With ChatGPT taking the world by storm, is Artificial Intelligence (AI) set to replace professional financial advice?
We were curious about the skills of the latest introduction to the AI world, ChatGPT. So, we decided to put it to the test and see how it handles the Australian tax system.
We asked ChatGPT a common question relating to Capital Gains Tax, to test the validity and reliability of its knowledge.
Here are the results of our interaction with ChatGPT, to see just how effective it is when it comes to understanding and providing tax advice.
Aussie Tax System Q&A with ChatGPT
Our Question: How much Capital Gains Tax does an Australian resident pay on an investment property?
ChatGPT’s Answer: An Australian resident pays capital gains tax (CGT) on the profit made from selling an investment property. The CGT is calculated by subtracting the cost of the property (purchase price plus any costs associated with acquiring and owning the property) from the sale price.
For example, let’s say an Australian resident purchased an investment property for $500,000 and spent $50,000 on costs associated with acquiring and owning the property (such as legal fees, stamp duty, and repairs). The total cost of the property is $550,000.
Stop! Let’s take stock.
There are some expert tricks and traps that need to be considered when working out an asset’s cost base.
#1 – Repair costs aren’t always part of a property’s cost base. Where the asset is a tenant-rented investment property, and damage occurs that require maintenance or repairs, these will often be deductible to the landlord, and therefore should not be included in the property’s cost base.
#2 – Adjustments must be made to the cost base where there is any capital works deductions. Landlords can often claim capital works deductions when the investment property derives assessable rental income. The cost base should then be reduced by capital works deductions that have been or could be claimed by the landlord (unless the property was acquired before 13 May 1997 and the cost of improvements was incurred by 30 June 1999).
The longer the period of ownership, the more likely that capital works deductions and repair costs can end up being quite significant and have a material impact on the Capital Gain calculation.
ChatGPT: After several years, the resident decides to sell the property for $700,000. The profit made from the sale is $700,000 – $550,000 = $150,000. The CGT rate in Australia is currently at 45% and the resident will pay 45% of the $150,000 profit, which is $67,500.
Hold up! Let’s take a closer look at that calculation.
There is no CGT rate of 45% that applies specifically to Capital Gains. Net Capital Gains form part of an individual taxpayer’s assessable income, which is then used to calculate the individual’s taxable income for the relevant year. If there is a positive taxable income figure, then we apply the individual’s marginal tax rates.
A higher taxable income normally results in a higher tax bracket and a higher rate of tax, but can be impacted by the individual’s other income or losses (if any). And while the highest marginal tax rate for individuals is currently 45% for each dollar of taxable income above $180,000, 2% Medicare levy for Australian residents must also be factored in.
ChatGPT: It’s worth noting that there are certain exemptions and reductions that can be applied to the CGT calculation, such as the main residence exemption and the small business CGT concessions.
Ah, if only tax was that simple! There are certain exemptions and reductions that can apply to Capital Gains. While ChatGPT mentions the main residence exemption and the small business CGT concessions, these concessions do not normally apply to the sale of an investment property.
For the main (or partial main) residence exemption to be available, a key condition is that property must not have been established and used as the individual’s main residence. The exemption is unlikely to be available if the property has been used solely as an investment property to derive assessable rental income.
Also, the small business CGT concessions would not normally apply to the sale of an investment property. Concessions can only apply if the asset passes an active asset test, which requires the property to have been used in qualifying business activities for a minimum period of time.
Assets used in a business carried on by the owner or certain related parties can often be treated as active assets for the purpose of these concessions, but there is a specific exception for assets used mainly to derive rent from unrelated parties.
If the property has been solely used to derive rent (even in a rental business) from unrelated parties, the property will likely fail the active asset test and the small business CGT concessions won’t be available.
Interestingly, the answer didn’t refer to the general CGT discount or indexation, which are the most likely concessions that would apply in this situation.
If the seller is a permanent Australian resident during the period they owned the property, and they’ve owned the property for more than 12 months, the 50% CGT general discount would often be available to reduce the Capital Gain.
If the property was acquired before 21 September 1999, indexation of the cost base could be available instead. It would be necessary to compare both options to see which provides the more favourable result.
Any final words, ChatGPT?
ChatGPT: It is strongly advised that you consult with a tax or finance professional to determine the specific tax implications of selling an investment property.
Yes, yes it is. Thank you ChatGPT.
There you have it! We were pretty impressed by its tone and approach, and most general comments are reasonably accurate. However it’s unlikely you’ll get reliable advice on the complexities of the Australian tax system from ChatGPT.
As for AI replacing financial advice all together? Stress less! I don’t think we’re getting there any time soon.
So don’t worry about the robot apocalypse just yet. If ChatGPT can’t even handle the Australian tax system, what chance does it have of taking over the world? Maybe we should just stick to using it for simpler questions, like “What’s the meaning of life?”.
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