What is Capital Gains Tax?
Capital gains tax (CGT) is the tax you pay on profits from selling assets, such as property. It is simply the difference between what you paid for an asset and what you sold it for.
It applies to property, leases, goodwill, licenses, foreign current, contractual rights and personal use assets purchased for more than $10,000. If you earn money from selling these assets, you would have made a capital gain and may need to pay CGT on it.
There are certain assets that you won’t have to pay Capital Gains Tax on. Those include your car, main residence, depreciating assets used solely for taxable purposes, and assets bought before 20 September 1985.
The application of a capital gain or loss depends on when you acquired the property:
- If the property was acquired before 20 September 1985, then CGT will only apply to certain capital improvements made after that date.
- If the property was acquired after 20 September 1985, then CGT will apply to the entire property.
Keep in mind that if your main residence sits on more than two hectares of land or you have not lived in it for the entire period of ownership, you’ll only be given a partial GST exemption on your home.
You report capital gains and capital losses in your income tax return and pay tax on your capital gains. Although it is referred to as ‘capital gains tax,’ it is part of your income tax and isn’t a separate tax.
If you have a capital gain, it will increase the tax you need to pay. You may want to work out how much tax you will owe and set aside funds to cover it.
The CGT discount
You can reduce your capital gain by 50% when you sell or otherwise dispose of an asset if both of the following apply:
- You have owned the asset for at least 12 months
- You are an Australian resident for tax purposes.
This is called the capital gains tax (CGT) discount.
The ownership requirement
For an asset to qualify for the CGT discount, it must have been owned for at least 12 months before the ‘CGT event’ happens. The day of acquisition and the day of the CGT event get excluded when working out if you owned the asset for at least 12 months before the ‘CGT event’ happens.
Some additional information for further clarity is provided:
- If you sell the asset and there is no contract of sale, the CGT event happens at the time of sale.
- If there is a contract to sell the asset, the CGT event happens on the date of the contract, not when you settle. Property sales usually work this way.
- If the asset is lost or destroyed, the CGT event happens when:
- you first receive an insurance payment or other compensation
- if there is no insurance payment or compensation, when the loss occurred or was discovered.
If you are a co-owner of the property, you’ll make a capital gain or loss in accordance with your ownership interest in the property.
You can offset any capital losses against capital gains during the same income year, too. Subject to specific exemptions, CGT is not payable on your family home, but it is on rental properties.
For more information, check out the Capital Gains Tax Record Keeping Tool or read more about investing.