How Much is the Capital Gain?
One of the most common questions I get asked is how much is capital gains tax. The answer is that there isn’t a general rate of tax specific to capital gains (like there is for company tax). The rate of tax applied to any capital gain is based on your marginal rate.
Let’s simplify it a bit. We’ll use a scenario where Jack and Jill owned property (consisting of a hill of course) that they purchased three years ago at a price of $200,000. They sold it on the 30th June 2007 at a price of $320,000.
Now the capital gain is the increase in value of the asset less any expenses incurred in holding the asset (in this case the property). Thus the capital gain would be as follows:
| Sale of property | $320,000 |
| Less Purchase of property | $200,000 |
| Less Stamp Duty on purchase | $ 5,500 |
| Less Legals on purchase | $ 2,500 |
| Less Legals on sale | $ 2,000 |
| Less commission on sale | $ 10,000 |
| Less property development | $ 5,000 |
| Less rates & insurances | $ 5,000 |
| Net capital gain on property | $90,000 |
Although the gain on the property may be $90,000 there could be factors that may influence how much of this is taxed or whether it is taxed at all!
For instance, if Jack and Jill had a residence on the property (other than the well) and had lived in the residence as their main dwelling, then they can claim the residence exemption which makes any gain from the property tax exempt.
Also, if they had purchased the property prior to 20 September 1985 they would be exempt from paying capital gains tax (CGT came in on this date).
Let’s assume that there was only land, a developed well and a hill on this property and their ownership was an equal 50% share. Let us also assume that Jack’s taxable income from earnings was $70,000 and Jill’s was $20,000.
Because the asset was held for over twelve months, both Jack and Jill receive a 50% concession on the split of capital gain they each receive: thus they both have $22,500 of the capital gain removed from the tax calculation.
Therefore the tax result for both Jack and Jill would be as follows (note that all facts and figures are current at time of writing but subject to change):
| Jack | |
| Taxable income from earnings | $70,000 |
| 50% distribution of capital gain | $45,000 |
| Less 50% general CGT concession | <$22,500> |
| Taxable income | $92,500 |
| Tax & Medicare levy on taxable income | $24,850 |
| Tax & Medicare on $70,000 | $16,350 |
| Therefore the tax on Jack’s share of the | |
| Capital gain is | $8,500 |
| For Jill | |
| Taxable income from earnings | $20,000 |
| 50% distribution of capital gain | $45,000 |
| Less 50% general CGT concession | <$22,500> |
| Taxable income | $42,500 |
| Tax & Medicare levy on taxable income | $8,100 |
| Tax & Medicare on $20,000 | $2,100 |
| Therefore the tax on Jill’s share of the | |
| Capital gain is | $6,000 |
As you can see the tax Jack will pay on the capital gain is $2,500 greater than Jill. This is because Jack is on a higher income so the majority of the gain is taxed at the 40% bracket where as Jill’s share of the gain is taxed mostly at 30%.
This information is for guidance only and is not intended as specific advice to any reader. Professional advice should be obtained before acting on any information contained herein. The publisher accepts no responsibility for loss occasioned to any person or organisation as a result of action or the refrain of action as a consequence of the contents of this publication.