$700,000
Sale Price
–
$500,000
Purchase Price
=
$200,000
Capital Gain
What Is Capital Gains Tax?
What Is Capital Gains Tax?
In simple terms:
You buy an investment for one amount → sell it for more → the difference may result in a capital gain.
Capital gains tax is the tax you may pay when you sell an asset for more than it cost you. It commonly applies to investments such as shares, property and managed investments.
How Does Capital Gains Tax Work?
Capital gains tax isn’t a separate tax. A capital gain generally forms part of your taxable income in the financial year the asset is sold.
1. Calculate Your Capital Gain
Work out the difference between what the asset cost you and what you received when you sold it.
2. Apply Any CGT Discount
If you’re an Australian resident individual and have owned the asset for at least 12 months, you may be eligible for the 50% CGT discount.
3. Include It in Your Taxable Income
The remaining taxable capital gain is generally included in your assessable income and taxed at your marginal tax rate.
What Is the 50% Capital Gains Tax Discount?
If you’re an Australian resident individual and have owned an investment for at least 12 months, you may generally be eligible to reduce the capital gain by 50% before it is included in your taxable income.
$200,000
Capital Gain
− 50% CGT Discount
= $100,000
Discounted Capital Gain
When Does Capital Gains Tax Apply?
Capital gains tax can apply when you dispose of an asset and make a capital gain. This commonly includes selling or transferring investments such as:
Investment Property
Property that isn’t fully covered by the main residence exemption.
Shares
Shares or other listed investments sold for a capital gain.
Managed Funds & ETFs
Investments that may generate capital gains when sold or through distributions.
Other Investments
Certain other assets, including some business and investment assets.
Do You Pay Capital Gains Tax on Your Home?
Your main residence is generally exempt from capital gains tax if it has been your home for the entire period you owned it and certain conditions are met.
CGT may become more complicated if the property has been used to produce income, was not your main residence for the entire ownership period, or part of the property was used for business or investment purposes.
What Happens if You Make a Capital Loss?
If you sell an investment for less than its cost base, you may make a capital loss rather than a capital gain.
Capital losses can generally be used to reduce capital gains, but they cannot generally be used to reduce other income such as your salary.
If you don’t have enough capital gains to use the loss in that year, unused capital losses can generally be carried forward and applied against capital gains in future years.
How Is Capital Gains Tax Calculated?
Capital gains tax isn’t a separate tax with its own tax rate. After applying any eligible capital losses and CGT discounts, your net capital gain is generally included in your assessable income for the financial year.
It is then taxed as part of your overall taxable income at your applicable income tax rates.
NET CAPITAL GAIN
↓
ADDED TO YOUR INCOME
↓
TAXED AS PART OF YOUR TAXABLE INCOME
Can You Reduce Capital Gains Tax?
There may be ways to reduce or manage the amount of capital gains tax you pay, depending on your circumstances.
Hold the Investment Longer
Individuals may be eligible for the 50% CGT discount where an investment has been owned for at least 12 months.
Check Your Cost Base
Certain costs associated with buying, holding and selling an asset may form part of its cost base.
Consider the Timing
The timing of a capital gain can affect your overall taxable income for that financial year.
Use Capital Losses
Available capital losses can generally be used to offset capital gains.
The best approach will depend on your individual tax position, investments and broader financial strategy.
Capital Gains Tax Is Only Part of the Picture
Tax is important, but it shouldn’t be the only reason you make an investment decision.
An investment should also make sense based on its expected return, cash flow, level of risk, your timeframe and what you’re ultimately trying to achieve.
A good investment strategy considers the tax outcome as part of the decision, rather than making the decision purely for the tax outcome.
Where Does This Fit Into Your Financial Strategy?
Capital gains tax is just one consideration when making investment decisions. How you invest, structure debt, manage tax and build wealth should ultimately work together as part of your broader financial strategy.
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