Camden Professionals

CGT Changes From 1 July 2027: Should You Sell, Hold or Restructure Your Investments?

Capital Gains Tax (CGT) is an important consideration for Australian investors, property owners and business owners when making decisions about their assets.Changes proposed to Australia’s CGT framework from 1 July 2027 may influence how investors approach buying, holding and selling assets.

For many Australians, the decision is not simply about whether an asset has increased in value.

It is also about understanding:

The tax consequences of selling
The benefits of holding assets long term
The impact of ownership structures
Future investment and wealth planning goals

With potential changes ahead, reviewing your investment strategy early can help you make more informed decisions.

What Is Capital Gains Tax (CGT)?

Capital Gains Tax is the tax applied when you make a capital gain from disposing of an asset.

A capital gain generally occurs when:

You sell an asset for more than its original cost
You transfer ownership of an asset
You dispose of an investment

Common assets that may be subject to CGT include:

Investment properties
Shares and managed funds
Business assets
Certain personal assets

The capital gain is generally calculated by comparing the asset’s cost base with the amount received when the asset is sold or disposed of.

What Are the Proposed CGT Changes From 1 July 2027?

The proposed CGT changes from 1 July 2027 may affect how some Australians plan their investments and asset ownership. For investors, the key consideration is not only the tax rate but also how future decisions may affect:

Investment returns
Asset ownership structures
Retirement planning
Estate planning outcomes

The impact will depend on individual circumstances, including:

Type of asset held
Length of ownership
Ownership structure
Future plans

Why CGT Planning Matters for Investors

Many investment decisions involve a balance between growth, income and tax outcomes. Selling an asset may create an immediate tax obligation, while holding an asset may continue providing:

Capital growth potential
Rental income
Dividend income
Long-term wealth accumulation

The right decision depends on your broader financial strategy rather than tax alone.

Should You Sell Your Investments Before 1 July 2027?

Selling an asset before a tax change is not automatically the right decision. While some investors may consider selling before a change takes effect, it is important to consider:

Whether the asset is still suitable
The current market conditions
The tax consequences of selling
Future investment opportunities

A decision made purely to avoid tax may not always create the best financial outcome.

Reasons Investors May Consider Selling

There may be situations where selling an asset before a CGT change could be appropriate. Examples include:

Taking Advantage of Existing Tax Rules

Some investors may consider whether selling before changes apply provides a more favourable tax outcome.

Rebalancing an Investment Portfolio

Selling may allow investors to:

Reduce concentration risk
Diversify investments
Adjust their investment strategy

Changing Investment Objectives

Personal circumstances may change due to:

Retirement
Business changes
Family circumstances
Financial goals

Reasons Investors May Consider Holding Assets

Holding an investment may continue to provide benefits.

Long-term ownership can allow investors to benefit from:

Potential capital growth
Rental income
Dividend income
Compounding returns

Selling an asset also means losing future exposure to that investment. Before selling, consider whether the asset still aligns with your long-term strategy.

The Importance of Ownership Structure

The tax outcome of an investment decision can depend significantly on how an asset is owned.

Different ownership structures may include:

Individual ownership
Joint ownership
Company ownership
Trust ownership
Superannuation ownership

Each structure has different tax implications. For example, an asset owned personally may have different CGT outcomes compared with an asset held through a company or trust.

Reviewing ownership structure before making changes can help avoid unexpected tax consequences.

CGT and Investment Property

Investment property is one of the most common assets affected by CGT.

Property owners should consider:

Original purchase cost
Improvements made to the property
Holding period
Rental income history
Available CGT concessions

Selling an investment property can create a significant capital gain, particularly where the property has experienced substantial growth.

Before selling, property owners should understand the potential tax impact.

CGT and Business Owners

Business owners should also consider CGT when making decisions about:

Selling a business
Restructuring ownership
Transferring assets
Succession planning

A business sale can create significant capital gains depending on:

Business structure
Asset ownership
Eligibility for concessions
Timing of the transaction

Early planning can provide more opportunities to manage tax outcomes.

Should You Restructure Your Investments?

Restructuring may be considered by investors who want to improve:

Tax efficiency
Asset protection
Succession planning
Long-term wealth outcomes

However, restructuring existing assets can create tax and transaction costs.

Potential considerations include:

CGT consequences
Stamp duty
Legal costs
Administration costs
Financing arrangements

Any restructuring decision should be carefully reviewed before implementation.

Common CGT Planning Mistakes

Selling Only Because of a Tax Change

Tax should be considered as part of the decision, not the only reason.

Ignoring Future Growth Potential

Selling an asset may remove future investment opportunities.

Failing to Review Ownership Structure

The way an asset is owned can significantly affect tax outcomes.

Leaving Planning Too Late

Complex investment decisions often require time and professional advice.

Not Considering Estate Planning

Investment decisions can also affect future wealth transfer outcomes.

How Should Investors Prepare for CGT Changes?

Investors should consider reviewing their position before any proposed changes take effect.

Important steps include:

Reviewing investment portfolios
Understanding potential CGT exposure
Reviewing ownership structures
Considering future investment goals
Assessing retirement and estate planning outcomes

Preparation can help investors make decisions based on strategy rather than urgency.

The Role of Professional Advice

CGT planning can become complex, particularly when dealing with:

Multiple investments
Property portfolios
Business assets
Trust structures
Significant capital gains

Professional advice can help investors understand:

Available options
Potential tax outcomes
Timing considerations
Long-term implications

Final Thoughts

The proposed CGT changes from 1 July 2027 highlight the importance of reviewing investment strategies early. There is no universal answer to whether investors should sell, hold or restructure their assets. The right decision depends on:

Personal circumstances
Investment objectives
Tax position
Long-term wealth goals

Rather than making decisions based only on tax changes, investors should consider how each option fits into their broader financial strategy.

Frequently Asked Questions

What is Capital Gains Tax (CGT)?

Capital Gains Tax is the tax that applies when you make a capital gain from disposing of an asset.

Are CGT changes happening from 1 July 2027?

Proposed CGT changes from 1 July 2027 may affect how investors approach asset sales, ownership structures and tax planning decisions.

Should I sell my investment before CGT changes?

Not necessarily. Selling should be based on your overall investment strategy, financial position and long-term objectives.

Will holding an investment avoid CGT?

Holding an asset generally delays the CGT event until the asset is disposed of, but future tax consequences should still be considered.

Does ownership structure affect CGT?

Yes. The tax outcome can vary depending on whether an asset is owned personally, jointly, through a company, trust or another structure.

Should I restructure my investments before CGT changes?

Restructuring may be beneficial in some situations, but it can also create tax and transaction costs. Professional advice should be obtained before making changes.

How Can We Help?

If you are concerned about how potential CGT changes may affect your investments, Camden Professionals can help review your current position and discuss possible strategies.

Our team can assist with:

Capital gains tax planning
Investment structure reviews
Property and business tax considerations
Long-term wealth planning

Contact Camden Professionals to discuss your requirements and understand your available options.

General Information Disclaimer

The material on this page and on this website has been prepared for general information purposes only and not as specific advice to any person. Any advice contained on this page and on this website is General Advice and does not consider any person’s particular investment objectives, financial situation and particular needs.

Before making an investment decision based on this advice you should consider, with or without the assistance of a securities adviser, whether it is appropriate to your particular investment needs, objectives and financial circumstances. In addition, the examples provided on this page and on this website are for illustrative purposes only.

Although every effort has been made to verify the accuracy of the information contained on this page and on this website, Camden Professionals and/or Investax Group, its officers, representatives, employees, and agents disclaim all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy in, or omission from the information contained in this website or any loss or damage suffered by any person directly or indirectly through relying on this information.

Camden Professionals

SMSF Capital Gains Tax: How To Minimise or Eliminate Tax

SMSF capital gains tax can vary significantly based on how your SMSF is structured and how long the asset being sold was owned. By understanding the application of SMSF capital gains tax, you can manage the sale of assets within your SMSF in a way that minimises tax – or even eliminates it.

The factors that determine capital gains tax within a self-managed superannuation fund (SMSF) include whether the SMSF is in accumulation phase or pension phase, how long the asset was owned and any capital losses that can be applied against the capital gain. The capital gains tax in super is actually the same for all types of superannuation funds, not just SMSFs.

SMSF Tax Rate

The SMSF tax rate on investment earnings depends on whether the SMSF balance is in accumulation phase or pension phase.

If the SMSF is partly in accumulation phase and partly in pension phase (or retirement phase), the earnings tax rate applied will be:

If the SMSF runs a pooled investment strategy: Proportionate based on the ratio of the SMSF balance pension phase and accumulation phase; OR
If the SMSF runs a segregated investment strategy: The phase that the investment relates to will be the tax rate that applies.

SMSF Tax Rate – Accumulation Phase

The SMSF tax rate on investment earnings, including realised capital gains, within the accumulation phase, is 15%. This is a flat rate, regardless of your age or employment status. However, if an investment sold within the accumulation phase was owned for longer than 12-months, the general SMSF CGT discount will apply.

SMSF Tax Rate – Pension Phase

The SMSF tax rate on investment earnings, including realised capital gains, within the pension phase is 0%. This is a flat rate, regardless of your age or employment status.

SMSF CGT Discount

The SMSF CGT discount applied to investments sold that had been owned for longer than 12 months is a 1/3rd discount. That is, the realised capital gain is reduced by 1/3rd before the 15% tax is applied.

It is often said that the tax rate on realised capital gains resulting from the sale of an asset owned for longer than 12 months is 10% – due to the 1/3rd discount. But this is not always the case, as any capital losses (or carried forward losses) will first be applied against the capital gain, before the 1/3rd discount and before the 15% tax rate applies, which means the effective rate may be different to 10%.

Do SMSFs Pay Capital Gains Tax?

Yes, a SMSF pays capital gains tax when an asset held within the SMSF is sold and a gain is realised, unless the SMSF is wholly in retirement pension phase.

A self-managed superannuation fund is a tax-paying entity and is therefore responsible for the payment of income taxes and capital gains taxes. The onus of tax payments resulting from the sale of investments within a SMSF does not fall on the member personally but is effectively paid out of the member’s super balance.

What Happens When You Sell a Property in a SMSF?

If a property is sold within a SMSF, the proceeds are paid into the bank account of the SMSF. The sale of the property is considered a CGT event. If the sale of the property resulted in a capital gain, then capital gains tax may be payable, depending on whether the asset was held wholly in accumulation phase, pension phase or a combination of both.

If the sale of the property resulted in a capital loss, the loss can be used to reduce capital gains resulting from the sale of other assets in the same year, or carried forward to offset losses in future financial years, until completely used up.

SMSF Property Sale CGT Example

An example of capital gains tax resulting from the sale of property would be as follows:

Let’s say your SMSF purchased a property 4 years ago for $500,000 and sold it this year for $800,000 (you little property guru, you!). This would be a realised capital gain of $300,000.

If the total balance of the SMSF (i.e. all member accounts) was in the retirement pension phase (not TTR pension), the whole capital gain would be received completely tax-free.

If the total balance of the SMSF was in the accumulation phase, the whole capital gain would receive a 1/3rd CGT discount ($100,000), because the asset was owned for longer than 12 months. Therefore $200,000 would be taxed at 15% ($30,000 CGT).

If half of the SMSF balance was in pension phase and half in accumulation phase and you were running a pooled investment strategy, then half of the $300,000 ($150,000) would be received completely tax-free and the other half ($150,000) would receive a 1/3rd discount ($50,000) and the remaining $100,000 would be taxed at 15% ($15,000 CGT).

If you had not owned the property for more than 12-months, then the 1/3rd CGT discount would not be applied – the full realised capital gain would be taxed at 15%.

Contact our office if you need assistance with SMSF tax planning

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We offer a 10-minute no obligation consultation to existing property investors, first home buyers and small business owners who are looking at property investments, business and asset protection. To Book an Appointment simply click here and pick a time and date.

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How can we help?

If you have any questions or would like further information, please feel free to give our office on 08 9221 5522 or via email – info@camdenprofessionals.com.au or arrange a time for a meeting so we can discuss your requirements in more detail.

General Advice Warning

The material on this page and on this website has been prepared for general information purposes only and not as specific advice to any particular person. Any advice contained on this page and on this website is General Advice and does not take into account any person’s particular investment objectives, financial situation and particular needs.

Although every effort has been made to verify the accuracy of the information contained on this page and on this website, Camden Professionals, its officers, representatives, employees, and agents disclaim all liability [except for any liability which by law cannot be excluded), for any error, inaccuracy in, or omission from the information contained in this website or any loss or damage suffered by any person directly or indirectly through relying on this information.

Camden Professionals

How Small Business CGT Concessions Work

Small business capital gains tax concessions provide an opportunity for small business owners to reduce the amount of tax they owe on the sale of business assets. One of the key CGT concessions is the CGT exemption, which can be a significant tax-saving opportunity for small business owners. In this guide, we’ll explore the small business CGT concessions available and how they can help you save money on taxes.

What is the CGT exemption?

The CGT exemption allows eligible small business owners to disregard or exempt capital gains from the sale of certain business assets.

These assets may include shares in a qualifying small business, business property, and other assets used in the business for at least 15 years. The CGT exemption can be used to reduce or completely eliminate the amount of capital gains tax owed on the sale of these assets.

What is the basic condition for the small business CGT concessions?

To be eligible for the small business CGT concessions in Australia, there are certain basic conditions that must be met, including:

The business must be an active small business entity, which means it must be carrying on a business or a part of a business.
The business must have an aggregated turnover of less than $2 million or the business’s net assets must be less than $6 million.
The asset being sold must have been owned for at least 12 months and used in the business for at least half of the ownership period (unless it is a qualifying small business asset).
If the CGT asset is a share in a company or interest in a trust, the business must satisfy the 90% test, which means that 90% or more of the company or trust’s assets must be active assets.
The individual selling the asset must be a small business entity, a partner in a partnership that is a small business entity, or a beneficiary of a trust that is a small business entity.

Who is eligible for the CGT exemption?

To be eligible for the CGT exemption, you must meet certain criteria:

Be a small business entity, which means that the business has an aggregated turnover of less than $2 million. This test must be met at the time of the CGT event
Not carrying on a business (other than as a partner) but your asset is used in a closely connected small business (passively-held assets such as land used in a farming business.
A partner in a partnership that is a small business entity, and the asset is either
- an interest in a partnership asset (partnership assets)
- an asset you own that is not an interest in a partnership asset (partner’s assets) but is used in the business of the partnership.

You satisfy the maximum net asset value test.

Active Asset Test

The asset sold must be an active asset, which means that the asset must have been used or held for use in the business. The asset must have been used or held for use for at least half of the ownership period.

Ownership Period Test

The asset must have been owned for at least 12 months before the CGT event occurred.

How do I apply for the CGT exemption?

To apply for the CGT exemption, you must complete and lodge the necessary forms with the Australian Taxation Office (ATO). The forms required will depend on the type of asset being sold and the type of entity that owns the asset. The CGT exemption can be a valuable tool for small business owners, but navigating the application process can be complex.

Let us take the stress out of the process and help you secure the exemption you’re eligible for.

What are the 4 small business CGT concessions?

CGT Exemption: This concession allows eligible small business owners to disregard or exempt capital gains from the sale of certain business assets.
50% Active Asset Reduction: This concession allows eligible small business owners to reduce the capital gain on the sale of an active asset by 50%.
Retirement Exemption: This concession provides an opportunity for small business owners who are retiring to receive an additional CGT exemption of up to $500,000.
Rollover Relief: This concession allows eligible small business owners to defer paying tax on a capital gain if the proceeds are invested in another active asset.

Do small business CGT concessions apply to companies?

Yes, small business CGT concessions can apply to companies in Australia if they meet the eligibility criteria. To be eligible for the concessions, a company must satisfy the following basic conditions:

Be a small business entity, which means that it carries on a business with an aggregated turnover of less than $2 million or the value of its net assets is less than $6 million.
The CGT asset being sold must have been used in the business for at least half of the ownership period or satisfy the active asset test.
The individual shareholder selling the asset must satisfy the significant individual test, which means that they must own at least 20% of the shares in the company, be a CGT concession stakeholder, or have a small business participation percentage of at least 90%.

—————BOOK YOUR EXCLUSIVE 15 MINUTE ZOOM CONSULTATION————-

We offer a 15-minute no obligation consultation to existing property investors, first home buyers and small business owners who are looking at property investments, business and asset protection. To Book an Appointment simply click here and pick a time and date.

BOOK YOUR ZOOM APPOINTMENT HERE

How can we help?

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Camden Professionals

How to avoid CGT (Capital Gains Tax)

Discovering how to avoid capital gains tax when selling your investment property can save you thousands of dollars. Yet so many first-time property investors continue to be overwhelmed at the thought of potentially paying capital gains tax on the hard-earned growth of their investment.

We have put together a ‘how-to’ guide that will show you how you can considerably reduce the amount of capital gains tax you pay and how you can avoid paying it at all.

What Is Capital Gains Tax (CGT)?

According to the Australian Tax Office (ATO), when you sell your property, the difference between how much you paid for it and how much you sold it for, is known as capital gains. Suppose you lost money on the sale of your asset. In that case, the difference will be a capital loss.

Any profit on the sale of your investment property is considered a capital gain, and you will need to declare it on your annual income tax return.

When Is CGT Payable?

Unless expressly excluded, you are required to pay CGT on the sale of your investment property, if you acquired it after 20 September 1985.

The gain from the sale of your property is added to your income tax return for the relevant income year.

The capital gain on the sale of your investment property is likely to push you into a new tax bracket. If that’s the case, then you may be required to pay a more considerable amount of income tax for that particular financial year.

How To Avoid Paying Capital Gains Tax In Australia

The ATO offers its taxpayers a few concessions and exemptions when it comes to paying CGT.

The following list will offer some insight into how to avoid capital gains tax when selling your investment property.

The Principal Place of Residence Exemption

As a general rule, you can avoid capital gains tax when selling your investment property if that property is your primary place of residence (PPOR).

This rule exists because you usually don’t generate an income from living in your own home. So, you won’t need to declare any profit on the sale of your home on your annual income tax return.

The ATO considers a property to be your PPOR if:

you and your family has lived in the property for the full duration that you’ve owned it;
you keep your possessions in the home;
you use the address to receive your postal mail; and
the utilities are connected and in your name.

Moreover, you’ll need to live in the property for a minimum of 6 months, from the settlement date, for it to be considered your PPOR.

The Capital Gains Tax 6-Year Rule

The CGT 6-year rule allows you to use your PPOR as an investment, by renting out, for a period of up to six years. So, if you decide to sell the property within the six years, you would be exempt from paying CGT as you would if you sold the house that you primarily reside in.

The benefit of the CGT 6-year rule similarly appeals to homeowners who want to make some extra money for the time that they are not, for whatever reasons, able to stay in their home – without prompting the need to pay CGT upon its eventual sale.

Example 1:

John purchased his first home in Melbourne in 2014. It has been his PPOR for the entire time that he has owned it. He lived in it for four years before being offered a job in Brisbane.

The job placement was only for two years, so he decided to temporarily move in with his sister and hold onto his house in Melbourne. As a result, he did not need to treat any other home as his PPOR.

Throughout the period that he was away, he rented out his house in Melbourne to generate some extra income and not have the house standing empty.

After the two years, in 2020, John decided that he enjoyed living in Brisbane and wanted to relocate permanently.

He consequently decided to sell his house in Melbourne. Through learning about the CGT 6-year rule, he discovered how to avoid capital gains tax when selling his investment property.

How To Avoid Capital Gains When Selling Your Investment Property With A Self-Managed Superannuation Fund

Self-managed superannuation funds (SMSF) have become considerably more attractive to property investors because the SMSF can now borrow money to purchase a property. There are several tax benefits if you purchase your investment property through an SMSF. For example, the fund is only required to pay a 15% tax rate on rental income from the property.

This is substantially lower than other income tax rates in Australia.

Moreover, if you keep the property for more than twelve months, the tax rate on sale will drop from 15% to 10%, i.e you would be eligible for a 33% discount on your CGT upon sale of the property. The most beneficial perk of the SMSF is that when it’s in its pension phase, you will not be required to pay any CGT on the sale of your investment property.

If You Can’t Avoid Capital Gains Tax, You May Be Able to Reduce It

Even if your property doesn’t meet the eligibility criteria for a full investment property exemption, the ATO provides ways to reduce how much capital gains tax you pay on the sale of your investment property.

4.1. Increasing Your Cost Base With Your Expenses To Reduce Your Capital Gain

If you’re selling an investment property and consequently not eligible to avoid paying CGT, you may want to consider increasing your cost base through your expenses.

Remember capital gain = selling price – cost base.Your cost base = purchase price + expenses (see below) – (grants + depreciation)

The expenses that you can add to your cost base include, but are not limited to:

Incidental Costs such as your advertising costs, legal fees and stamp duty
Ownership Costs such council rates incurred but not previously claimed as a tax deduction.
Title Costs such as the legal fees incurred when organising and defending the title on the property
Improvement costs should you decide to replace the flooring or install a deck, for example.

By adding expenses to your cost base, you can reduce the capital gains you declare on your annual income tax return. This could lead to a reduction in the amount of CGT that you’re required to pay on the sale of your investment property.

4.2. The 12-Month Ownership Partial Exemption

Suppose you aren’t able to claim a full exemption because your property is not considered your PPOR.

If that is the case, the ATO does provide ways in which you could potentially reduce the amount of tax you pay on the capital gain from the sale of your property. One of these partial exemptions allows you to claim a 50% discount on your capital gains tax if you have owned the property for at least 12 months before selling it.

4.3. The “Years Lived In vs. Years Rented” Partial Exemption

If you decided to turn your rental property into your primary residence at a later date, in other words, you did not move in straight away; then you are eligible to claim a partial CGT exemption.

The discount percentage on your capital gains will be calculated proportionally, according to the years that you rented the property out and the years that you lived in it.

Example 2:

After two years of renting out her first investment property, Cathy decided to move in and declare it her PPOR. Eight years later, in 2020, Cathy decided to sell the property. She made a capital gain of $235,500.

She only has to pay CGT for two of the ten years that she has owned the property:

$235,000 x ²⁄₁₀ = $47, 100.

So, Cathy’s taxable amount is only $47,100.

Key Takeaways

If you are selling a property, you should know that any profit made from the sale is potentially considered a capital gain and therefore subject to capital gains tax. Knowing how to avoid capital gains tax when selling your investment property can save you a pretty penny!

If you hold onto your investment property for at least 12 months, you can qualify for a 50% discount on your capital gain.

Or, to avoid capital gains tax when selling your investment property entirely, make sure your property remains your PPOR. Even if you don’t necessarily reside in it, you could still sell it within six years and capital gains tax property 6-year-rule to qualify for the main residence exemption.

How can we help? if you have any questions or would like further information, please feel free to give our office on 08 9221 5522 or via email – info@camdenprofessionals.com.au or arrange a time for a meeting so we can discuss your requirements in more detail.

General Advice Warning

Camden Professionals

How the small business CGT concessions work

The small business CGT concessions allow you to reduce, disregard or defer some or all capital gain from an active asset used in a small business.

The 4 small business CGT concessions include the:

small business 15-year exemption
small business 50% active asset reduction
small business retirement exemption
small business roll-over.

The concessions are available when you dispose of an active asset and meet basic eligibility conditions.

You must then meet any additional conditions that apply specifically to the individual concessions.

There are rules about the order you apply:

the CGT small business concessions
any current year or prior year capital losses
the CGT discount.

You may be able to apply one or both of the following to each capital gain:

more than one of the 4 concessions if you meet the conditions for each
the CGT discount if it also applies.

Basic eligibility conditions

To be eligible for any of the CGT concessions, you must first meet the basic eligibility conditions.

Depreciating assets do not meet the basic eligibility conditions:

Under the uniform capital allowance system, any gain or loss from a depreciating asset is included in your assessable income, or is deductible as a balancing adjustment, to the extent the asset was used for a taxable purpose (business use). The small business CGT concessions do not apply to gains you make on depreciating assets that are included in your income.
You make a capital gain or capital loss from a depreciating asset to the extent you have used the asset for a non-taxable purpose (private use). Any capital gain you make in this way does not qualify for the small business CGT concessions because it reflects the non-business use of the asset.

All the concessions except for the small business 50% active asset reduction have additional requirements you must meet.

Step 1: Determine if you are an eligible entity

You must be one of the following:

a CGT small business entity eligibility with an aggregated turnover of less than $2 million
not running a business (other than as a partner) but your asset is used in your affiliate or connected entity’s small business (CGT concessions on passively-held assets)
a partner in a partnership that is a small business entity, and the asset is either
- an interest in a partnership asset (partnership assets)
- an asset you own that is not an interest in a partnership asset (partner’s assets) but is used in the business of the partnership
you meet the maximum net asset value test.

Step 2: The asset must be an active asset

The asset must meet the active asset test.

Step 3: Is the asset a share in a company or an interest in a trust?

It must meet additional conditions.

Step 4: Does your situation involve a CGT event related to a partnership?

The eligibility condition in this step applies to a CGT event happening after 7:30 pm AEDT on 8 May 2018 that involves the creation, transfer, variation or ending of your right or interest to either:

an amount of income or capital of a partnership
an amount calculated by reference to the entitlement of a partner in a partnership to an amount of the partnership‘s income or capital.
If the CGT event involved ending your right or interest, it must be a membership interest in the partnership immediately before the CGT event happens. For all other cases, your right or interest must be a membership interest in the partnership immediately after the CGT event happens.

Applying the small business CGT concessions

If you have more than one capital gain for the year, you can apply as many of the small business CGT concessions as you are eligible for until each capital gain is reduced to zero. Each active asset’s attributable capital gain is assessed for CGT concession eligibility individually.

The small business 50% active asset reduction applies automatically if the basic conditions are met and you have not specifically chosen for it not to apply. However, you must choose whether to apply the small business 15-year exemption, small business retirement exemption and small business roll-over.

You need to choose by the day you lodge your income tax return for the income year in which the relevant CGT event happened unless we allow you to make the choice later.

Lodging and preparing your income tax return is generally enough proof of the choice you’ve made. However, for the small business retirement exemption, you must keep a written record of the amount you choose to disregard.

Steps to apply the small business CGT concessions, capital losses and the CGT discount

Step 1: Do you meet the basic eligibility conditions for the small business CGT concessions?

Yes: Go to step 2.
No: You do not qualify for any of the small business CGT concessions. You may be eligible for the CGT discount.

Step 2: Do you qualify for the small business 15-year exemption?

Yes: Disregard the entire capital gain. You do not need to apply any of the other small business CGT concessions.
No: Go to step 3.

Step 3: Offset any capital losses against the capital gain

If you have more than one capital gain, you can choose the order in which your capital gains are reduced by your capital losses.

Step 4: If you are eligible for the CGT discount, reduce the remaining capital gain

Step 5: Apply the small business 50% active asset reduction to reduce the remaining capital gain

You can choose not to apply the reduction and go straight to the small business retirement exemption or small business roll-over at step 6.

Step 6: If you qualify for the small business retirement exemption or small business roll-over, reduce the remaining capital gain

The amount remaining is the net capital gain to include in your assessable income for the year.

Example: applying the small business CGT concessions to reduce a capital gain

Kendra is a small business operator who sells an active asset that she has owned for more than 12 months. She makes a capital gain of $20,000. Kendra also has a separate capital loss of $4,000.

She meets all the conditions for the small business 50% active asset reduction and the CGT discount.

Kendra calculates her net capital gain as follows:

$20,000 (capital gain)

− $4,000 (capital loss)

= $16,000 (net capital gain)

× 50% (applying the CGT discount)

= $8,000 (net capital gain)

× 50% (applying the small business active asset reduction)

= $4,000 (reduced capital gain)

Kendra may be able to further reduce her $4,000 (already reduced) capital gain by using the small business retirement exemption and small business roll-over if she meets the conditions for those concessions. If eligible, she can keep applying the other small business CGT concessions to reduce her capital gain to zero.

How the CGT concessions affect super contributions

Small business 15-year exemption

You may be able to contribute amounts to your super fund from the small business 15-year exemption without affecting your non-concessional contributions limits.

Small business retirement exemption

You may be able to use amounts from the small business retirement exemption as contributions to your super fund without affecting your non-concessional contributions limits.

Source: ATO

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Capital Gains Tax (CGT) implications of a home-based business

Did you find working from home during COVID-19 lockdown to be a success? Are you considering giving up your leased commercial business premises to instead run your business from home? This choice may result in the Australian Taxation Office taking a slice of the capital gain that you make when you eventually sell your home.

Tax Tip: If you have been using your home to run your business and are considering selling it, speak to your accountant before you sign a contract to sell so you have the best chance to minimise any capital gains tax (CGT) on the sale.

Do you run a home-based business?

When you operate a home-based business and you have set aside part of your home exclusively for the purpose of conducting your business activities, your home is your principal place of business and you may be entitled to claim a Tax deduction for both business related occupancy expenses and running expenses.

Examples of businesses operated from home include:

a doctor or a dentist who run their surgery or consulting room at home
a small business operator who operates their main office in their home
a tradesperson or craftsperson who operate their workshop at home

Note: If you only do some business or work from home, in either a specific work area or another part of your home, it may not qualify as a place of business, however you might be eligible to claim only additional working from home related running expenses.

Deductions you may claim when your home qualifies as your principal place of business:

If you operate some or all of your business from home, you may be able to claim tax deductions for the business portion of expenses.

These may include:

occupancy expenses (such as mortgage interest or rent, council rates, land taxes, house insurance premiums)
running expenses (such as electricity, phone, decline in value of plant and equipment, furniture and furnishing repairs, cleaning)
the cost of motor vehicle trips between your home and other locations, if the travel is for business purposes.

You may not be able to claim occupancy expenses if personal services income rules (PSI) apply to your business.

You can claim both occupancy expenses and running expenses if you have an area of your home set aside as a ‘place of business’.

Remember, if your business is entitled to goods and services tax (GST) input tax credits, you must claim the deduction in your income tax return at the GST exclusive amount.

You may be eligible for an immediate deduction or an accelerated rate of decline in value for depreciating assets under one of the tax depreciation incentives, such as temporary full expensing.

Home-based business and CGT implications

Generally, when you sell your home CGT doesn’t apply. However, if you used any part of your home for business purposes, you may have to pay CGT.

CGT won’t apply if any of the following occurred with your home-based business:

You operated your business from a rented home
You didn’t have an area specifically set aside for your business activities
You operated your business through a company or trust

CGT Rule: You only have to pay CGT for periods when you used your home for your business.

For example, if you owned your home for 10 years, but only used it for business in the last two years, then you only need to pay tax on the capital gain in the last two years.

In most cases, the percentage of the capital gain that is taxable is the same as the percentage for which you could claim a deduction for mortgage interest. This is generally based on the floor area of your home you have set aside for business, for example 10%.

Tax Tip. You may be able to apply one or more of the small business CGT concessions to reduce your capital gain unless the main use of the house was to produce rent.

How it works

If you rent out part of your home or run a business from home, you do not get the full main residence exemption from capital gains tax (CGT).

When you sell your home, the part you used for rental or to run a business is subject to CGT.

You can usually claim income tax deductions for that part of your home because it has been used to produce assessable income.

To work out your assessable capital gain or loss, you take into account:

the proportion of the floor area that was set aside for rental or to run a business
the period you used it for this purpose
the capital gain or loss on your home since you first started using it for rental or business, assuming this was after 20 August 1996. If it was before this, you use the gain or loss since you acquired your home.

Tax Tip: It is a good idea to get your home valued when you first start using it for rental or business. You’ll need to know this value later when you sell it.

If you move out of your home and rent it out, you can continue treating your former home as your main residence for up to 6 years. However, you can’t claim a main residence exemption for any other property for the same period.

Check whether CGT applies – the interest deductibility test

You may not be entitled to a full main residence exemption if you use part of your home for producing assessable income. If you pass the interest deductibility test you will have some assessable capital gain.

The test is, if you had borrowed to acquire the home would you be allowed a tax deduction for part of the home loan interest. If you would be eligible to claim part of the interest expense your home is subject to CGT to the same extent.

If you have a home loan you cannot reduce the capital gain by not claiming some or all of the interest, nor can you increase the cost base of your home by the amount of interest you choose not to claim.

You can still get a full main residence exemption if someone else uses part of your home to produce income and you receive no income from that person for the use of the property.

Running a business from home

You are running a business from home if it is your principal place of business and you have a space set aside just for this purpose. Merely working from home occasionally does not qualify.

You would be entitled to deduct part of any home loan interest if:

part of your home is set aside exclusively as a place of business and is clearly identifiable as such
that part of the home is not readily adaptable for private use – for example, a doctor’s surgery located in a doctor’s home.

You would not be entitled to deduct interest expenses if, for example:

you use a home study to do work usually done at your place of work
you do paid child-minding at home (unless a special part of the home was set aside exclusively for that purpose).

If you are not entitled to deduct interest expenses you are eligible for the full main residence exemption.

Work out the assessable part of your capital gain or loss

You can use the CGT property exemption tool to calculate the proportion of your home that is subject to CGT.

Alternatively, you can work out the assessable part of your capital gain or loss as follows:

Step 1: Work out the capital gain or loss on your home based on its value when you first used it to produce income.

There are exceptions if you first used your home to produce income before 21 August 1996 or inherited your home. See Value of home when first used to produce income

Step 2: Determine the proportion of your home’s floor area that you set aside to produce income.

Step 3: Multiply steps 1 × 2. If you:

used your home to produce income right up to when you sold it, this is your assessable capital gain or loss – you do not need to continue
stopped using your home to produce income before you sold it – continue to step 4.

Step 4: Determine the number of days you used your home to produce income.

Step 5: Determine the number of days from when you first used your home to produce income until you sold it.

Step 6: Your assessable capital gain is step 3 × (step 4 ÷ step 5).

Example: Part of home used for income throughout ownership period

Thomas bought a house on 1 July 2000 for $300,000. He sold it on 30 June 2023 for $700,000. The house was his main residence for the entire time.

Throughout the period Thomas owned the house a tenant rented one bedroom, which represented 20% of the house. Both Thomas and the tenant used the living room, bathroom, laundry and kitchen, which represented 30% of the house. Only Thomas used the remainder of the house. Therefore, Thomas would be entitled to a 35% deduction (20% + (30% ÷ 2 people) for home loan interest (if he incurred it).

Using the steps above, Thomas works out his assessable capital gain as follows.

Thomas used his home to produce income from the time he acquired it. Therefore he uses its initial value to work out his capital gain:
$700,000 − $300,000 = $400,000.
The proportion of the floor area set aside for rental is 35%.
Thomas’ assessable capital gain is $400,000 × 35% = $140,000. As he used his home for income right up to when he sold it, he does not need to apportion the time it was used to produce income.

As Thomas owned his house for at least 12 months he can use the CGT discount (50% for individuals) to reduce his capital gain. Therefore, Thomas’s assessable capital gain would be $70,000.

Example 2: Part of home used for income for part of ownership period

Fatima bought a house in December 1995 for $200,000. It was her main residence.

On 1 November 2015 she started to use 40% of the house for a consultancy business. At that time the market value of the house was $520,000.
On 1 August 2019 she shifted her consultancy practice to separate business premises and once again used her home solely for private purposes.
On 1 May 2023 she sold her house for $620,000.

Using the steps above, Fatima works out her assessable capital gain as follows.

Her capital gain based on the value of her home when she first used it to produce income is $620,000 − $520,000 = $100,000.
The proportion of her home’s floor area set aside for business was 40%.
$100,000 × 40% = $40,000. As Fatima stopped using her home for business before she sold it, she continues to step 4.
Fatima used her home to produce income from 1 November 2015 to 1 August 2019, a total of 1,370 days.
The period from when she first used her home to produce income until she sold it is 2,739 days.
Fatima’s assessable capital gain is $40,000 × 1,370 ÷ 2,739 = $20,007.

For CGT purposes, Fatima is taken to have acquired the house on 1 November 2015. This is more than 12 months before she sold it, so she can use the CGT discount (50% for individuals) to reduce her capital gain. Therefore, Fatima’s assessable capital gain would be $10,003.

Value of home when first used to produce income

If you use your home to produce income you are generally taken to have acquired it at the time you first used it for this purpose.

This means when you sell your home, you work out the capital gain or loss using its market value at the time you first used it to produce income.

It is called the ‘home first used to produce income rule’.
If you sell your home within 12 months of when you first use it to produce income you cannot use the CGT discount.

Exclusions

If you:

use your home to produce income from the time you acquire it, the rule does not affect you – for example, see Rental property becomes your main residence
inherit a dwelling that was the deceased’s main residence – the rule does not apply if you sell the dwelling within 2 years
choose to continue treating a property as your main residence after you move out – if the property is fully exempt, the rule does not apply.

Example – ‘Home first used to produce income rule’ does not apply in some cases

Peter bought a house on 1 October 2010 for $550,000. He rented it out until 30 June 2013. Peter moved into the house on 1 July 2013 and lived in it for the entire period until it was sold on 30 March 2023 for $780,000.

The ‘home first used to produce income rule’ does not apply as the house was rented from the time Peter acquired it. This means that Peter is not required to use the market value of the house at the time it was first used to produce income. Peter will work out the capital gain based on the cost base of $550,000. Peter is entitled to the main residence exemption from 1 July 2013 to 30 March 2023 (3,560 days).

The assessable part of Peter’s capital gain will be calculated as follows:

Capital gain for the entire period is $780,000 − $550,000 = $230,000
Peter’s home was rented out for 1,004 days (1 October 2010 to 30 June 2013)
Peter’s total period of ownership was 4,564 days.
Capital gain for the period that was rented out is $230,000 × (1,004 ÷ 4,564) = $50,577.
Peter is entitled to the CGT discount of 50% which will reduce his capital gain. This means Peter’s assessable capital gain would be $25,288.

When the rule applies

Apart from the exclusions above, the rule applies if all of the following are true:

you acquired the property on or after 20 September 1985
you first used the property to produce income after 20 August 1996when you sell the property (or another CGT event happens to it), you would get only a partial CGT exemption because you used it to produce income during the period you owned it
you would have been entitled to a full exemption if the sale or other CGT event happened to the property immediately before you first used it to produce income.

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Granny Flat Arrangements and Capital Gains Tax

A granny flat arrangement is a written agreement that gives an eligible person the right to occupy a property for life. Ordinarily, an arrangement like this may trigger CGT because it is the creation of a contractual or other right (CGT Event D1).

From 1 July 2021, capital gains tax (CGT) may not apply when a granny flat arrangement is created, varied or terminated.

A granny flat arrangement typically happens between an older person and their adult child. However, the parties in a granny flat arrangement do not need to be related. A granny flat arrangement can be entered into with any party, including family or friends.

Granny flat interest

An individual has an eligible granny flat interest if they have a right to occupy a property for life under a granny flat arrangement. A granny flat interest can be held in any type of property, provided it is a dwelling. This includes the owner’s main residence or a separate property. It is not restricted to what is commonly referred to as a ‘granny flat’. The interest may be in part or all of the property.

For a granny flat arrangement to be exempt from CGT, the person with the granny flat interest must either:

have reached pension age
require assistance for day-to-day activities because of a disability

A granny flat arrangement is exempt from CGT if:

the owner or owners of the property are individuals
one or more eligible people have an eligible granny flat interest in the property
the owners and the people with the granny flat interest enter into a written and binding granny flat arrangement. This arrangement must not be commercial in nature.

The exemption only applies to creating, changing or terminating a granny flat arrangement. Other CGT events that are not related to a granny flat arrangement, or sit outside the arrangement, are subject to normal CGT rules and may be liable to CGT. For example, the sale of a property that was used in a granny flat arrangement, which has since terminated, is subject to the normal CGT rules.

The ATO have provided the following examples.

Example 1

Mary is 70 years old. She lives in her own house, which is currently valued at $400,000. Her daughter, Isabella, lives with friends in a different house.

To secure her house for her daughter’s inheritance, Mary:

transfers the ownership of her house to Isabella
creates a granny flat arrangement with Isabella under which Mary retains a right to accommodation for life.
After taking ownership of the property, Isabella moves in and lives with her mother.

When Mary transfers her home to Isabella there is a CGT event. However, Mary is entitled to the main residence exemption on the transfer of her home, so there is no CGT liability. The requirements of a granny flat arrangement have been met. Therefore, Isabella will have no CGT liability for granting her mother a right to accommodation for life. As Isabella moves into the home once she owns it, she will be entitled to the main residence exemption from CGT if she later sells it.

Example 2

Jim and Joan are of pension age. They live in a home on a large block, which they are struggling to maintain. They decide to sell their home and buy a 6-bedroom home in their son, Isaac’s, name. The home can accommodate themselves and Isaac’s family.

Jim and Joan:

sell their old home for $800,000. The sale is exempt from CGT under the main residence exemption
buy a new home for $600,000 in Isaac’s name
transfer the additional $200,000 to Isaac
create a written granny flat arrangement with Isaac

All the requirements of a granny flat arrangement have been met. Therefore, Isaac will have no CGT consequences for granting the granny flat interest to Jim and Joan. Some years later, Isaac and his spouse separate. Isaac sells the 6-bedroom family home and buys another home not too far away.

Isaac is entitled to the main residence exemption on the 6-bedroom home, so there is no CGT when he sells it.
Jim, Joan and Isaac move into the new family home and vary their written granny flat arrangement so that it covers the new home.
As Jim and Joan are still eligible to enter a granny flat arrangement, there are no CGT consequences for Isaac when the arrangement is varied.

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