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How much Capital Gains Tax do I have to pay?

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Q. Hi Josie just a quick question. In 2001 my wife and i purchased our home and 50 acres for $198000.We have just sold half the land alone for $218,000 leaving us the house and 25 acres. We own the place outright and want to know what capital gains we would have to pay and how we can reduce this if we can. I am employed and make around $52000 and my wife works part time earning around $10000 and we have 2 children aged 13 and 10.Thank you for your time Tim

Josie’s answer: Hi Tim. Capital Gains Tax (CGT) is a very complex area of taxation. Basically, the family home is tax free, but only if the land area is less than 2 hectares.

Consequently, the half that you sold will be subject to capital gains tax. Determining how much is very tricky as difficulties arise in determining the value of the land in excess of the 2 hectares which is exempt.

For example, a qualified valuer may value the land that your family home is sitting on to be worth significantly more than the balance (some of it could be swamp land). Therefore, I am not really in a position to estimate your potential tax liability. For your info, I have included a link to the ATO website which covers this matter Guide to capital gains tax 2005-06.

I highly recommend that you contact your accountant whose job is to do the number crunching and properly interpret the Tax Act. Financial planners understand the rules and work with accountants to develop strategies to find legitimate ways to reduce the tax liability.

Nevertheless, let’s say your accountant determines that 100% of the proceeds will be subject to CGT, i.e. $218K. Fifty per cent (50%) of this amount will be subject to CGT as you owned it more than 12 months.

Therefore, $109K will be included in your tax return as assessable income and then taxed at your marginal rate of tax (I call it the income bucket!). To complicate it further, if the property is owned jointly, then it is divided between yourself and your wife.

Assuming it is not, and then your gross income for 2008/09 will be $161K ($52K which you stated you earn from employment + $109 capital gain from sale of land). Assuming there are no expenses you can offset against this income, your total tax liability will be approximately $50K. I simply used the Tax Calculator on Yahoo Finance http://au.pfinance.yahoo.com/calculators/income-tax.html.

The self employed are in a fortunate position, in that they can make concessional contributions to superannuation (up to $100K if they are aged over 50, or $50K if you are aged less than 50).

This basically means that the entire contribution would be tax deductible. I get the impression that you are not self employed, and if this is the case, I regret to advise that you are not in a position to adopt this strategy. Consequently, you are just left finding as many tax deductions as you can this financial year to offset the gain.

These may include any work expenses, including motor vehicles, mobile phones, home office expenses (need to be careful though), income protection expenses, investment expenses.

Also, if you made any investment losses in previous years, these can be also used to offset the gain. If you believe you have some ‘dud’ investments at the moment i.e. currently in loss, you might want to think about selling to crystalise the loss.

You also need to ensure you include any expenses that you may have incurred when you purchased the property e.g. stamp duty, improvements to the land. Hope the above helps and wishing you all the best. On a positive note, it is nice to have a tax problem – means you have made some money and thankfully the tax man doesn’t take 100%. Cheers Josie

Don’t forget that the above information is general in nature and not specific to your goals and objectives. It is recommended that you seek personal financial advice specific to your needs. Thanks for posting your question on www.askjosiekay.com. As you know, this is a free service and if you found it useful, we would be chuffed if you told your friends, family and workmates about www.askjosiekay.com – free financial advice by a Certified Financial Planner, without the sales pressure. Happy money organisation.

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