What Is Capital Gains Tax?

Capital gains tax, often referred to as CGT, is the tax you may pay when you sell an asset for a profit.

This can include things like:

• investment properties
• shares and managed funds
• other income producing assets

While the concept is straightforward, the way it is calculated can be confusing.

What Is Capital Gains Tax?

Capital gains tax applies when you sell an asset for more than you paid for it.

The difference between your purchase price and sale price is known as the capital gain.

This gain is then added to your taxable income in the year the asset is sold.

A Simple Capital Gains Tax Example

Let’s say you purchase an investment property.

• Purchase price: $500,000
• Sale price: $700,000

This results in a capital gain of:

• $200,000

In most cases, if you have held the asset for more than 12 months, you may be eligible for a 50% CGT discount.

This means:

• taxable gain = $100,000

This amount is then added to your income and taxed at your marginal tax rate.

How the CGT Discount Works

The CGT discount is one of the key features to understand.

If an asset is held for more than 12 months:

• individuals and trusts may receive a 50% discount
• super funds may receive a reduced discount

This is one reason why long term investing is often more tax effective than short term trading.

When Capital Gains Tax Applies

CGT is generally triggered when an asset is sold.

It is important to note:

• you do not pay CGT each year as the value increases
• it only applies when the gain is realised

This means timing can play an important role.

Offsetting Capital Gains

Capital gains can sometimes be reduced by capital losses.

For example:

• if you make a $200,000 gain
• and have a $50,000 loss

Your net gain becomes:

• $150,000 (before any discount is applied)

This is one of the ways tax outcomes can be managed over time.

If you are also looking at strategies like negative gearing, it is worth understanding how these interact over the life of an investment:
What is Negative Gearing?

Bringing It Back to Your Plan

Capital gains tax is not something to avoid at all costs.

In many cases, it is a sign that an investment has performed well.

The key is understanding how it works and planning for it as part of your broader strategy.

General Advice Warning

The information above is general in nature and does not take into account your personal objectives, financial situation or needs. Before acting on any strategy, you should consider whether it is appropriate for you and seek personalised advice.