FAQs & Glossaries

Capital gains tax is a tax you pay on the profit you make when you sell certain assets, like investments or property. Here’s a breakdown:

• Profit: Imagine you buy a share of stock for $100 and later sell it for $120. Your profit, or capital gain, is $20.
• Taxed Profit: Capital gains tax applies to the profit you make from selling the assets. In this case, the $20 you made will be taxed.
• Assets: This can include things like stocks, bonds, and real estate.

You’re paying tax on the money you earned from selling something, not the total amount you sold it for.

Here are some key points to remember:

• You don’t pay capital gains tax if there’s no profit: If you sell an asset for less than you bought it for (a loss), you generally don’t owe any capital gains tax. You can use this loss to reduce the amount of any capital gains tax you may pay in the future.
• Rates can vary: In real estate, the capital gain is effectively added onto your income and treated as an income tax.
• Some exceptions exist: If you have held the asset for longer than 12 months you get a 50% concession. This means the CGT you must pay is cut in half.

Negative gearing is simply a tax deduction. Property usually provides you with an income (in terms of rent) as well as a range of costs. If the costs are greater than the rent you receive, then you have made a loss (in terms of cash flow). Negative gearing allows you to reduce your income at tax time by the amount of the loss you made. This lowers your income tax, and you typically get the difference back in your tax return.

The costs that you incur are things like interest expense, strata fees, property management fees.

You can also claim depreciation on the structure of the building itself and the fittings inside such as the cupboards, blinds, carpet, and any repairs and renovations that may be required. This is because the tax department recognises that there is a finite lifespan on these items, and they wear out over time. As such the value of them reduces over time.

The tax savings can add up to a substantial amount over the course of a year. A property can also be positively geared. Where your rental income is greater than the cost to hold the property. In this case the additional income is added to any other income you make and is taxed at the appropriate marginal rate.

When it was introduced in 1865, stamp duty was literally an administrative cost for a government clerk to stamp a piece of paper. At the time it cost the equivalent of a few cents. Nobody is sure how it ballooned out to tens of thousands of dollars today, especially since there isn’t even a stamp anymore. Today, it is just another form of revenue for the state governments. It isn’t just a tax on houses, it can arise from the sale or transfer of a wide range of assets.

Rental yield is a simple metric that allows investors to get a quick estimate of the income you would receive for the amount you are spending on a property. It is calculated as the total rent you would receive in a year, divided by the current price of the property. This is expressed as a percentage. The higher the yield, the more income you would make for the given price of the investment.

Rental yields can also give investors a guide to the value of property and allow them to compare how good one investment may be compared to another. They can be compared to the price/earnings ratio (PE ratio) in the share market. It is one of two types of return you get from property, the other being capital growth.

When you have a physical asset that deteriorates over time like a house, this is known as depreciation. As the asset ages, its value declines. This is recognised by the Australian Taxation Office (ATO) and investors can claim tax deductions on both the decline in value of the building’s structure and items considered permanently fixed to the property. This includes ‘plant and equipment’ such as ovens, dishwashers, carpets, and blinds.

The most practical way of determining how much you can depreciate is by purchasing a depreciation schedule from a reputable company. There are set calculations by the ATO which specify the amount by which each item can be depreciated.

Rentvesting is a home-owning strategy where you rent a property to live in that’s right for your lifestyle, while you own an investment property that’s right for your budget. As home prices in inner-city areas have gone up, this strategy is increasingly popular, especially among younger buyers. It can be a more effective way to use your income because rentvestors are typically able to own a bigger asset than had they purchased a house to live in.