By Ken Raiss | www.chan-naylor.com.au | Submitted 23rd April 2009 The way the taxation system works in Australia no taxation is normally due on the increasing value of your assets. You only pay tax on the capital gain (increase in value) when you sell. If the asset was purchase to hold and you kept it over 12 months there is a 50% General Capital Gains Tax (CGT) discount. If you buy with the intention to sell then the profit is taxed at your full marginal tax rate irrespective of how long you retained the asset. A lot of people believe the only way to get your hands on any increased asset value is to sell but, on doing so many taxes and costs are triggered including: 1. Income tax 2. CGT 3. Selling expenses 4. On your next purchase stamp duty, legal's, loan costs etc. If a new property then the price will also include GST In total the above can minimise your "profit" considerably and in some instances all can be lost. Some clients prefer to refinance and draw the cash out via a line of credit (LOC). If the LOC is used for investment purposes ie a new purchase, funding negative gearing etc then the interest costs are tax deductible. Detailed analysis should be made to determine the viability of borrowing including capacity to fund and this exercise should be completed before committing. All facts should be considered. In Australia the property market on average has historically grown by 7-10% per annum. Some years have been negative but on average has grown to a point were property values have doubled every 7-10 years. This period of time is referred to as the cycle ie 7-10 years between each peak in values. As this analysis is historic and not specific to any particular property any review must take into account the specific property in question to give a specific answer. On future movements many considerations will need to be made and the use of statistical reports as prepared by various property groups may be useful in understanding and estimating future growth. For example if you purchased a property in say 1999 for $550,000 and you decide to sell in 2009 when the property value is say $750,000 the following taxes and costs would be applicable. 1. Profit from Above $200k 2. Selling Costs $20k 3. Taxable profit $180k 4. CGT $ 84k (assume 50% CGT discount and 46.5% marginal tax rate) 5. Remaining Cash $96k 6. Stamp duty & costs on next property $36K 7. Available Funds $60k As the above example shows there is only an available $60k out of a $200k "profit". If you could refinance at say 80% then you would get access to $160k which even for allowing for interest may put you in a better position. Obviously if there were underlying reasons to sell ie well below average property value growth etc then it may be better to cut your position and find a better investment which over time would make up for the $120k of taxes and expenses you have lost. The decision to sell or retain will also be influenced by where the property is in relation to the cycle. If it is at say near the bottom the decision to keep either for an extra period or long term may be appropriate. If your decision is to sell but keep for a short period of time until markets move up then the cost to hold (net rent after interest and other costs) would need to be higher than your estimated market growth during the period. As you can see there are many considerations and you may find it beneficial to seek some professional help in completing your calculations.
