We were wondering about ChatGPT’s proficiency in working with the Australian tax system, without any intention of being overly suspicious. First and foremost, we were impressed with ChatGPT’s tone and approach. However, our testing revealed that while ChatGPT may provide some general comments that are reasonably accurate, it may not be able to provide reliable answers on tax matters.
Additionally, much of the technical commentary on tax is tied up in personal advice, which may not be readily available for ChatGPT to explore online, so it is unlikely that ChatGPT will become proficient in this area anytime soon.
Below are the outcomes of their test question and accompanying commentary, with ChatGPT’s response displayed in italics.
Question to ChatGpt: How much capital gains tax does an Australian resident pay on an investment property with a worked example?
ChatGPT: As an Australian resident, if you sell an investment property, you are liable to pay capital gains tax (CGT) on the profit earned. To calculate the CGT, you subtract the total cost of the property (which includes the purchase price and any expenses incurred while acquiring and owning the property) from the sale price. For instance, if you purchased an investment property for $500,000 and incurred expenses of $50,000 on legal fees, stamp duty, and repairs, the total cost of the property would be $550,000.
Accountant: It’s important to take stock and consider the tricks and traps involved in determining an asset’s cost base. While repair costs may sometimes be included in a property’s cost base, this isn’t always the case, especially when selling an investment property that has been rented out. Landlords can deduct repair costs incurred while the property is rented, so they should not be included in the property’s cost base. Additionally, adjustments should be made to account for capital works deductions, which can be claimed by landlords who derive rental income from an investment property. If the property was acquired before May 13, 1997, and the cost of improvements was incurred before June 30, 1999, there is an exception to reducing the property’s cost base. The longer the ownership period, the more significant the impact of capital works deductions and repair costs on the capital gain calculation.
ChatGPT: When the Australian resident sells their investment property for $700,000 after several years, the profit is calculated by subtracting the property’s total cost of $550,000 from the sale price, resulting in a profit of $150,000. The current CGT rate in Australia is 45%, meaning the resident will owe 45% of the $150,000 profit, which amounts to $67,500.
Accountant: Let’s examine the calculation more closely. There isn’t a specific CGT rate of 45%. Net capital gains are included in an individual’s assessable income, which is used to determine their taxable income for the relevant income year. If the taxable income figure is positive, the individual’s marginal tax rates are applied.
To clarify, higher taxable income typically results in a higher tax bracket and a higher tax rate. In other words, an individual’s tax rate on net capital gains is affected by their other income or losses (if any).
Furthermore, while the highest marginal tax rate for individuals is currently 45% for every dollar of taxable income over $180,000, Australian residents are usually also subject to a 2% Medicare levy. This should be taken into account and considered in the calculation.
ChatGPT: It is important to mention that there are some exemptions and reductions available that can be applied to the CGT calculation. These include the main residence exemption and the small business CGT concessions.
Accountant: It is important to note that the CGT calculation can become more complex due to certain exemptions and reductions that may apply. Although the main residence exemption and small business CGT concessions were mentioned, these concessions are not usually applicable when selling an investment property.
For the main residence exemption to be available, the property must have been established and used as the individual’s main residence, which is unlikely to be the case for an investment property. Similarly, the small business CGT concessions usually only apply if the property passes the active asset test, which may not be met if the property has been solely used to derive rent.
It is worth mentioning that the general CGT discount or indexation may be the most applicable concessions for this situation. If the seller is an Australian resident and has owned the property for over 12 months, the 50% CGT general discount could be used to reduce the capital gain. Alternatively, if the property was acquired before 21 September 1999, indexation of the cost base may be applicable. It is recommended to compare both options to determine the most favourable result.
ChatGPT: It’s recommended to seek guidance from a tax expert to understand the exact tax consequences of disposing of an investment property.
Accountant: Absolutely! Thank you ChatGPT!
Key takeaway
As an AI language model, ChatGPT has been trained on a wide range of topics, including tax. ChatGPT can provide information on tax laws, regulations, and rules, as well as offer insights into the tax implications of different financial decisions.
However, it is important to note that tax laws and regulations can be complex and subject to change. It is always advisable to consult with a qualified tax professional for specific advice related to your individual circumstances.
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