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Investment Tax and Capital Gain

Discussion in 'Accounting, Tax & Legal' started by thirunachi, 15th Jan, 2010.

  1. thirunachi

    thirunachi New Member

    Joined:
    29th Dec, 2009
    Posts:
    3
    Location:
    Perth, WA
    I need clarification for the below....

    Say I have an Investment Property (New Built House) worth 400K on Jan 2010. I recover some Interest (say 20K) and depreciation amount (say 50K) in next 5 years time (total 70K recovered in 2015). when I sell this property for 500K in 2015 with a 100k profit, What will be the tax amount i need to pay if I am on a 30% bracket?

    some say, I will get only (100K-70K ) minus tax at 30% on this and others say 100K minus tax 30% on this.

    Thanks
    Thiru
     
  2. Rod_WA

    Rod_WA Well-Known Member

    Joined:
    18th May, 2007
    Posts:
    324
    Location:
    Inglewood, WA
    And I say something different again!

    You'd most likely pay capital gains tax at 0.5 x $100k x 31.5% = $15,750

    The 0.5 comes from the 50% CGT discount since you will have held the asset for more than 12 months, and the 31.5% is the 30% tax rate with medicare levy.

    I'm not sure what you mean here:
    The interest payments are likely to be a lot more than $20k over five years, but at the same time you're very unlikely (!) to be able to claim that amount of depreciation each year. So I assume you mean over the whole five year period 2010-2015.

    I'm curious to know, why would you only have $20k interest payable over 5 years (about 1% pa interest)? If you have a large amount of cash and only need to borrow a small amount, then you're not taking full advantage of your possible leverage... Maybe a better idea while you're unsure what to do would be to borrow say 80%-90% of the property and leave the cash surplus in a 100% offset account... giving you (i) same interest payable, (ii) flexibilty and cash at the ready, (iii) no need to cross-collateralise investments, (iii) full deductibility when you choose to use the cash elsewhere.

    Generally the interest and depreciation are deductible against your income tax each year, and thus do not form part of the cost base for CGT purposes.

    If you didn't claim the deductions each year then you may be able to put these to the cost base, which then becomes $470k (ignoring other costs), so CGT would only be payable on the $30k difference, which at 50% CGT reduction would be a bit under $5k tax payable.

    If you can clarify what you're planning to do then the answers can be more specific.
     
  3. thirunachi

    thirunachi New Member

    Joined:
    29th Dec, 2009
    Posts:
    3
    Location:
    Perth, WA
    Thanks for your response and now I understood well.

    I've just used some rough numbers for purpose of understanding. The actual recoverable interest amount is in the range of $9,000 each year.

    Thanks Again