Capital Gains Tax (CGT) is a tax on the profit you make when you sell or dispose of an asset that has increased in value. The gain you make from selling certain assets is added to your assessible income, and tax applied at your marginal rate. Understanding CGT is crucial for anyone investing, selling property, or dealing with assets that could be subject to this tax.
| What is a Capital Gain? |
A capital gain is the difference between what you paid for an asset (your cost basis) and what you sell it for. For example, if you bought shares for $1,000 and sold for $1,500, your capital gain is $500.
| Assets Subject to CGT |
CGT can apply to a variety of assets, including:
- Shares: Profits from selling shares.
- Real Estate: Gains from selling property that isn’t your primary residence.
- Collectibles: Items like art, antiques, and jewelry.
- Business Assets: Assets used in a business, such as equipment or goodwill.
- Cryptocurrencies: Gains from selling or trading cryptocurrencies.
| CGT Rates |
CGT rates depend on your taxable income and how long the asset is held. Capital gains are included in assessable income and taxed at your marginal tax rate. There are two key holding‑period outcomes:
- Assets held for 12 months or less: Capital gains are fully included in assessable income and taxed at the taxpayer’s marginal tax rate. No CGT discount applies.
- Assets held for more than 12 months: Capital gains are taxed at the taxpayer’s marginal tax rate after applying any eligible CGT discount (generally 50% for individuals and trusts, 33⅓% for superannuation funds).
| Calculating CGT |
Calculating CGT in Australia generally involves the following sequence:
- Determine the Capital Gain or Capital Loss
- Calculate the difference between the capital proceeds (usually the sale price) and the cost base of the asset.
- If the proceeds exceed the cost base, a capital gain arises.
- If the proceeds are lower, a capital loss arises.
- Apply Capital Losses
- Offset any current‑year capital losses against capital gains.
- Apply carried‑forward capital losses from prior years.
- Capital losses must be applied before any CGT discount.
- Companies are not eligible for the CGT discount.
- Apply the CGT Discount (if eligible):
- Individuals and trusts may reduce the remaining capital gain by 50% if the asset was held for at least 12 months.
- Superannuation funds may apply a 33⅓% discount.
- Companies are not eligible for the CGT discount.
- Include the Net Capital Gain in Assessable Income
- The discounted net capital gain is included in the taxpayer’s assessable income.
- Tax is calculated at the taxpayer’s marginal income tax rate, not a separate or flat CGT rate.
| Strategies to Minimise CGT |
There are several strategies you can use to minimise CGT:
- Hold Assets for the Long Term: Taking advantage of the 50% capital gains rate discount can substantially reduce the tax you pay.
- Offset Gains with Losses: Capital losses can be used to offset capital gains, reducing your overall tax liability. If your losses exceed your gains, you may be able to carry the excess losses forward to future tax years.
- Consider Tax-Loss Harvesting: Selling an asset at a capital loss. Using that loss to offset current‑year capital gains. Carrying forward unused capital losses to offset future capital gains
- Primary Residence Exemption: Selling a property that qualifies as your main residence can fully exempt the capital gain from CGT, or partially exempt it where the property has been used to produce income or was not your main residence for the entire ownership period.
| Conclusion |
Capital gains tax is a key consideration for investors and anyone dealing with appreciating assets. Understanding how CGT operates within Australia’s income tax system, and how timing, exemptions, and capital losses interact, can materially affect after‑tax outcomes. While general principles can inform decision‑making, individual circumstances vary, and professional advice is essential to ensure compliance with Australian tax law and to structure investments efficiently.