Capital Gain Tax reduction on a lease-option deal

Hi Cris,
Keep in mind that many times the seller may not need to pay ANY CGT. Main one is if they are selling you their PPOR. It is probably important that you know just how a sale affects the seller, so you can create a deal that they can say “Yes” to, eh?

Then, as you say, there may be other ways to assist – e.g. if you are paying Rent for 5 years, then that could perhaps be treated differently to a Deposit payment (or, would it?). Now, I don’t know of just what can/can’t work, but it could be that there will be a different treatment of monies on an ordinary sale when compared to a Lease Option sale.

Perhaps check some of these with the POAA crew – here http://www.poaa.asn.au/ If I have it right, many of those in that group are using alternate methods of selling/renting properties. Some are around as members on here – maybe one of them will stop by to offer you some ideas.

Re CGT and its calculation, you are right in that the total profit is taxed appropriately depending on the seller, and will often be less than 25% of the total profit gained (based on the 50% discount if owned longer than 12 months, and then taxed at the seller’s Marginal Tax Rate). So, the amount paid could be quite different for each seller.

Good luck with your hunting down of the information you need,

Benny

Hi Cris,
PPOR = Principal Place of Residence = their own home (or once was – conditions apply).

and Cris, I am not sure how you got this :-

and initial CGT is 25% of capital gain

…so let me give you an example of CGT that I am reasonably sure will be somewhat correct (as I am unfamiliar with Lease/Options and payments being Rent, or not, I will leave that part out). Here is a simple CGT calculation:-

Using some of your numbers :-
Cost Base = Vendor purchase price + purchase costs ($20k) + any renovation costs (let’s say $0) = $300k +$20k = $320k

Sale Price = $400k – selling costs ($10k) = $390k

Capital Gain = Sale Price – Cost Base = 390 – 320 = $70k

Thus, working out Capital Gain Tax assuming the seller owned the place longer than 12 months, and assuming it was NOT his PPOR is like this:-

Taxable Gain = CG of $70k x 50% x Marginal Tax Rate = $35k x Marginal Tax Rate. So, HOW do we calculate Marginal Tax? Something like this…. If seller earns $40k per annum (and currently pays Tax on that amount of $3670), then the $35k is added to his Income for that year to total $75k, then taxed for the year at the appropriate marginal rate to pay a total of $12,300 (this from the personal tax rates for 2015/16).

Now, subtract the tax they WOULD have paid if no sale had occurred ($12,300 less $3670) = $9k approximately.

Note that I DIDN’T add in any Levies (Medicare, etc) so some small differences would come into it. But that should give you a better idea of how CGT is calculated – it is not overly straight forward, but also not impossible to understand…..

Now, I don’t quite understand that first phrase of yours (the one I highlighted) but your calculation of CGT came out remarkably close to mine. So maybe your guess was pretty good, or maybe you DO understand it and had used what made sense to you to arrive at the right answer. Well done…. ;)

Benny

PS For anyone reading, I am not an accountant or other licenced adviser – so the above is all how “I think it works”. I could be wrong !! Get proper advice rather than depending on the above…..