Do Property traders pay CGT on a sale?

[michaelg]

Reply: 2.1.1.1.1.2.1.1.1.1.1.1.1
From: Michael G


Rob,

My understanding, is the amount is the same (ie rate based on your annual income). But capital gains can only be reduced by capital loses, whereas income gains can be reduced by income expenses (business expenses).

For traders, the benefit is, as a business they can determine business expenses like rent, cars, etc. Practical costs they reduce their tax.

Whereas capital loses/expenses are less available.

On the other hand, the 50% CGT allowance for holding property for 12mths is only available for capital gains and not income gains.

Then again, the idea of trading is to have a higher turnover.

Not sure if that makes things clearer, but its more food for thought.

Michael G

 

[Owen]

Reply: 2.1.1.1.1.2.1.1.1.1.1.1.1.1
From: Owen .


Good stuff guys. It's all got me thinking. Following on from Dales post though, if I just do one short term buy and sell it is not classed as trading, if I do 2 over 6 months is it? How does the tax office know after the first one that I don't intend to do more. The reason I ask is if my deal works out it may be the only trade I do this financial year but it doesn't mean that I won't be doing more in the next financial year. I guess it's just a matter of walking like a duck if asked by the ATO.

Owen

"Gambling promises the poor what property performs for the rich – something for nothing"

 

[DaleGG]

Reply: 2.1.1.1.1.2.1.1.1.1.1.2
From: Dale Gatherum-Goss



>Basically you are
>taxed on your gain regardless
>of whether you are trading or
>not. One is called CGT and the
>other is not. Is this correct?
>Are they different amounts or
>is is just the column it's put
>in at tax time?
>
>Owen


Hi Owen!

Yes, you are correct. You are taxed either way. The tax is the same under your circumstances as all the income goes together.

Dale

 

[DaleGG]

Reply: 2.2.1
From: Dale Gatherum-Goss


Hi Michael!

Believe it or not, there is no easy answer to your question as it will depend upon the forms, processes and contracts used by the wrapper.

In most cases though, the wrapper declares income each month when it is received by them and offsets that income with the costs involved such as interest that they pay.

There is no capital gain until the sale is completed.

I know that we have a number of wrappers involved in this forum and they might be willing and able to explain how their accountant treats this issue.

Any takers?

Dale

 

[Sim]

Reply: 2.1.1.1.1.2.1.1.1.1.1.1.1.1.1
From: Sim' Hampel


Owen, if you buy your property through a company where the goal of that company is to make money through trading property, it doesn't really matter whether you buy today and sell tomorrow, or hold for 2 years (more gain !) before selling... as Dale said, it is the intent that counts, and you can help show your intent by the way you structure and document your business activities.

Holding in your own name to "trade at a later date" is likely to get closely scrutinised by the ATO I would imagine, as it starts to smell less like a duck and more like a fish.

 

[Owen]

Reply: 2.1.1.1.1.2.1.1.1.1.1.1.1.1.1.1
From: Owen .


Good point Sim'. I forgot about a conversation I had with my accountant about CGT and his explanation was that is just an income tax like all the others, it just happens to be on a capital gain and not an income. As Dale said, it all gets bundled up anyway at the end of the year.

Of course it doesn't matter how long I hold a property in a company structure as there are no income concessions for a company or trust anyway. I knew this, I just forgot it for while )

Thanks for all your help guys. I get stuck on the real simple stuff sometimes and then say to myself "Oh I know that, what am I thinking". Thanks for the clarity.

Owen

"Gambling promises the poor what property performs for the rich – something for nothing"

 

[yuch.]

Reply: 2.2.1.1
From: Yuch .


Hi Dale,

I am just wondering if there is any property trader or share trader being audited by the ATO, because "properties" and "stocks" are not "goods"?

One of my friends accountant says under section 15, a trader trades "good" etc. And properties and shares are not "goods".


Regards
yuchun
~ The secret to success is to start from scratch and keep on scratching. ~

 

[Boyler_Room]

Reply: 2.2.1.1.1
From: Boyler Room


Yuch,

This is my take, and I'm not an accountant so you know the usual disclaimer etc.

If you're carrying on a business by "trading" property, where the intention is to buy property and sell for a profit in a business like manner, then property becomes "goods". Just like a car salesman sells cars for a profit, or a bookstore sells books.

I may be totally off the mark here, but that's my take.

Boyler Room
Co Ordinator for ADL Freestylers

 

[Sim]

Reply: 2.2.1.1.1.1
From: Sim' Hampel


I agree with BR on this...

What's your opinion Dale ? (or others) ?

 

[DaleGG]

Reply: 2.2.1.1.1.1.1
From: Dale Gatherum-Goss


Hi

Trading is a misnomer.

If you are in business to make a profit, that profit is taxed.

However, if you invest in assets and occasionally cash in your investment, it is the gain that is taxed under separate CGT rules which may, or may not, have discounts available depending upon the circumstances involved.

Does this help? I hope so.

Dale

 

[tonyd]

Reply: 2.3
From: Tony Dixon


Dale wrote:
>A trader is someone who buys
>and sells properties for a
>quick gain and not of the buy
>and hold variety. Their
>business is to buy properties
>and sell them for a profit and
>make their income from this
>activity.

What if you are a registered trader, but you're not very good at it.
You keep trying to sell your 100k property for 140k. In the meantime you have tenants.
If you sell the property for 140k, fantastic! If you don't...

The GST on the purchase costs is claimable.

Great forum!

Tony

 

[watto]

Reply: 3
From: .watto .


Thanks one and all..

Well that certainly clears up a few things.

Thanks for the great responses.

Cheers
Watto

 

[DaleGG]

Reply: 2.3.1
From: Dale Gatherum-Goss


Hi Tony

It is your intention that will matter followed by the facts of your actions. Good, bad or otherwise.

Have fun

Dale

 

[Waverlybay]

Reply: 3.1
From: Waverly Bay


It seems from the above posts that whether a taxpayer is engaged in the "business of property trading" is a question of fact to be determined according to the particular circumstances surrounding the purchase and sale of the property.

Does this open up possibilities for legitimate tax minimisation opportunities?

Is it possible that a taxpayer could "save" tax or "defer" tax ... depending on whether their profit from the property sale is taxed on an income basis as a property trader vs being taxed on a CGT basis?

Here are some examples:

1) if after 12 months holding of the property, the taxpayer is viewed as a trader and the NET profit is fully taxed as ordinary income. But on the other hand, if the taxpayer is not viewed as a trader and the CGT rules apply, then will only 50% of the capital gain be taxed?

2) Taxpayer has carried forward income tax losses from their takeaway business. Will they not "defer " the payment of tax on their property gains.... if such property gains can be classified as "ordinary income" which fall outside the scope of the CGT rules?

3) Taxpayer has carried forward capital losses from the sale of a failed business. Again, is it possible to "defer" the payment of tax on the property gains.... if such property gains can be classified as capital gains that fall within the CGT rules?

Practically, it maybe difficult to create the necessary documents and circumstances to bring a taxpayer within the desired taxing rules (ie the ordinary income rules or cgt rules) but if it can be done, it maybe worthwhile creating those docs and circumstances from the OUTSET of the transaction ....when it is not too late !


cheers

waverly

 

[DaleGG]

Reply: 3.1.1
From: Dale Gatherum-Goss



>Does this open up
>possibilities for legitimate
>tax minimisation
>opportunities?

Hi!

Yes, it does but you would, as always, need to be careful.

>Is it possible that a taxpayer
>could "save" tax or "defer"
>tax ... depending on whether
>their profit from the property
>sale is taxed on an income
>basis as a property trader vs
>being taxed on a CGT basis?

Yes, it is possible with planning, advice and a great deal of caution.

>Here are some examples:
>
>1) if after 12 months holding
>of the property, the taxpayer
>is viewed as a trader and the
>NET profit is fully taxed as
>ordinary income. But on the
>other hand, if the taxpayer is
>not viewed as a trader and the
>CGT rules apply, then will
>only 50% of the capital gain
>be taxed?

Yes, if the person holding the property for more than 12 months sells, they will have a chance at being taxed under the CGT rules and therefore get the discount. But, it would depend upon the other facts within the circumstances. For example, I would not want to swap around (hey, I'm a married kinda guy!!) each year as this could refute our own arguments.


>2) Taxpayer has carried
>forward income tax losses from
>their takeaway business. Will
>they not "defer " the payment
>of tax on their property
>gains.... if such property
>gains can be classified as
>"ordinary income" which fall
>outside the scope of the CGT
>rules?

This is something that we would assess on a case by case scenario. At face value though, we would normally run the numbers and see which option gives me the best result now, and, in the future given the particular circumstances of the investor.



>3) Taxpayer has carried
>forward capital losses from
>the sale of a failed business.
>Again, is it possible to
>"defer" the payment of tax on
>the property gains.... if such
>property gains can be
>classified as capital gains
>that fall within the CGT
>rules?


Yes, we can offset the gain against the loss and then get a discount on anything left over.


>Practically, it maybe
>difficult to create the
>necessary documents and
>circumstances to bring a
>taxpayer within the desired
>taxing rules (ie the ordinary
>income rules or cgt rules) but
>if it can be done, it maybe
>worthwhile creating those docs
>and circumstances from the
>OUTSET of the transaction
>....when it is not too late !
>
>
>cheers
>
>waverly

Be careful, but, I like the way that you think!!!

Have fun

Dale