Frequently Asked Questions
Do I have to pay Capital Gain Tax if I sell my home?
Generally, you don’t pay capital gains tax (CGT) if you sell the home you live in (under the main residence exemption). You also can’t claim income tax deductions for costs associated with buying or selling your home.
But you should keep all the records relating to your home so that if things change – for example, you start to rent it out or otherwise use it to produce income (such as flipping the property) – you don’t pay more tax than necessary.
A second property, such as a holiday house or hobby farm, is subject to CGT.
If you are a foreign resident when a CGT event happens to your residential property in Australia you may no longer be entitled to claim the main residence exemption.
What is my “main residence”?
Generally, a dwelling is considered to be your main residence if:
- you and your family live in it
- your personal belongings are in it
- it’s the address your mail is delivered to
- it’s your address on the electoral roll,
- services such as gas and power are connected.
How to be eligible for a full main residence exemption?
You’re eligible for a full main residence exemption if the dwelling:
- has been the home of you, your partner and other dependants for the whole period you’ve owned it
- has not been used to produce assessable income – that is, you’ve not run a business from it, rented it out or flipped it, and
- is on land of two hectares or less.
If the full exemption applies your capital gain or loss is disregarded – you don’t pay tax on any capital gain, but nor can you use any capital loss to reduce your assessable income.
Alternatively, you may be entitled to a partial exemption.
Do I have to pay Capital Gain Tax for my rental property?
If you invest in a rental property or rent out your current property, you’ll need to keep records right from the start, work out what expenses you can claim as deductions, and declare all your rental-related income in your tax return.
Any capital gain you make when selling or otherwise disposing of the property will be subject to capital gains tax (CGT) except in some circumstances where you rent out the home you’ve been living in.
Do I have to pay GST for my residential rental properties?
You’re not liable for goods and services tax (GST) when you sell a rental property and you can’t claim GST credits on any costs associated with buying or selling it, as the sale of existing residential premises is generally input taxed.
However, if you build new residential premises for sale, you may be liable for GST on the sale and entitled to GST credits on construction and sale costs, even if the premises have been rented for a period before being sold.
What kinds of income must I declare in my tax return?
You must include in your tax return the full amount of rent and any other rental-related income you receive (or become entitled to) when you rent out your property – whether paid to you or your agent.
Rental-related income includes:
- rental bond money you become entitled to retain – such as when a tenant defaults on the rent, or damage to your rental property requires repairs or maintenance
- insurance payouts in some circumstances – such as where you receive an insurance payment to compensate for damage to your property or for lost rent
- letting and booking fees you receive
- associated payments you receive, or become entitled to, as part of the normal, repetitive and recurrent activities through which you intend to generate profit from the use of your rental property (if these payments are in the form of goods and services you’ll need to work out their monetary value)
- reimbursement or recoupment for deductible expenditure – for example:
- if you receive an amount from a tenant to cover the cost of repairing damage to your rental property and you can claim a deduction for the cost of the repairs, you need to include the whole amount in your income
- if you receive a government rebate for the purchase of a depreciating asset, such as a solar hot-water system, you may need to include an amount in your income (see Taxation Determination TD 2006/31)
- any excessive deductions for capital allowances involving your rental property where a limited recourse debt is terminated without you paying it in full.
- Lump sum payment, where the nature of the payment is a substitute for or prepayment of rental income (and thus ordinary income).
What expenses can I claim immediately?
To claim deductions for expenses, your property must include a dwelling that is rented or available for rent – for example, advertised for rent. If you’re building a rental dwelling, you can claim deductions for the land while you are building.
Expenses for which you may be entitled to claim an immediate deduction include:
- advertising for tenants
- body corporate fees and charges
- council rates
- water charges
- land tax
- gardening and lawn mowing
- pest control
- insurance (building, contents, public liability)
- interest expenses
- property agent’s fees and commission
- repairs and maintenance
- some legal expenses.
What types of repairs and maintenance expenses can I claim as income tax deductions immediately?
You can claim an income tax deduction for your costs in repairing and maintaining your rental property in the year you pay them.
When we say ‘repairs’, we mean work to make good or remedy defects in, damage to or deterioration of the property. For example:
- replacing part of the guttering or windows damaged in a storm
- replacing part of a fence damaged by a falling tree branch
- repairing electrical appliances or machinery.
When we say ‘maintenance’, we mean work to prevent deterioration or fix existing deterioration. For example:
- painting a rental property
- oiling, brushing or cleaning something that is otherwise in good working condition
- maintaining plumbing.
If you receive income other than rent for your rental property (for example, an insurance payout for the cost of repairs) you must include this amount as income on your tax return.
What types of repairs and maintenance expenses are you unable to claim immediately?
You cannot claim the total costs of repairs and maintenance in the year you paid them if they did not relate directly to wear and tear or other damage occurring due to renting out your property. These are capital expenses you may be able to claim over a number of years as capital works deductions or deductions for decline in value.
You cannot claim a deduction for the total cost of improvements to your rental property in the year you incur them.
Capital improvements (such as remodelling a bathroom or adding a pergola) should be claimed as capital works deductions.
When we say ‘improvement’ we mean work that:
- provides something new
- generally furthers the income-producing ability or expected life of the property
- generally changes the character of the item you have improved
- goes beyond just restoring the efficient functioning of the property.
Repairs vs improvements：
If you conduct a project that includes both repairs and improvements to your property, you can only claim an income tax deduction for the cost of your repairs if you can separate the cost of the repairs from the cost of the improvements.
If you hire a builder or other professional to carry out these works for you, we recommend you ask for an itemised invoice to help work out your claim.
What interest expenses can I claim?
You can claim the interest charged on the loan you used to:
- purchase a rental property
- purchase a depreciating asset for the rental property (for example, to purchase an air conditioner for the rental property)
- make repairs to the rental property (for example, roof repairs due to storm damage)
- finance renovations on the rental property, which is currently rented out, or which you intend to rent out (for example, to add a deck to the rear of the rental property)
- purchase land on which to build a rental property.
You can also claim interest you have pre-paid up to 12 months in advance.
What interest expenses are you unable to claim?
You cannot claim interest:
- you incur after you start using the rental property for private purposes
- on the portion of the loan you use for private purposes (for example, money you use to purchase a new car or invest in a super fund)
- on a loan you used to buy a new home if you do not use the new home to produce income.
What expenses for your rental property may be deducted over several years?
The following expenses for your rental property may be deducted over a number of income years:
- Decline in value of depreciating assets
- Capital works
How to work out Capital Gain or Capital Loss when I sell a rental property?
You’re likely to make a capital gain or capital loss when you sell or otherwise dispose of a rental property. If you make a net capital gain in an income year, you’ll generally be liable for capital gains tax (CGT). If you make a net capital loss you can carry it forward and deduct it from your capital gains in later years.
Proceeds − Cost base = Capital gain outcome
A + B + C − D − E + F = Cost base
- A is the purchase price
- B is the costs of the purchase
- C is the cost of property improvements
- D is the decline in value deductions
- E is the capital works deductions
- F is the legal fees
You may be able to include capital expenses when calculating the ‘cost base’ of your property. This can help you reduce the amount of CGT you pay when you sell your property. Expenses you incur when purchasing or acquiring and selling or disposing of your rental property are capital expenses.
Capital expenses include:
- conveyancing costs paid to a conveyancer or solicitor
- title search fees
- valuation fees (when it is a private valuation conducted by your solicitor)
- stamp duty on the transfer of the property.
Do I have to pay CGT or GST for the Vacant Land?
If you’ve acquired vacant land (either for private purposes or as an investment) it’s usually considered a capital asset which is subject to capital gains tax (CGT) when you sell the land.
If you buy vacant land with the intent to build a rental property on it, you may be able to claim tax deductions for expenses incurred in holding the land. you are not liable for GST on the rent you charge and you will not be able to claim credits for the GST included in anything you purchase.
But if you purchase land for use in a business or profit making activity that deals in land, any sale proceeds are treated as ordinary income, and you may need to register for goods and services tax (GST).
Business activities that involve dealing in land include either:
• acquiring land to develop or subdivide and sell
• acquiring land for the purpose of building a dwelling or commercial property and selling the developed property.
Once registered, you need to include the GST in the price of the goods you sell, including vacant land, commercial and commercial residential premises and new residential premises. You’ll be able to claim credits for the GST included in the price of most of your business purchases, subject to normal GST rules. You’ll also need to report these transactions by completing a business activity statement.
Do I have to pay CGT or GST for subdividing land?
If you subdivide a block of land – such as the land on which you live – and sell the newly created block, any profit is generally treated as a capital gain subject to capital gains tax.
However, any profit is treated as ordinary income (not a capital gain) if both of the following apply:
• your intention or purpose in entering into the transaction was to make a profit or gain
• you entered into the transaction, and the profit was made, in the course of carrying on a business or carrying out a business operation or commercial transaction.
In this case you’ll probably have GST obligations and entitlements.
Do I have to withhold GST at settlement when I purchase new residential premises or potential residential land?
On or after 1 July 2018, certain purchasers of new residential premises or potential residential land will be required to withhold an amount from the price of the supply for payment to ATO.
Note: When we refer to purchasers we are also referring to lessees under long-term leases.
The withholding amount is due on or before the day that consideration for the supply (other than a deposit) is first provided. If the contract is an instalment contract that will be the day the first instalment is paid otherwise it will be the day of settlement.
Suppliers will be required to assist their purchasers to comply by notifying them whether or not they have a withholding obligation on supplies of certain kinds of residential premises and potential residential land. Where there is a withholding obligation, the supplier must notify the purchaser of the amount they must withhold, when they must pay it to us, and of certain other particulars.
The amount a purchaser must withhold and pay to us is generally either:
• 1/11th of the contract price (for fully taxable supplies)
• 7% of the contract price (for margin scheme supplies), or
• 10% of GST exclusive market value of the supply (for supplies between associates for consideration less than GST inclusive market value).
• Purchasers do not need to register for GST just because they have a withholding requirement.
Transitional arrangements apply to contracts entered into before 1 July 2018.
Check ATO: How the measure will work from 1 July 2018
Residential property investment: fact sheet for foreign owners
If you are a foreign person who has invested in, or plans to invest in Australian residential real estate, there are obligations you will need to meet under Australian law.
Step 1. Obtain FIRB approval
Before you purchase residential real estate, you must obtain Foreign Investment Review Board (FIRB) approval and pay a fee.
Incorrect applications or information may result in delays in processing and additional charges.
Step 2. Review your FIRB approval conditions
You will generally receive your FIRB approval within 30 days. The approval letter will tell you any conditions you must follow when you purchase your property and after settlement (the date that ownership of the property transferred to you, not the sale date).
If you do not comply with these conditions, you may be liable for an infringement notice, criminal prosecution or civil penalty.
Step 3. Record your property on the ATO Land and water register
The ATO records details of purchases of residential property by foreign persons on the ATO Land and water register. As a condition of your FIRB approval, you are required to enter your purchased property on the ATO Land and water register within 30 days of settlement.
Step 4. Lodge your Vacancy fee return
If your land has a residential dwelling on it, you must lodge an annual Vacancy fee return within 30 days of the end of every 12 month period you own it. This is called the ‘vacancy year’.
In the Vacancy fee return, you need to tell ATO how the dwelling was used over the previous 12 months.
ATO will email you a reminder to lodge your Vacancy fee return when it is due, to the email address you gave ATO in your ATO Land and water registration. You will need your ATO land registration number to lodge your Vacancy fee return.
If your situation changes
Make sure you tell ATO if your details change so that we can contact you about your property.
How to lodge Vacancy fee return by foreign owners?
If you are a foreign owner of residential real estate in Australia, you must lodge an annual Vacancy fee return with ATO if you:
• made a foreign investment application for residential property after 7.30pm AEST on 9 May 2017
• purchased the property from a developer who holds a new dwelling exemption certificate they applied for after 7:30pm AEST on 9 May 2017.
You may also have to lodge a Vacancy fee return if you purchased a residential property before 9 May 2017 but did not apply for approval.
Step 1. Obtain FIRB approval
Before you purchase residential real estate, you must obtain Foreign Investment Review Board (FIRB) approval and pay a fee. To apply, complete the Residential real estate application form. This is available from ato.gov.au/rreappinstructions
Step 2.Record your property on the ATO Land and water register
You will generally receive your FIRB approval within 30 days. The approval letter will tell you any conditions you must follow when you purchase your property and after settlement (the date that ownership of the property transferred to you, not the sale date). The ATO records details of purchases of residential property by foreign persons on the ATO Land and water register. As a condition of your FIRB approval, you are required to enter the details of your purchased property on the ATO Land and water register within 30 days of settlement.
Once you enter your information you will receive an ATO Land registration number, which you need to use when you lodge your Vacancy fee return.
Step 3. Lodge your Vacancy fee return
If your land has a residential dwelling on it, you must lodge a Vacancy fee return within 30 days of the end of every 12 month period you own it. This is called the ‘vacancy year’.
The vacancy year is the 12 month period starting on the date you first had the right to occupy the dwelling (the ‘occupation day’).
You will need to tell ATO:
• your ATO land registration number
• the occupation day
• your vacancy year
• how your dwelling was used over the previous 12 months.
ATO will email you a reminder to lodge your Vacancy fee return to the email address you gave ATO in your land and water registration. You must lodge a Vacancy fee return even if you do not receive a reminder from ATO. To lodge your Vacancy fee return visit ato.gov.au/vacancyfeereturns
Step 4. Pay your Vacancy fee
After you lodge your Vacancy fee return, you will see a confirmation page containing reference details, any amount you need to pay and how to pay. ATO will also send you a written notice by email. You must pay by the due date in your notice.
The Vacancy fee may also apply if you do not lodge your Vacancy fee return by the due date.
If your situation changes
Make sure you tell ATO if your details change, so that we can contact you about your property.
Foreign investment in Australia: what you need to know
Foreign investment in Australia: what you need to know