Sarah purchased an investment property for $800,000 and sold it 18 months later for $950,000. Assuming she is in the highest marginal tax bracket, what CGT discount is she entitled to?

Q: What is the correct answer to: Sarah purchased an investment property for $800,000 and sold it 18 months later for $950,000. Assuming she is in the highest marginal tax bracket, what CGT discount is she entitled to?

The correct answer is 50% discount. Option C is correct because Sarah held the investment property for 18 months, which exceeds the 12-month minimum holding period required under Division 115 of the Income Tax Assessment Act 1997. As an individual taxpayer, she automatically qualifies for the 50% CGT discount. This means only half of her $150,000 capital gain ($950,000 - $800,000) will be subject to tax at her marginal rate. The discount applies regardless of her tax bracket - the 50% reduction occurs before applying the marginal tax rate.

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

Capital Gains Tax (CGT) discount provisions are found in Division 115 of the Income Tax Assessment Act 1997. Individual taxpayers who hold CGT assets for more than 12 months qualify for a 50% discount on capital gains. The discount applies to the net capital gain after offsetting any capital losses. For assets held 12 months or less, no discount applies and the full gain is taxable. The holding period is calculated from the day after acquisition to the day of disposal. This discount significantly reduces tax liability for long-term investors, making it a crucial consideration in investment property strategies and timing decisions.

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

Remember '12 months = 50% off' like a loyalty program. Just as many stores offer 50% discounts to loyal customers, the tax office offers 50% off your capital gains tax bill if you're a 'loyal' property owner for more than 12 months. The longer you stay loyal to your investment, the bigger the discount! When you see any CGT question, immediately check the holding period. If it's more than 12 months for an individual, automatically think '50% discount applies.' If it's 12 months or less, think 'no discount, full tax applies.'

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

Always identify the holding period first in CGT questions. Look for phrases like 'more than 12 months' or specific timeframes. For individuals, the rule is simple: over 12 months = 50% discount, 12 months or under = no discount.

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 due to market conditions. The agent explains that waiting just one more month could save thousands in tax through the 50% CGT discount. For a $100,000 gain and 45% marginal tax rate, selling now means $45,000 tax, but waiting means only $22,500 tax on the discounted gain. This timing advice demonstrates the practical importance of understanding CGT discount rules.

Question

Finance TaxationCGTMEDIUM

Sarah purchased an investment property for $800,000 and sold it 18 months later for $950,000. Assuming she is in the highest marginal tax bracket, what CGT discount is she entitled to?

Answer Options

A

No discount - full CGT applies

B

25% discount

C

50% discount

D

75% discount