Sarah purchased an investment property for $500,000 in 2020 and sold it for $650,000 in 2024. If she held the property for more than 12 months and has no other capital gains, what discount applies to her capital gains tax calculation?

Q: What is the correct answer to: Sarah purchased an investment property for $500,000 in 2020 and sold it for $650,000 in 2024. If she held the property for more than 12 months and has no other capital gains, what discount applies to her capital gains tax calculation?

The correct answer is 50% discount on the capital gain. Option C is correct because under Division 115 of the Income Tax Assessment Act 1997, individual taxpayers (including Sarah) who hold a CGT asset for more than 12 months are entitled to a 50% capital gains tax discount. Since Sarah held the property from 2020 to 2024 (more than 12 months) and is an individual taxpayer, she qualifies for this discount. This means only 50% of her $150,000 capital gain ($75,000) will be included in her assessable income for tax purposes.

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

Capital Gains Tax (CGT) in Australia applies to the disposal of assets acquired after 19 September 1985. The CGT discount, introduced in 1999, provides a 50% reduction in taxable capital gains for individuals and trusts (not companies) who hold assets for more than 12 months. The discount is calculated on the net capital gain after deducting any capital losses. For investment properties, this significantly reduces the tax burden and encourages long-term investment. The 12-month holding period is measured from the contract date of purchase to the contract date of sale, not settlement dates.

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

Remember '50-12': 50% discount for assets held more than 12 months. Think of it as 'Fifty percent off after a full year plus' - like a loyalty reward for patient investors who hold assets for over a year. When you see CGT questions, immediately check the holding period. If it's more than 12 months for an individual taxpayer, apply the 50-12 rule - 50% discount applies. If less than 12 months or it's a company, no discount.

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

Look for the holding period first - if over 12 months and individual taxpayer, it's 50% discount. Companies never get the discount regardless of holding period. The discount is always 50% for qualifying individuals, never 25% or 75%.

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

A real estate agent advising clients on investment property timing would explain that selling just before the 12-month anniversary could cost thousands in extra tax. For example, if a client bought a property in January 2023 for $400,000 and wants to sell for $500,000, waiting until after January 2024 would reduce their taxable gain from $100,000 to $50,000, potentially saving $23,250 in tax (at the top marginal rate of 45% plus Medicare levy).

Question

Finance TaxationCGTMEDIUM

Sarah purchased an investment property for $500,000 in 2020 and sold it for $650,000 in 2024. If she held the property for more than 12 months and has no other capital gains, what discount applies to her capital gains tax calculation?

Answer Options

A

No discount applies

B

25% discount on the capital gain

C

50% discount on the capital gain

D

75% discount on the capital gain