Capital gains tax is a tax on the profit when you sell (or ‘dispose of’) something (an ‘asset’) that’s increased in value. It’s the gain you make that’s taxed, not the amount of money you receive.
What is capital gains tax?
Capital gains tax (CGT) is a tax on the profit when you sell (or ‘dispose of’) something (an ‘asset’) that’s increased in value. It’s the gain you make that’s taxed, not the amount of money you receive.
For example, you buy shares for $5,000 and sell them for $7,500. Your capital gain is $2,500. This is the amount that’s included in your assessable income.
You pay CGT when you:
- sell (or dispose of) a CGT asset – for example, shares or an investment property
- receive a capital gain – for example, a distribution from a trust
- are considered to have disposed of an asset – for example, under a contract to sell something even though you haven’t settled the contract.
You don’t pay CGT when you:
- sell your main residence (the home you live in)
- sell most personal use assets – for example, a boat for private use, furniture, or household electrical goods
- sell collectables worth $500 or less
- receive exempt income – for example, most lottery winnings.
Note that while you don’t pay CGT on any profit from selling your home, you may have to pay CGT on any part of the home used to produce income – for example, if part of the home was used as a business.
How is capital gains tax calculated?
To work out your capital gain you:
- work out your capital proceeds – usually the money you made when you disposed of your asset
- take away your cost base – generally what you paid for your asset
You then make some adjustments and apply any exemptions and discounts that apply.
For example:
- You bought a rental property for $300,000
- You later sold the property for $500,000
- Your capital proceeds are $500,000
- Your cost base is $300,000
- So your capital gain is $200,000
This $200,000 is then included in your assessable income for the year and taxed accordingly at your marginal tax rate.
However there are some adjustments that may reduce your capital gain:
Adjustments
You may be able to reduce your capital gain by certain costs associated with buying, holding and disposing of the asset. This can include:
- Costs incurred when buying the asset like conveyancing fees, settlement fees or stamp duty
- Costs incurred while holding the asset like interest on loans used to finance the asset
- Costs incurred when disposing of the asset like advertising and commission fees
Exemptions and Discounts
You may also reduce your capital gain or eliminate it completely through exemptions and discounts including:
- Main residence exemption – no CGT is payable on the sale of your main residence
- Pre-CGT assets – assets purchased before September 20, 1985 do not incur CGT
- Small business exemptions – exemptions may apply for small business assets held for at least 1 year
- 50% discount – individuals and trusts may claim a 50% discount on capital gains from assets held for at least 12 months
Taking into account possible reductions, the $200,000 capital gain in the previous example would become:
- Original capital gain: $200,000
- Minus 50% CGT discount (held for over 12 months): -$100,000
- Assessable capital gain: $100,000
This $100,000 would then be included in your assessable income for the year.
What assets does capital gains tax apply to?
You may have a capital gain or loss when you dispose of a Capital Gains Tax (CGT) asset. Almost any kind of asset can be a CGT asset, including:
- Shares
- Investment property
- Holiday homes
- Units and townhouses
- Collectables like art, jewelry or antiques
- Licenses or statutory rights
- Goodwill
- Cryptocurrency like Bitcoin
- Foreign currency gains
Your main residence is generally exempt from CGT. Most personal use assets are also exempt – for example, furniture, home appliances or motor vehicles not used for income producing purposes.
When do you pay capital gains tax?
You must declare capital gains and losses in the income year you dispose of the CGT asset.
You dispose of a CGT asset when you:
- Sell it
- Give it away
- Lose it or it’s destroyed
- Convert it to another asset type
- Stop using it for income producing purposes (even if you still own it)
The time of disposal depends on the type of asset:
| Asset Type | Time of Disposal |
|---|---|
| Shares | Date contract notes are received |
| Real estate | Date when change of ownership occurs |
| Depreciating assets | Date asset stopped being used for income producing purposes |
| Cryptocurrency | Date you receive payment in return for the cryptocurrency |
Your capital gain or loss must then be reported in your income tax return for that financial year.
Are there limits on capital losses?
If you make a capital loss, you can use it to reduce capital gains you make in the same or a later year.
You can’t reduce your income with a capital loss. For example, if you have salary of $100,000 and a capital loss of $10,000, your taxable income remains $100,000.
However, you can carry forward unused capital losses to future tax years to offset future capital gains.
When carrying forward a capital loss:
- Individuals, trusts and SMSFs can carry forward losses indefinitely.
- Companies can carry forward losses for as long as they continue operating.
Who pays capital gains tax?
Individuals, companies, trusts and complying super funds may need to pay CGT if they dispose of an asset for a capital gain in that financial year.
If you’re an individual with a capital gain, the CGT is included in your assessable income for the year and taxed at your marginal tax rate. This could be:
- 0% – for low income earners below the tax-free threshold
- 19% – 32.5% – depending on your taxable income
- 45% – for income over $180,000
Companies pay CGT on capital gains at the company tax rate, which is currently 30% or 25% for Base Rate Entities.
Trusts pay CGT at the top individual marginal rate, which is 47% in the 2022-23 year including the Medicare levy.
Complying super funds pay CGT on assets held for less than 12 months at 15%. Funds pay CGT at 10% on assets held longer than 12 months.
Avoiding capital gains tax
While CGT is difficult to avoid completely, there are ways to minimise your liability:
- Use CGT exemptions – for example, selling an exempt main residence or pre-CGT asset
- Offset gains with capital losses
- Apply discounts like the 50% discount where eligible
- Hold assets for 12 months or more before disposing to qualify for discounts
- Make lump sum super contributions to reduce your taxable income
- Contribute to your spouse’s super to take advantage of lower tax rates
You should also keep detailed records for your CGT assets, including:
- Purchase contracts and receipts
- Costs of acquisition and disposal
- Ownership and transfer documents
- Valuations
Good records will help you calculate your capital gains and losses accurately.
Conclusion
Capital gains tax applies when you dispose of a CGT asset for a profit. It’s important to determine the correct time of disposal and maintain thorough records to calculate CGT correctly.
While CGT can’t be completely avoided, several exemptions, discounts and strategies are available to help minimize your liability. Obtaining tax advice may also help you optimize your CGT position.