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How Does Capital Gains Tax Work When Buying Or Selling Off-The-Plan

Daniel Chadrawy on May 13, 2022

Ugh. Taxes. They’re not everyone’s best friend.

They are, however, a part of life. Ben Franklin once noted that in this world, nothing can be said to be certain, except death and taxes. Ben Franklin died in 1790. Over 200 years later, we’re still dealing with taxes. He was certainly on the money (pardon the pun).

We digress, the real reason we’re here today is not, in fact, to whinge about taxes behind their back, but to inform you of the ins and outs of capital gains tax (CGT) when it comes time for the purchase or sale of an off-the-plan property. Understanding how CGT works now will help you later on when it comes time to complete your tax return after you sell.

Keep reading this article to learn about capital gain, capital losses and how off-the-plan investment properties offer a range of benefits, even when CGT is taken into account.

What Is ‘Off-The-Plan’?

Essentially, buying off-the-plan means you’re buying a property while it is still in the planning, development or construction stages. As the purchaser, before you sign the contract, you will generally be able to see a floorplan and the location of the property, as well as having some input into appliances, colour schemes and fittings, but not too much else until you settle.

Free Silhouette of Crane Near High Rise Buildings during Sunset Stock Photo

How Does ‘Off-The-Plan’ Work?

Off-the-plan investors will generally be up for a deposit of around 10%-15%, but in some circumstances, it can be as low as 5%.

The balance is then paid only once the property has been fully constructed, which poses quite a few advantages to buyers.

Considering it can take 12-18 months for an off-the-plan property to be ready for settlement, this allows the purchaser more time to save before payments like stamp duty buying fees is required. On top of this, the far-off due date allows an extended period to act if you’re attempting to find a buyer for a property you currently own to fund the purchase of your new investment.

As a prospective off-the-plan buyer, it’s generally not too hard to find more information about the contract the deposit and everything in between, if you know where to look. (the Liviti website is a great place to start).

What Does It Mean To Pay Capital Gains Tax?

Alright, we’re back to the nitty-gritty tax talk. Bear with us here. It may be boring, but it’s important to know this stuff before entering into an off-the-plan contract you plan to sell in future.

Capital gains tax is managed by the ATO, calculated as part of your income tax and is applicable to all properties (with one or two exceptions, but more on those later in this article).

CGT applies to properties acquired post-1985, as this is when CGT was introduced.

For taxpayers, CGT is applied to any capital gains you’ve made within the financial year. A capital gain refers to a profit made on the sale of any assets.

capital gains tax when buying or selling off-the-plan

Sale Price – (Purchase Price + Costs) = Profit.

For example, if you purchase a home for $500,000, sell it for $800,000 and incur $50,000 worth of costs in the process of buying, owning and selling it, your profit would work out to be $800,000 – ($500,000 + $50,000) = $250,000. That $250,000 is what you would pay CGT on.

What Is The Ideal Amount Of Capital Gain Tax?

It’s important to realise that there really is no specific capital gains tax amount that is ideal, on the whole. It truly does depend on individual circumstances.

As your capital gain increases, your capital gain tax will also increase and will depend on factors like the amount of time you’ve owned the property, your marginal tax rate, and more.

How To Calculate Capital Gain Tax

We’re going to try and simplify this as much as we can because nobody wants to spend time reading tax info. Here goes…

By law, you pay CGT as part of your annual income tax. Essentially, there’s no specific CGT tax rate applied, but the tax rate is subject to your total income which will include any applicable capital gains (or capital losses).

Here are a few examples of different ways one might complete their CGT calculations…

1. Discount Method

This method allows you to reduce your capital gains if you sell the asset after a period of more than 12 months of holding it. A discount of 50% may be applied in this case.

So, if you make $205, 000 profit, you would only pay CGT tax on the $102, 500 gained.

Follow this formula…

  1. Asset Sale Price – Cost Base = Capital Proceeds
  2. Capital Proceeds x 50% = Capital Gain

2. Indexation Method

This allows you to increase the cost base by applying an indexation based on the Consumer Price Index (CPI), up to September 1999.

Follow this formula…

  1. CPI for Quarter of CGT Event ÷ CPI for Quarter when Expenditure Occurred = Indexation Factor
  2. Capital Proceeds x Indexation Factor = Capital Gain

No matter how you plan on calculating CGT, it’s super important to consult with a tax specialist so you don’t end up with the tax department hot on your heels.

Capital Gains Tax For Foreign Residents

If you are a foreign resident and an investor in off-the-plan property in Australia, your CGT calculations will slightly differ.

You will be required to pay GCT on taxable Australian properties that you sell, worth more than $750,000.

Unfortunately, some CGT exemptions and discounts will not be applied. For example, when being taxed you will likely not be eligible for the 50% CGT discount when you make a capital gain after holding the property for more than 12 months (unless you purchased the property before 8th May 2012).

The good news is that any assets signed over to you in an acquisition before CGT started on 20 September 1985 are not subject to it when re-sold.

Tax Planning For Off-The-Plan Apartment Purchasing

When it comes to tax for off-the-plan apartments, it’s important to know how CGT might affect the property before settlement and eventually when the property is sold.

Having a plan for the method of CGT you or your tax agent is likely to use when the time comes is good to know from the get-go.

Certain items can be used to make tax deductions and work to lower CGT including rental advertising, interest on the loan, strata fees, stamp duty, depreciation and repairs/maintenance, so keep these in mind.

Again, it is so important to contact a tax specialist to make sure you’re able to take advantage of these tax benefits before purchasing off-the-plan property in Australia.

How Can You Avoid Paying Capital Gains Tax?

Often, by making the property a principal place of residence (PPOR), investors can get away with not being taxed for GCT.

Here’s the deal…

The property must have a dwelling on it and it must be your PPOR, meaning it is where you live, where your personal belongings are, where your mail is delivered, etc.

Free Little Girl Playing in a Box Stock Photo

An exemption is available if PPORs eventually become a rental property, as long as it sells within 6 years of becoming a rental AND no other property is listed as your PPOR. If you reoccupy the property as a PPOR before the 6 years is up, the exemption resets.

As for discounts, investors who have held an asset for more than a year-long period may be eligible for a 50% discount on capital gains tax once its sale is completed. There’s also the possibility of tax discounts if the property is purchased by a self-managed super fund.

Again, all of this is dependent on circumstances. Please seek expert advice before agreeing to a contract, paying a deposit or planning a sale.

Selling An Off-The-Plan Property Before Settlement

Can You Sell Off-The-Plan Properties Before Settlement?

Yep! Off-the-plan properties often provide the opportunity within the contract to re-sell in the time period before settlement which is an awesome advantage to buyers.

If circumstances change prior to settlement, you may be able to sell up and hand the signed agreement over to a new buyer (kind of like when you have a gym membership and you literally never go so you find someone else to take over the contract instead…yeah, we’ve all been there).

Making a tidy profit from pre-settlement sales is possible if you’re clever about it.

How To Sell Off-The-Plan Property Before Settlement?

Firstly, consider whether the developer will allow a re-sale on an unconditional contract prior to settlement. Always check the fine print in the contract and have a legal expert confirm whether a re-sale is possible.

Once the legal stuff has been a-okayed, here are a few tips…

  • Timing is key! Try and allow at least 6 months from the expected completion date to give the property a good chance at selling before it’s due to settle.
  • Hire an agent to market the property for you. They can promote through their website, sales agents or online platforms!

Things Consider When Selling An Off-The-Plan Investment Property Before Settlement

If re-selling prior to settlement, it’s important for investors to consider the need to pay stamp duty when the property is re-sold, cover any additional legal fees for solicitor services and marketing fees if you use an agency, plus, our old friend CGT will rear its ugly head in the same tax period.

Most importantly, remember that you do remain bound to the developer after signing if no other buyer will take on the title.

calculate capital gains tax

Where To Find Information On Capital Gains Tax Selling Off-The-Plan?

As always, a qualified tax agent or solicitor is your best bet for feedback on the nitty-gritty stuff, but if you’re still confused about any aspects of CGT and buying/selling an off-the-plan property, don’t hesitate to get in touch with our team here at Liviti.

You can get in contact with us or view our available properties.

Remember, CGT might suck but it doesn’t have to be hard to manage if you work with the right people.

Strata Fees: We Answered 8 of Your Questions

Daniel Chadrawy on April 11, 2022

Strata is a concept that is often overlooked when purchasing a property. We get it, it’s not an easy thing to wrap your head around, especially if there is no one there to explain it to you.

That’s where we come in – providing you with the answers to the top questions you have on strata and maybe even to the ones you didn’t even think to ask!

1. What is a strata scheme?

A strata scheme is a process of handling the legal ownership of a shared building or land. This ownership is known as a strata title. By purchasing a property in a strata scheme, you are buying a portion of that property and its common areas to own rather than the entire complex.

These buildings can be residential or commercial like:

  • Apartment blocks
  • Villas
  • Townhouses
  • Duplexes
  • Office buildings
  • Warehouses
  • Storage units
  • Factories

And the common areas of a property can include:

  • Rooftops
  • Gardens
  • Pools
  • Courtyards
  • Hallways
  • Car parks
  • Shared laundry
  • Stairwells
  • Lobbies
  • Lifts
  • Driveways
  • The exterior of the building

Each owner is then a part of the property’s owners corporation, who are all responsible for its maintenance and upkeep.

2. What are strata fees?

Strata fees, also commonly known as strata levies, are the regular payments that you need to pay regularly to contribute towards the upkeep and maintenance of the strata property, or body corporate. Although this can vary from property to property, generally, these levies are paid and collected quarterly.

3. What do strata fees cover?

These fees are paid by the owners’ corporation, a.k.a. you if you and your fellow owners, to keep the strata scheme in standard condition. Although every body corporate will have different strata levies in terms of price and coverage, they usually include:

  • Building maintenance and upkeep
  • Building insurance
  • The maintenance and upkeep of the building’s common areas
  • The maintenance and upkeep of communal amenities
  • Strata management fees
  • Utilities for any common areas like electricity & water
  • Periodic and unexpected repairs

These are categorised into three different categories in order the keep the scheme running smoothly and may also determine the frequency at which they are paid.

The categories include:

  • Administrative fund levy
  • Sinking fund levy
  • Special levy

Let’s look a bit closer at what these categories are and what they cover.

Administrative Fund levies

Administrative fund levies cover the daily running costs of the strata building including the private and common areas as well as any necessary admin work.

These can include:

  • Shared cleaning bills
  • Shared utility bills
  • Garden maintenance
  • Facility management fees
  • Maintenance and repairs
  • Other administrative work

Basically, anything that gets used every day has a bill that needs to be paid. Turned on a light? Electricity bill. Noticed how pretty the garden looks? Must have recently been maintained. Garden maintenance bill.

Sinking Fund Levies

Sinking fund levies, also known as capital works funds, cover the ongoing larger expenses of strata complexes. These are usually anticipated expenses but can also include any potential unexpected costs incurred that aren’t fully covered by the building insurance.

These can include:

  • Painting
  • Exterior repairs
  • Flooring, carpet and pathway maintenance or replacement
  • Lift maintenance
  • Common area maintenance or replacement

Most people like to think ahead and plan for the worst. Forget the fear of having to fork out a large sum of money to cover the elevator that just randomly broke down. This isn’t The Big Bang Theory, the sinking fund will take care of it and ensure it gets fixed in no time.

Special Strata Levies

Special levies cover the unexpected expenses incurred that a sinking fund cannot. These often occur when these circumstances relate to something that can be hazardous to the residents of the scheme. It is common though for the owners’ corporation to contribute more to the other categories instead, however, if a problem arises suddenly it is ideal to have a fund prepared for special levies.

Special levies can include:

  • Severe building defects
  • Severe weather damage
  • Emergency maintenance

4. Who is responsible for paying Strata Fees?

It is important to note that strata fees are not paid by the tenants of the building but by its lot owners, again that’s you! But people can be busy. How many times have you forgotten all about your bills and paid at the last minute? It happens. That’s why a strata manager is often appointed by the owners’ corporation to manage the property’s strata levies and oversee the entire process for them.

The role of a strata manager is usually to:

  • Work out how much money the other owners need to individually contribute
  • Collect the money on your behalf
  • Oversee the day to day running of the property – working out a payment plan, budgeting costs, paying invoices, organising strata meetings
  • Pay strata levies on behalf of the strata owners

5. How are strata fees calculated?

Usually, the strata manager is the one in charge of calculating how much is needed for the administrative fund and sinking fund levies and creating the payment schedule.

However, for off the plan purchases, it is very important that the strata fees are calculated by an experienced quantity surveyor or property valuer at the beginning of the building’s construction. They have the responsibility of surveying all of the potential expenses, calculating the fees that need to be paid and creating a schedule by which they should be paid.

At the first annual general meeting or AGM, following this, body corporates determine the levies for the lot owners. They are presented with the predetermined budget and vote on the levy motion. In order to approve the levy motion, a 75% vote is required by the other owners.

Strata fees can vary between developments because of the significant elements that need to be taken into consideration when making budget and levy calculations. For property investors, it is important to be aware of these and how they may influence the average strata fees before purchasing a property, for example, some factors of a property can determine higher levies than others.

These can include:

  • The age of the building – older buildings may need more maintenance and repairs
  • The building’s condition – buildings that are quite rundown and damaged will require more repairs and upkeep
  • The building’s location – properties that are closer to the sea tend to deteriorate and corrode quickly due to their exposure to the water and high wind pressure.
  • The size of the building – a larger building complex will require maintenance and upkeep more frequently to accommodate for the number of ‘units’ and communal areas.
  • The building’s facilities – levies need to accommodate for facilities like swimming pools, lifts and gyms that need maintenance and repairs so the more amenities a building has, the more bills there are to pay.
  • the building’s services and common property – cleaning and gardening services require payments in order to keep common areas of a scheme organised and tidy. It is also important to factor in the utility bills like water and lighting in these areas that need to be paid.

6. Are strata fees tax deductible?

Strata fees can be seen as a means of maintaining and improving your asset to continue generating an income. So typically, if you are a property investor, your strata levies are tax-deductible.

You should keep records of all of the incurred expenses to determine what can be claimed. It is a good idea to consult a tax professional to be sure that this claim is acceptable. If the strata fee falls into the special fund or capital expenditure a deduction most likely won’t be claimed. Not to worry though because if it is from the administrative or capital works fund, which most are, then usually it CAN be claimed. YAY!

7. What happens if you don’t pay your strata fees?

As these fees need to be quarterly, there are long periods in between where you can sort out your financial situation and budget well in order to make these payments on time. However, lie most legal matters, failure to comply will mean penalties apply as this places financial and emotional stress on the owners’ corporation and strata managers who have to make up for the shortfall. A lot of owners who fails to pay their fees are labelled as “unfinancial” and may lose some important rights like the ability to vote at AGMs and will develop a debt.

An unfinancial owner’s debt will acquire interest on the overdue amount at a traditional rate of 10% per annum. If it is unpaid for long enough a debt collector or solicitor may be called to recover the debt but if it remains unpaid then the owners’ corporation can file legal action in the NSW Civil and Administrative Tribunal (NCAT).

8. What are strata bylaws?

As in any legal process, laws are required to ensure it runs smoothly and in a fair and organised manner. Strata laws are enforced by the building management to encourage communal living and protect the rights of the owners and other tenants of the strata property.

These laws mostly cover the responsibilities relating to the common property and facilities like laundry, parking and maintenance.

This ensures that every resident does their role to ensure a peaceful and respectful environment for living. Any breach of the strata by-laws might result in penalties occurring some of which might even be legal.

Conclusion

So now that you know a bit more about strata, go ahead and apply that newfound understanding to your next property investment. Find out as much as you can about the property and try and determine how much you could potentially pay in strata levies as part of the body corporate.

Liviti is dedicated to providing you with the right information that you need to find your dream home.

If you have any more questions reach out to us here or give us a call at (02) 9056 4311. One of our trusted strata experts would be more than happy to provide further clarification and guide you through any more queries that you may have on this topic.