Keeping track – records needed for Capital Gains Tax purposes
When you sell an investment, especially a property, you have a pretty good idea of what capital gain you have made. But do you really know what the cost of the property was, and what you sold it for?
In the last newsletter we looked at the tax deductions available for investment property and we mentioned the acquisition and disposal costs. Acquisition costs include stamp duty and legal fees, and disposal costs include commission on the sale, legal fees, and advertising.
If you have spent anything to increase or preserve the value of your property, and you have not been able to claim a deduction or depreciation, it is included in the cost base.
This is best illustrated by way of example.
Fred and Mary bought a piece of land in 1993 for $100,000, borrowing $70,000 on a five-year 8% fixed interest loan. Annual rates were $880. In 1998, they built a house on the land for $130,000 and spent a further $25,000 on fencing, landscaping and installing a pool. From 2000 to 2007 they rented the house out and sold it in 2008 for $375,000 after spending $10,000 repainting and repairing. Legal fees on the purchase and sale were $1,000 each time. The normal agent commission of 2.5% applied on the sale and Fred and Mary paid advertising costs of $1,500.
|
Cost of land |
$100,000 |
|
Stamp duty |
$600 |
|
Legal fees |
$1,000 |
|
Interest on borrowings - five years |
$28,000 |
|
Rates |
$4,400 |
|
House costs |
$130,000 |
|
Landscaping and fencing |
$25,000 |
|
Painting and repairing |
$10,000 |
|
|
|
|
Total cost of acquisition |
$299,000 |
|
|
|
|
Sale price |
$375,000 |
|
Less sales commission |
-$9,375 |
|
Advertising |
-$1,500 |
|
Legal fees |
-$1,000 |
|
|
|
|
|
$363,125 |
|
|
|
|
Net capital gain |
$64,125 |
What records do you need to keep for other investments?
The cost of shares and managed funds includes stamp duty and brokerage. It also includes additional units or shares purchased with reinvested dividends and distributions if you take advantage of dividend reinvestment.
Distributions from managed funds may include a tax-deferred portion that represents depreciation allowances used by the fund manager in calculating the profit to be distributed. When calculating capital gain, the cost base of the managed fund can be reduced by the tax-deferred component of your distributions.
Maintaining good records makes it easy to calculate accurate capital gains, which means that you won’t pay more tax than is required by law.
