Capital Gains Settlement or Contract Date: Which is More Important?

When it comes to buying and selling assets, particularly real estate, capital gains tax is an important consideration. A common question that arises is: which date is more important for determining capital gains tax – the settlement date or the contract date?

The answer to that question is ultimately dependent on individual circumstances, but let’s examine the factors that could make one date more important than the other.

Settlement Date

The settlement date is the date on which ownership of the asset is transferred from the seller to the buyer, and the balance of the purchase price is paid. This is the date on which any capital gains tax liability is triggered.

If you’re a seller, the settlement date is the date on which you’ll realise your capital gain or loss and must include it in your tax return for that financial year. If the asset has been held for more than 12 months, then you may be eligible for a discount on the capital gains tax amount.

If you’re a buyer, the settlement date is the date on which you’ll take legal ownership of the asset. However, since you didn’t own the asset prior to this date, you don’t have any capital gains tax liability until you eventually sell it.

Contract Date

The contract date is the date on which the contract of sale is signed by both the buyer and seller. The contract date can be important in situations where the settlement date is delayed.

If you’re a seller, you’ll be considered to have sold the asset on the contract date if the settlement occurs within 12 months. This means that if you sign a contract on 30 June but the settlement is delayed until 31 July, you’ll be taxed on the capital gain or loss in the financial year in which the contract was signed.

If you’re a buyer, the contract date is important if you decide to terminate the contract before the settlement date. If you terminate the contract and the asset increases in value between the contract date and the settlement date, you may still be liable to pay capital gains tax.

Conclusion

In summary, both the settlement date and contract date can be important for determining capital gains tax liability, depending on the individual circumstances of the transaction. The settlement date is the date on which any capital gains tax liability is triggered, while the contract date can be important in situations where the settlement is delayed or the contract is terminated.

It’s important to seek advice from a tax professional to ensure that you’re meeting your obligations and making the best decisions for your financial situation.