Capital gains tax uncertainty

Discussion in 'Accounting & Tax' started by Al1979, 7th Feb, 2017.

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  1. Al1979

    Al1979 Well-Known Member

    Joined:
    24th Jan, 2016
    Posts:
    111
    Location:
    Australia
    Is capital gains tax simply calculated on the difference between your purchasing / renovating costs and your sale price?

    For some reason I thought if you purchased under market value and then got the property valued you could then renovate and sell with the "profit" that was taxed the difference between the valuation / renovating costs and the sale price.

    So for example

    Purchase price $300k
    Purchasing costs $25k
    Renovation $30k
    Total cost: $355k
    Sell price: $420k
    Profit: $65k
    Tax rate: 38%
    Capital gains tax to be paid: $24,700


    Or is it like this
    Purchase price: $300k
    Purchasing costs: $25k
    Total cost: $325k
    VALUATION: $390k
    Renovation: $25k
    Valuation + renovation: $415k
    Sell price: $420k
    Profit: $5k
    Tax rate: 38%
    Capital gains tax to be paid: $1,900

    The figures are basic and I have not detailed selling costs etc but I hope you get the idea.

    I am obviously trying to reduce my capital gains tax so any creative (legal) ideas would be greatly appreciated.

    Thanks in advance.

    Al.
     
  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    It depends on the circumstances, but option 2 couldn't be correct
     
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  3. Ross Forrester

    Ross Forrester Well-Known Member

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    30th Oct, 2016
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    Location:
    Perth, Western Australia
    You can only apply the market value if you bought from an associated party (paragraph 112-20(1)(c) of the ITAA 1997)
     
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  4. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Sydney
    Dont forget to add in - Legals to buy and sell, stamp duty, selling expenses (often a big one), loan break costs and the like.

    1. Did you ever live in it ? If so, when.
    2. Was there ever a period it was NOT rented ?
    3. How long did you own it ?..

    Are all q's I would be asking a client before a calculation is even performed. Important to consider a number of exemptions before calculating if there is a profit. Then if there is a profit can it be pro-rata calculated ? Is there a 50% CGT discount or does another tax rule impact tax ? Then finally, what is the marginal tax rate at the time when it is proposed to be contracted for sale. There is no 38% marginal tax rate !!

    Then there is taxpayer specifc knowledge ...Do you have private health insurance ? Help debts, Centrelink benefits etc ? All can impact
     
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