Have you tried to calculate a capital gain recently? Chartered accountant GAIL FREEMAN has and says they’re not for the faint hearted!

Have you tried to calculate a capital gain recently? Over the last few weeks we have had to calculate several and I realise how difficult it can be and how many different scenarios there can be.

It is always best to consult a tax professional to make sure that you have got it right.

Firstly, you need to establish whether the property was purchased before or after September 20 1985. If it was purchased after that date the property is definitely subject to capital gains tax.

However if it was bought before then and it has improvements of more than $182,665 currently, then those improvements may be subject to capital gains tax although the original purchase is not.

This can be a complex calculation.

In addition, if you inherited property that was bought before September 20 1985, this property will pass to you at the market value at the date of death and therefore will come into the capital gains tax net.

Capital gains tax cannot be avoided and on the death of the asset’s owner, the capital gain of the deceased passes to the beneficiaries when that asset is sold.

This means you have to keep really good records of your purchase costs, your renovation costs and even your holding costs.

One of the interesting gains we had to prepare this week concerned inherited properties and there were no purchase records available.

This meant that valuations had to be obtained as to the value at the date of purchase. This took a long time and a lot of detective work. However, we did find answers.

A number of legislative changes occurred on August 20 1991. The major change here being that you cannot claim holding costs before that date. So what are holding costs? They include interest on borrowed funds, costs of repair, maintenance or insurance of the asset, rates or land tax, refinancing costs or water consumption.

If the property was purchased or inherited by you after that date you can claim the holding costs.

If you have capital expenditure on the asset you need to include that amount. You can also claim expenditure on depreciable items.

However, capital works that have been depreciated are written back, thereby reducing the total capital works expenditure by half. This is because the capital gain for an individual is calculated on a cost base with a 50 per cent discount.

In addition, capital allowance depreciation is also calculated and reduces the gain. This is particularly important for buildings purchased after July 1 2017 when depreciation is only allowable on assets purchased by the owner after the initial purchase.

So, for example, if you rent out your house and you installed a new kitchen two years before you start renting it out, you cannot claim depreciation on that new kitchen. But if you install it after you start renting the property, you can claim depreciation. In either case this is taken into account in the capital gains tax calculation.

In addition, if you own two properties you need to have nominated one of them as your main residence so that it receives the main residence exemption.

A couple can only have one main residence between them. It is also possible that they can each nominate a different property as their main residence, all adding to the complexity.

If you need help with calculating the capital gain on the sale of a residence contact the expert team at Gail Freeman & Co Pty Ltd on 02 6295 2844, email [email protected] or visit gailfreeman.com.au

Disclaimer
This column contains general advice, please do not rely on it. If you require specific advice on this topic please contact Gail Freeman or your professional adviser. Authorised Representative of Lifespan Financial Planning Pty Ltd AFS Lic No. 229892.

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