Capital Gains Tax Estimates

A capital gain - or capital loss – is best defined as the difference between the purchase of the asset and the cost you received when you disposed of it.

Put simply, you pay tax on your capital gains.

All assets you have acquired since tax on capital gains came into effect (20th September 1985) are subject to CGT unless specifically excluded.

It is important to note though, Capital Gains Tax is not a separate tax, it just forms part of your income tax (although it is generally referred to as capital gains tax).

Selling assets such as real estate or shares is the most common way you make a capital gain or capital loss.

The most common way you make a capital gain is by selling assets such as real estate, shares or managed fund investments.

Capital Loss

If you happen to make a capital loss, you are unable to claim it against your income. However, you can use it to reduce a capital gain in the same income year.
If your total capital losses exceed your total capital gains or you make a capital loss in an income year you don't have a capital gain.
Noting this, usually you are then able to carry the loss forward into the new financial year and deduct it against any capital gains in future years.

Capital Gain

Almost all real estate is subject to Capital Gains Tax.

This includes vacant land, business premises, rental properties, holiday houses and hobby farms.
Your 'Principal Property of Residence' is exempt from Capital Gains Tax, unless the property has been rented for any period of time or it's on more than 2 hectares of land.

When you intend to sell you property, we recommend that you obtain a MCG Quantity Surveyors Capital Gains Tax Estimate.

To ATO states that you calculate the capital gain or capital loss on the major improvements by taking away the cost base of the improvements from the proceeds of the sale that are reasonably attributable to the improvements:

Capital gain on major improvements = proceeds of sale attributable to improvements - cost base of improvements

Working out your Capital Gain

There are three ways to work out your capital gain, and the most common two methods (discount or indexation) are detailed in the table below.
You are able to choose the method that gives you the best result (that is, gives you the smallest capital gain).

Albeit the two methods (discount or indexation) reduce the amount of your capital gain, you need to have owned the asset for at least 12 months before you disposed of it.
MCG Quantity Surveyors note that you must remember that when calculating whether you acquired the asset at least 12 months before the Capital Gains Tax event, you must exclude both the day of the acquisition and the day of the Capital Gains Tax event (settlement).


Example Case Study:

Mike buys a Capital Gains Tax asset on the 2nd February one year. His 12-month ownership period starts on the 3rd February (the day after he bought the asset) and ends 365 days later (366 in a leap year), 2nd February the following year.
If a Capital Gains Tax event occurs in relation to the asset before the 3rd February the following year, Mike can not claim the two methods (discount or indexation) because he has not owned the asset for more than 12 months.

Calculation methods

Method Description How to do it
Capital Gains Tax discount: For assets held for 12 months or more before the relevant CGT event. Allows you to reduce your capitalgain by:
  • 50% for individuals (including partners in partnerships) and trusts
  • 33 1/3% for complying super funds.
  • Not available to companies.
Subtract the cost base from the capital proceeds, deduct any capital losses, then reduce by the relevant discount percentage.
Capital Gains Tax
Indexation:
For assets acquired after the (20th September 1985) and before (21st September 1999) and held for 12 months or more before the relevant Capital Gains Tax event.
Allows you to increase the cost base by applying an indexation factor based on CPI up to September 1999. Apply the relevant indexation factor, then subtract the indexed cost base from the capital proceeds.

 

Example Case Study:

Marty bought a home in 1998 and undertook major renovations to the home. These renovation costs totalled $100,000.
Many years later, Marty sold the home for $500,000 in December 2011.

At the date of sale, a MCG Quantity Surveyors report was able to index the cost base of these improvements to the current indexed value calculated at $120,000.

Of the $500,000 Marty received for the home, $180,000 was attributed to the improvements. As the property was rented, Marty used the improvements to produce income from the time they were finished until the time he sold the property.

As Marty completed the improvements before 21st September 1999 and sold the home after that time, and had held the improvements for at least 12 months, he could use either the indexation method or the discount method to calculate his capital gain on the improvements.

Indexation method

Marty calculates his capital gain using the indexation method as follows:

Amount of proceeds attributable to the improvements $180,000
less cost base of improvements indexed for inflation $120,000
Taxable capital gain $60,000

 

Discount method

Marty's capital gain using the discount method is:

Amount of proceeds attributable to the improvements $180,000
less cost base of improvements (without indexation) $100,000
Capital gain $80,000
less 50% discount $40,000
Net capital gain $40,000

Therefore, Marty would choose the discount method because this gives him a lower capital gain.

MCG Quantity Surveyors are acutely aware of the demanding and competitive nature of the construction industry and as such, the MCG Quantity Surveyors team will ensure that reporting turn around times are consistently met, and clients are kept up to date with the status of projects and reports.

Should you have any further queries or questions pertaining to Cost Estimating Services or additional reporting services, do not hesitate to contact the team at MCG Quantity Surveyors.