• Capital gains tax (CGT)

    A capital gain or capital loss on an asset is the difference between:

    • what it cost you
    • what you receive when you dispose of it.

    Generally, you can ignore a capital gain or loss you make when you sell your home. However, you may have to pay CGT when you sell your home if you have used any part of it for business purposes.

    CGT will not apply if any of the following apply:

    • you operate your business from a rented home
    • you do not have an area specifically set aside for your business activities
    • you operate your business through a company or trust.

    In most cases, the portion of any capital gain on your home that is taxable is the same as the portion for which you could claim a deduction for interest. Generally, this is based on the floor area of your home you have set aside for business, for example 10%.

    You do not have to pay CGT for those periods you did not use your home for your business.

    If you have a capital gain because you use your home for business purposes, you may be able to apply one or more of the small business CGT concessions to reduce your capital gain.

    See also:

    Examples: Will CGT apply?

    Olga (sole trader)

    Olga runs a florist business from her home, which she is paying off. Olga does not have an area set aside for her work but does most of her work on the kitchen table. Olga cannot claim a deduction for any interest she pays on her home loan because she does not have an area set aside exclusively for her business. This means she does not have to worry about the CGT implications of carrying on a home-based business.

    Blake and Chantal (partnership)

    Blake and Chantal operate a life coaching business from their home. They are renting their home so CGT on their home is not an issue for them.

    Harry (company)

    Harry is a travel agent who runs his business as a company from his home. He is paying off his home and has converted a bedroom into an office where he does most of the work for his company.

    Harry does not have to worry about the CGT implications of carrying on a home-based business as the home is used by his company to carry on the business, not by Harry. This means that Harry cannot claim any deductions for the interest he pays on his home loan. However, if Harry charges his company rent for using his home, he may have to work out a capital gain on the sale of his home.

    Example: Using part of your home for business for part of the time you own it - capital gain calculated using the indexation method

    See the indexation method of calculating your capital gain for more information.

    Alex (sole trader)

    Alex purchased his home for $180,000 on 1 January 1991 and started operating his home-based electrical business on 1 January 1994.

    Even though he owned his home outright before he started his business, if he sells his house, he may have to pay CGT on the part of his home he used for his business. This is because he would have been eligible to claim a deduction for interest on money he borrowed to buy the home.

    Alex's workshop covers 10% of the floor area of his home.

    Alex settled the contract for the sale of his home on 31 December 2016 for $330,000. After allowing for purchase costs of $8,000 and selling costs of $12,000, he made a profit of $130,000. Using the indexation method, he works out his capital gain as follows:

    • Step 1: Calculate the capital gain using the indexation method
    • Step 2: Multiply the result by the Percentage of floor area not used as main residence
    • Step 3: Multiply the result by the Percentage of ownership period that part of the home was not used as main residence

    Using the values given in this example the calculation would be:

    • Step 1: ($330,000 - $12,000) - [($180,000 + $8,000) x 68.7÷58.9] = $98,792. $
    • Step 2: $98,792 × 10% = $9,879
    • Step 3: $9,879 x 88% = $8,694

    Example: Using part of your home for business for part of the time you own it (capital gain calculated using the discount method)

    Alex also qualifies to use the discount method for calculating his capital gain. This method is available for asset sales occurring after 21 September 1999, provided he held the asset for 12 months or more.

    Companies cannot use the discount method.

    Using this method, Alex bases his calculation on 50% of the capital gain he made after deducting costs. The taxable capital gain calculation is as follows:

    • Step 1: Multiply the Nominal profit or gain by the CGT discount rate
    • Step 2: Multiply the result by the Percentage of floor area not used as main residence
    • Step 3: Multiply the result by the Percentage of ownership period that part of the home was not used as main residence

    Using the values given in this example the calculation would be:

    • Step 1: $130,000 × 50% = $65,000
    • Step 2: $65,000 × 10% = $6,500
    • Step 3: $6,500 × 88% = $5,720

    Example: CGT concessions

    In the previous example, Alex has made a net capital gain of $8,694 indexation method. If Alex continued his business in his new home or purchased other active business assets, he would be eligible to apply the 50% active asset reduction concession. This means he will only pay tax on half the net capital gain, as follows:

    • Capital gain using index method multiplied by Active asset reduction equals the Net capital gain

    Using the values given in this example the calculation would be:

    $8,694 × 50% = $4,347

    The same 50% reduction would apply if Alex had used the discount CGT method.

    • Capital gain using discount method multiplied by Active asset reduction equals the Net capital gain

    Using the values given in this example the calculation would be:

    $5,720 × 50% = $2,860

    Example: Home first used to produce income after 20 August 1996

    Pam (company)

    Pam, a technical writer who runs her business as a company from her home, purchased her home on 1 November 1995 for $280,000. Her company started operating its business from her home and paying rent to Pam from 1 November 2007. The market value of her home at that time was $300,000.

    Even though she has never claimed a deduction for interest on money she borrowed to buy the house, if she sells the house, Pam may have to work out a capital gain on the part of the home she rented to her company to allow it to carry on the business- that is, the office, which covers 9% of the floor area of the house. This is because she would have been eligible to claim a deduction for mortgage interest.

    Because she first used her home to produce (rental) income after 20 August 1996, Pam can use this special rule to work out her capital gain.

    For example, if Pam had settled the contract on the sale of her home on 31 December 2016 for $330,000, she would work out her capital gain as follows:

    • Step 1: From the Proceeds subtract the Cost base
    • Step 2: Multiply the result by the Percentage of business use

    Using the values given in this example the calculation would be:

    • Step 1: $330,000 − $300,000 = $30,000
    • Step 2: $30,000 × 9% = $2,700

    Pam may also be able to use the small business CGT concessions to further reduce the capital gain.

    End of example
      Last modified: 21 Jun 2017QC 17502