Buying and owning property in Victoria attracts a range of state and federal taxes and duties. It is important that the different types of taxes are understood as some duties and tax issues are complex and require the expertise of a lawyer.
This article series outlines an overview of the most common property taxes in Victoria. This is crucial information for anyone buying and selling real estate, particularly investors and developers.
Property taxes in Victoria are frequently changing; this series provides a clear and practical guide for anyone involved in the real estate industry. Please note that tax laws, thresholds and tax rates are subject to annual revisions, so check the government website for the latest information.
Capital Gains Tax (CGT)
Capital Gains Tax (CGT) is a federal tax on the profit made from selling property or other assets and commenced on 20 September 1985. The gain is added to your income and paid as part of the income tax system.
CGT generally does not normally apply to your primary home/principal place of residence, if you meet the complex exemption criteria. In most circumstances is usually applied to investment properties, commercial properties and other real estate sales.
For individuals, a 50% CGT discount may reduce the taxable gain if the property was held for more than 12 months. Foreign residents are not eligible for this discount and (since 2017) usually cannot claim the main residence exemption, which can lead to significant CGT on sales by non-residents.
CGT withholding obligations
If you are purchasing real estate, there is an obligation to withhold and pay part of the purchase price of the real estate transaction to the ATO.
This obligation commenced in 2016 for an acquisition price of 2 million or more. From 1 July 2017, this reduced to an acquisition price of $750,000 or more.
From 1 January 2015, changes have been made that removed any threshold acquisition price and increased the rate to 15%. The Legal Practitioners' Liability Committee anticipates that these changes will apply to contracts for the disposal of real property entered from 1 January 2025. Please refer to theTreasury Laws Amendment (Tax and other Measures No.1) Act 2024 which amends schedule 1 of the Taxation Administration Act 1953 (Cth).
Further, from 1 January 2025, withholding will apply to all Australian real property transactions regardless of value. The purchaser will be required to withhold and pay 15% of the acquisition price to the ATO, unless the vendor provides a valid clearance certificate or a withholding variation at or before settlement.
CGT is triggered when you dispose property by selling of transferring it, typically at the contract settlement date. Any capital gain or loss is calculated as the difference between the property's sale price (less sale costs) and its cost base (purchase price plus eligible costs of purchase and improvement).
If there is a net gain for the year, then CGT is payable. However, if it's a loss, it can be carried forward to offset future gains. For example, if you bought a vacant lot to develop and later sell it at a profit, that profit is subject to CGT.
Properties acquired before 20 September 1985 are exempt from CGT (as they pre-date the CGT regime).
CGT Foreign Resident Capital Gains Withholding (FRCGW)
FRCGW applies to all Australian property sales, unless the vendor is either:
- An Australian resident for tax purposes and has a valid clearance certificate or
- A foreign resident and has a variation notice reducing the amount to be withheld.
This withholding applies to all Australian real property sales, including residential and commercial.
Up to 31 Dec 2024, this rule applied only for properties valued at $750,000 or more with a 12.5% withholding rate.
From 1 January 2025, the $750,000 threshold is removed, and all property sales require a clearance certificate – the withholding rate also increased to 15% of the sale price. Latest details can be found on the ATO's website.
Australian resident vendors also must obtain a free ATO clearance certificate before settlement and give it to the purchaser, otherwise the buyer must withhold 15% and pay it to the ATO.
Foreign resident sellers can apply for a variation to reduce the withholding if their expected tax will be less than the default amount. If an amount is withheld, the seller later files a tax return to calculate the actual CGT. Any excess withheld (for example, if no tax was ultimately payable) is refunded.
Common Issues for Property Owners
One common issue is failing to plan for CGT. Many landowners overlook the CGT obligation that comes after selling an investment property or land with a large gain. If you're selling a property that has risen substantially in value, CGT can be significant (up to 45% of the gain for individuals, before discounts).
You should budget for this and consider timing the sale for tax planning (something to be discussed with your accountant).
Another issue is not understanding the main residence exemption rules. For example, if you inherit a property or move out and rent your home, CGT may apply in part. Executors should obtain advice from their accountant before distributing any assets to ensure the tax obligations are considered.
Conveyancer vs lawyer
Conveyancers will typically handle the procedural aspects of CGT withholding when you are buying or transferring a property. For example, they check whether a clearance certificate is provided and, if not, arrange for the 15% to be withheld and paid to the ATO at settlement.
However, conveyancers cannot provide advice on income tax or CGT planning. Questions about reducing your CGT are complex income tax law matters beyond a conveyancer's scope and insurance.
For advice on CGT implications (such as structuring a sale, claiming exemptions, or managing a dispute with the ATO) you should consult both an accountant and tax lawyer. A property lawyer can work alongside your accountant to ensure the contract terms and notifications (clearance certificates, etc.) are handled correctly.
In a dispute, a lawyer experienced in tax disputes would be needed to contest the assessment through objections or potential litigation with the ATO. This requires careful consideration and approach to resolve tax disputes effectively.
What are the steps to disputing a CGT assessment?
CGT is assessed as part of your income tax return. If you disagree with how the tax applies (for instance, the ATO disallows an exemption or calculates the gain or penalties incorrectly), you can object to the assessment through the ATO's dispute process. If unresolved you can appeal to the Administrative Appeals Tribunal or Federal Court.
Always seek professional advice in any court-based proceeding. Engaging a lawyer early in a dispute usually leads to a faster and more effective resolution. Tax lawyers are skilled at navigating the legal and procedural issues to ensure that your matter is presented in the best possible light.
Always keep records of your property's purchase and improvement costs, as well as any periods it was your residence, to support your position.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
