Sarah bought an investment property for $600,000 in January 2020 and sold it for $750,000 in March 2024. She incurred $15,000 in selling costs. What is her net capital gain for CGT purposes?

Q: What is the correct answer to: Sarah bought an investment property for $600,000 in January 2020 and sold it for $750,000 in March 2024. She incurred $15,000 in selling costs. What is her net capital gain for CGT purposes?

The correct answer is $67,500. Option C ($67,500) is correct because it properly applies the CGT calculation process. The gross capital gain is $750,000 (sale price) - $600,000 (cost base) - $15,000 (selling costs) = $135,000. Since Sarah held the property for more than 12 months (January 2020 to March 2024), she qualifies for the 50% CGT discount under Division 115 of the Income Tax Assessment Act 1997. Therefore, her net assessable capital gain is $135,000 × 50% = $67,500.

Q: What background knowledge is needed for this Finance Taxation question?

Capital Gains Tax in Australia applies to the disposal of assets acquired after 19 September 1985. For individuals, a 50% CGT discount applies to assets held for more than 12 months. The capital gain calculation involves: Sale proceeds minus cost base (purchase price plus incidental costs) minus selling costs. Selling costs include agent commissions, legal fees, and advertising. The CGT discount encourages long-term investment by reducing the assessable capital gain. This is governed by the Income Tax Assessment Act 1997, particularly Division 115 for the discount and Division 104 for capital gains events.

Q: What is a good way to remember the answer to this Finance Taxation question?

Remember 'HALF-TIME' - if you Hold an Asset Longer than 12 months, you get HALF Tax (50% discount) on your capital gain. Like a sports half-time break, holding longer gives you a breather from full tax. When you see CGT questions, immediately check the holding period. If it's over 12 months for individuals, apply the HALF-TIME rule and reduce the gross capital gain by 50% to get the assessable amount.

Q: What exam tip applies to this Finance Taxation question?

Always follow the three-step CGT process: 1) Calculate gross gain (sale price minus cost base minus costs), 2) Check holding period, 3) Apply 50% discount if held over 12 months by individuals.

Q: How does this Finance Taxation concept apply in Australian real estate practice?

A property investor considering selling their investment property after 11 months might delay the sale by one month to qualify for the CGT discount. On a $100,000 capital gain, this delay could save $25,000 in tax (assuming a 50% marginal tax rate). Real estate agents often advise clients about this timing consideration, as it can significantly impact the net proceeds from a property sale and influence investment strategies.

Question

Finance TaxationCGTMEDIUM

Sarah bought an investment property for $600,000 in January 2020 and sold it for $750,000 in March 2024. She incurred $15,000 in selling costs. What is her net capital gain for CGT purposes?

Answer Options

A

$135,000

B

$150,000

C

$67,500

D

$75,000