Sarah purchased an investment property for $800,000 in 2020 and sold it for $950,000 in 2024. She has held the property for more than 12 months and has no other capital gains. What is her assessable capital gain for tax purposes?
Correct Answer
B) $75,000
Sarah's capital gain is $150,000 ($950,000 - $800,000). Since she held the property for more than 12 months, she is eligible for the 50% CGT discount, making her assessable capital gain $75,000.
Why This Is the Correct Answer
Option B ($75,000) is correct because Sarah's gross capital gain is $150,000 ($950,000 - $800,000). Under Division 115 of the Income Tax Assessment Act 1997, individuals who hold CGT assets for more than 12 months are entitled to a 50% CGT discount. Since Sarah held the investment property for 4 years (2020-2024), she qualifies for this discount. Therefore, her assessable capital gain is $150,000 × 50% = $75,000.
Why the Other Options Are Wrong
Option A: $150,000
Option A ($150,000) represents the gross capital gain before applying any discounts. While this is the correct calculation of the total gain ($950,000 - $800,000), it fails to account for the 50% CGT discount available to individual taxpayers who hold assets for more than 12 months. This would be the assessable amount only if Sarah held the property for 12 months or less.
Option C: $112,500
Option C ($112,500) appears to apply an incorrect discount rate of 25% rather than the legislated 50% CGT discount. This calculation ($150,000 × 75% = $112,500) doesn't align with any provision in Australian tax law. The CGT discount for individuals and trusts is specifically 50% for assets held longer than 12 months, not 25%.
Option D: $0 due to main residence exemption
Option D incorrectly applies the main residence exemption, which only applies to a taxpayer's principal place of residence under section 118-110 of the Income Tax Assessment Act 1997. Since this is explicitly stated as an investment property, not Sarah's main residence, this exemption is not available. Investment properties are subject to CGT with potential discount benefits, not complete exemption.
Deep Analysis of This Finance Taxation Question
This question tests understanding of Australia's Capital Gains Tax (CGT) discount provisions under the Income Tax Assessment Act 1997. The CGT discount is a significant tax concession that reduces the assessable capital gain by 50% for assets held longer than 12 months by individual taxpayers and trusts. This policy encourages long-term investment by providing preferential tax treatment compared to short-term speculation. The calculation involves determining the gross capital gain (sale price minus cost base), then applying the 50% discount if eligible. This concept is fundamental for property investors and real estate professionals advising clients on investment strategies. Understanding CGT implications helps agents provide informed advice about holding periods and tax consequences, directly impacting investment decisions and client outcomes in the property market.
Background Knowledge for Finance Taxation
Capital Gains Tax in Australia applies to assets acquired after 19 September 1985. The CGT discount, introduced in 1999, provides a 50% reduction in assessable capital gains for individuals and trusts holding assets for more than 12 months. The discount encourages long-term investment over short-term speculation. Key legislation includes the Income Tax Assessment Act 1997, specifically Division 115 (CGT discount) and Division 118 (exemptions). The main residence exemption completely excludes gains on a taxpayer's principal place of residence, but investment properties remain subject to CGT with potential discount benefits.
Memory Technique
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 discount - the longer you hold (over 12 months), the bigger the tax discount (50% off your gain).
When you see CGT questions, immediately check the holding period. If it's more than 12 months for an individual, apply the 50-12 rule: calculate the gross gain, then cut it in half for the assessable amount.
Exam Tip for Finance Taxation
For CGT questions: 1) Calculate gross gain (sale price - cost base), 2) Check holding period, 3) If >12 months for individuals, apply 50% discount, 4) Verify it's not main residence (which would be exempt).
Real World Application in Finance Taxation
A real estate agent advising clients on investment property sales must understand CGT implications. When a client considers selling an investment property purchased 18 months ago for a $200,000 gain, the agent can explain that holding for over 12 months qualifies for the 50% CGT discount, reducing the assessable gain to $100,000. This knowledge helps agents provide valuable tax-effective timing advice, potentially saving clients thousands in tax and strengthening the agent-client relationship through informed counsel.
Common Mistakes to Avoid on Finance Taxation Questions
- •Forgetting to apply the 50% CGT discount for assets held over 12 months
- •Confusing investment property with main residence exemption
- •Applying incorrect discount percentages (like 25% instead of 50%)
Related Topics & Key Terms
Key Terms:
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