When to Pay Capital Gains Tax on Property – Avoid the Pitfalls

Thinking of selling an investment or business property? Between finding the right buyer and sorting out paperwork, who wants to worry about getting hit with an unexpected tax bill?

Knowing when to pay Capital Gains Tax on property means avoiding nasty surprises, keeping the tax office happy, and—most importantly—pocketing more of your well-deserved profit from selling.

With a little know-how, you can stay ahead of deadlines, take advantage of key exemptions, and even minimise your CGT liability.

That’s what we’re here to help with!

Understanding Capital Gains Tax (CGT)

Capital Gains Tax (CGT) is a tax on the profit (or capital gain) you make when selling certain assets.

It’s not a separate tax but part of your overall annual income tax.

CGT applies to

• Investment properties (rental and holiday homes)
• Business premises (offices, shops, and warehouses)
• Vacant land

When Do You Pay CGT on Property?

Selling an Investment Property

If you sell an investment property for a profit, the CGT event occurs when you enter into the contract of sale, not at settlement.

You must report the capital gain in your tax return for the financial year in which you signed the contract and pay the CGT when you lodge your tax return.

There are CGT exemptions available, including

• Main residence exemption: Your main residence is exempt from CGT if you’re an Australian resident and the property has been home to you, your partner, or any dependents for the whole time you’ve owned it and hasn’t been used to produce income.
• 50% CGT discount: If you owned the asset for at least 12 months, your capital gain can be reduced by 50% when you sell it.
• Affordable housing discount: In addition to the 50% CGT discount, your CGT can be reduced by an extra 10% if the property was used to provide affordable rental housing that meets certain conditions.
• Granny flat arrangement exemption: Formal granny flat arrangements with eligible elderly or disabled individuals are exempt from CGT. 

Selling a Business Premise

CGT on a business premise also occurs when you sign the contract of sale, and it’s paid in the financial year that you sold the property.

If you qualify as a small business entity, you may be eligible for concessions that reduce or defer your capital gain. 

• 15-year exemption: If you’ve owned the asset for at least 15 years, are permanently incapacitated, or are aged 55 or older and retiring, you won’t pay any CGT on the sale.
• 50% active asset reduction: The capital gain on an active asset used in your business can be reduced by 50%. If you also qualify for the general 50% CGT discount (for assets held for more than 12 months), the gain can be reduced further.
• Retirement exemption: Capital gains may be disregarded up to a lifetime limit of $500,000. If you’re under 55, you must pay the exempt amount into a complying superannuation fund.
• Rollover relief: You can defer all or part of a capital gain from selling an active asset if you acquire a replacement asset or make a capital improvement (a significant upgrade that increases the asset’s value, extends its life, or adapts it for a different use) to an existing asset within a certain period. The deferred gain is generally not taxed until the replacement or improved asset is disposed of or its use changes. 

Inheriting Property

Certain CGT considerations arise when you sell an inherited property. 

The property’s cost base—used to calculate any capital gain or loss upon sale—depends on when the deceased acquired the property.

If it was before September 20, 1985, the cost base is the property’s market value at the date of the property owner’s death.

If acquired on or after September 20, 1985, the cost base includes the deceased’s original purchase price plus any associated costs, adjusted for improvements and depreciation.

If the property was the deceased’s main residence and wasn’t used to produce income, you may be exempt from CGT if you sell the property within two years of their death. 

If the property was used to produce income or isn’t sold within two years, a partial exemption may apply, proportionate to the periods it was the main residence versus income-producing.

Calculating Your CGT Liability

To determine your CGT liability, you’ll need to calculate the

1. Property’s cost base: The total you spent to buy, hold, and sell the property, including legal fees, renovations, and repairs.
2. Property’s sale price.
3. Capital gain or loss: Subtract the property’s cost base from its sale price. A profit is counted as a capital gain.
4. CGT discount: If you’ve held the asset for over 12 months, apply the 50% CGT discount to your capital gain, plus any other exemptions you’re eligible for.
5. CGT: Add the discounted capital gain to your assessable income for the financial year. It will be taxed at your marginal tax rate.

Minimising Your CGT Liability

Here are some strategies to reduce your CGT.

• 50% CGT discount: If you’ve owned an asset for over 12 months, you can reduce your capital gain by 50%. This discount applies to individuals and trusts but not companies.
• Main residence exemption: If the property was your main residence, you may be fully exempt from CGT when selling. If you move out and rent the property, it can still be treated as your main residence for up to six years and remain CGT-free when sold.
• Offsetting gains with losses: You can use any capital losses (from selling other assets) to reduce your capital gains. If your losses exceed your gains, you can carry forward the remaining losses to future years.
• Spreading asset sales across financial years: If you have multiple assets to sell, spreading the sales over different financial years can lower your taxable income and potentially keep you in a lower tax bracket.
• Small business concessions: If you’re a small business owner, you may qualify for certain CGT exemptions.
• Gifting strategies: Gifting assets to family or charities can help manage future CGT liabilities. However, gifts are considered a CGT event and may still trigger a capital gain or loss.
• Trust structures: Holding assets in a trust can provide flexibility for distributing capital gains to beneficiaries in lower tax brackets, reducing the overall CGT burden.
• Super contributions: You can use the proceeds from a capital gain to make a concessional superannuation contribution, reducing your taxable income and offsetting the impact of CGT.

Calculate Capital Gains Tax Confidently With Pherrus

Selling up and wondering when to pay Capital Gains Tax on property?

The CGT event occurs when you sign the contract. You report and pay CGT when you lodge your tax return for that financial year.

Sounds simple, right?

Truth be told, CGT can be tricky. Deadlines, discounts, exemptions—miss a detail, and you could be waving goodbye to your profits or facing penalties. Why risk it?

With a professional Pherrus tax consultant on your side, you’ll gain access to tailored strategies that’ll save you money, expert insights to maximise exemptions, and the confidence that your CGT is being handled correctly.

Partner with our specialists in tax planning and property accounting today.

Fill out this online form or call (02) 9099 9109 to book an appointment at our Bella Vista office in Sydney, NSW.

FAQs About “When To Pay Capital Gains Tax on Property”

What Is the Six-Year Rule for Capital Gains Tax in Australia?

The six-year rule lets you treat your former home as your main residence for up to six years after you move out, even if you rent it out during that time.

This means you can avoid CGT if you sell the property within six years. If you move back in, the six years reset. 

Can You Defer Capital Gains Tax in Australia?

If you’re a small business owner replacing an active asset (an asset you own and use in your business), you may defer the capital gain if you acquire a replacement asset within a specified period.

You can also possibly defer a capital gain if your asset is lost, destroyed, or compulsorily acquired and you acquire a similar replacement asset.

What Is the Exemption of Capital Gains Tax?

The CGT exemption typically applies to your main residence, meaning you don’t pay CGT when selling your home if it meets certain criteria.

Other exemptions include the six-year rule for temporarily rented homes, granny flat arrangements, and small business concessions like the 15-year exemption for qualifying business assets.