation on previously used assets.

Whilst the method of calculating capital gains tax has not changed, it has become imperative for investors to be aware of the implications of CGT from the outset of their purchase, particularly when they are investing in a second-hand property.

The scenarios where the capital loss schedule becomes crucial include:

  • When an asset is scrapped during ownership, CGT Event K7 can be used to establish a capital loss in that year, even if the property was not sold.
  • Where there is a partial or full CGT main residence exemption. Even though the property was a main residence, they may still be eligible for a CGT Event K7.
  • When the contract date and settlement date for the sale of the property occur in separate financial years. The normal capital gain or loss from the property (CGT Event A1) is calculated in the financial year of contract exchange, where as the CGT Event K7 is calculated in the year of settlement.

Although the capital loss schedule is needed for capital gains tax calculations, some scenarios result in a nil effect because the value of plant and equipment is separated out of the purchase price to show an amount attributed to the property. Any difference identified due to a reduced termination value of plant and equipment increases the portion of purchase price attributed to the property when the property is sold.

It is critical that property investors consult with a specialist Quantity Surveyor and Accountant to ensure their claim is correct.

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