Tax Q&A: CGT taxing point for the sale of a property

Question: I sold an investment property with a contract date of 5 June 2018. It didn’t settle until 5 November 2018, meaning the sale crossed over two financial years.

The ATO advised that I needed to declare the capital gain (which is around $200,000) in the 2017/18 financial year. However, all of the expenses to do with selling the property, like legal fees and $20,000 worth of real estate commission, aren’t incurred until settlement, and thus would fall into the 2018/19 financial year. This means that I’ll be paying 45% tax on my capital gain, but I’ll only be able to claim 37% (my usual income tax rate) on the expenses next year. Is this correct?

Many thanks, Donna

Answer: For capital gains tax (CGT) purposes, the relevant taxing point for the sale of a property is generally the date of the contract. Therefore, as the contract for the sale of your investment property was dated 5 June 2018, for CGT purposes the sale is treated to have taken place in the year ended 30 June 2018.

For capital gains tax purposes, the relevant taxing point for the sale of a property is generally the date of the contract

To work out your CGT liability for the year ended 30 June 2018, in broad terms, your taxable capital gain is calculated by subtracting the ‘cost base’ of the investment property from the capital proceeds on sale. The cost base of your investment property includes incidental costs incurred on the sale of the property, so even though the real estate agent commission and legal costs were not physically paid by 30 June 2018, they are still included in calculating your CGT liability for the year ended 30 June 2018, even though they are incurred after that date.

In other words, you can include the real estate agent’s commission and legal costs in calculating your CGT liability for the year ended 30 June 2018 without losing the tax benefit associated with these amounts.

As mentioned above, given that the contract date dictates when the CGT event associated with the sale of your investment property will occur, even if the settlement of your investment property occurs after 31 October 2018, you are still assessed on the capital gain or loss in the year ended 30 June 2018.

However, if the contract fell through and the sale never proceeded to settlement, the law would treat as if the CGT event had never happened because no change of ownership occurred.

Because the sale of your investment in your tax return was for the year ended 30 June 2018, you had two options.

First, wait and see if settlement occurs before you lodge your tax return. If you are concerned that you may lodge your tax return late but are not sure if the sale will settle, you may consider appointing a registered tax agent and requesting them to include your tax return on their tax lodgement list with the ATO before 31 October 2018. In doing so, your tax return may enjoy a later lodgement due date under the tax agent lodgement program, which could potentially be deferred to as late as 15 May 2019 or even beyond.

Second, if settlement occurs after the due date for the lodgement of your tax return and you do not wish to be penalised for lodging your return late, you may lodge your return before the lodgement due date without the capital gain or capital loss on the sale of the property in your tax return. If settlement occurs after you have lodged your return, you can amend your return to include the capital gain or loss.

Need to know

- The contract date is the relevant taxing point for a property sale.

- Agent’s commission can be deducted in the tax year of the CGT event.

- A registered tax agent can include their client’s tax return on the ATO’s late lodgement list.

Eddie Chung

is tax and advisory

partner at BDO