Sarah purchased an investment property for $500,000 in 2020 and sold it for $650,000 in 2024. If she is in the 37% tax bracket and held the property for more than 12 months, what is her capital gains tax liability?

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 is in the 37% tax bracket and held the property for more than 12 months, what is her capital gains tax liability?

The correct answer is $27,750. Option B correctly applies the CGT discount provisions under Australian tax law. Sarah's capital gain is $150,000 ($650,000 - $500,000). Since she held the property for more than 12 months, she qualifies for the 50% CGT discount, reducing her taxable capital gain to $75,000. At her marginal tax rate of 37%, her CGT liability is $75,000 × 37% = $27,750. This calculation properly follows the Income Tax Assessment Act 1997 provisions for individual taxpayers.

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

Capital Gains Tax in Australia applies to assets acquired after 19 September 1985. For individuals, a 50% discount applies to capital gains on assets held for more than 12 months, excluding the family home (principal place of residence exemption). The discount reduces the taxable capital gain before applying the individual's marginal tax rate. This system encourages long-term investment and is governed by the Income Tax Assessment Act 1997. The CGT discount doesn't apply to companies, which pay the full corporate tax rate on capital gains. Understanding these provisions is essential for property investment advice and compliance.

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

Remember 'HALF-TIME' - if you Hold an Asset for Longer than 12 months, you get HALF the capital gain Taxed at your Income Marginal rate. Just like half-time in sports divides the game, 12 months divides full CGT from discounted CGT. When you see a CGT question, immediately check the holding period. If over 12 months, think 'HALF-TIME' and halve the capital gain before applying the tax rate. This prevents forgetting the discount step.

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

Always check the holding period first in CGT questions. If over 12 months, apply the 50% discount before calculating tax. Calculate: gain minus cost, apply discount if eligible, then multiply by tax rate.

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

A real estate agent advises clients considering selling investment properties. A client bought a property 11 months ago and wants to sell for a $100,000 gain. The agent explains waiting one more month would halve their CGT liability due to the 50% discount. For a client in the 37% tax bracket, this means paying $18,500 instead of $37,000 in CGT - a $18,500 saving for waiting just one month. This timing advice demonstrates the practical importance of understanding CGT discount rules.

Question

Finance TaxationCGTMEDIUM

Sarah purchased an investment property for $500,000 in 2020 and sold it for $650,000 in 2024. If she is in the 37% tax bracket and held the property for more than 12 months, what is her capital gains tax liability?

Answer Options

A

$55,500

B

$27,750

C

$37,000

D

$75,000