Borrowing to pay tax


Question: I own an investment unit on the Sunshine Coast worth about $360,000 and have been renting in Brisbane. I’m thinking about selling the unit so I can buy my first home closer to where I work. I bought the unit about five years ago for $250,000 so I guess I have about $110,000 in capital gains, before sale costs. I’d rather put my money towards the house deposit than pay the CGT. Is it possible to borrow from the bank to pay the CGT and then claim this as a tax deduction?

Answer: No. For interest to be deductible under section 8-1 of the Income Tax Assessment Act 1997, it must be either incurred in gaining or producing assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing such income (Ref. TD2000/24 & TR95/25).

Also remember that you get a 50% discount on the capital gain, so although you’ve made a capital gain of $110,000, the Australian Taxation Office discounts this by 50%, meaning the income you pay tax on is approximately $55,000 – this amount gets added to your income and you pay tax on this.

If you were paying tax at the highest rate, the worst case scenario would be a tax bill of around $25,000, and don’t forget you can subtract selling costs like agent commissions and legals from this capital gain of $110,000 before the 50% discount is applied, reducing the tax even further.


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