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What is Capital Gains Tax?

Capital gains tax (CGT) refers to the tax that you must pay on the gains and losses from capital assets.

What is a Capital Asset?

Capital assets are those that you generally hold for a long term, such as real property or shares in a company.

It can be a blurry line between revenue assets and capital assets. However, where you hold an asset for a long period of time without a clear timeframe as to its disposal, it is likely that it is a capital asset.

When is CGT Payable?

Australia does not technically have a separate CGT regime. Rather, a capital gain is calculated and then fed into your ordinary assessable income. It will then be taxed at your marginal tax rate.

Capital gains or losses result from certain ‘CGT events’. These include when the CGT asset is:

  • disposed of;
  • lost; or
  • destroyed.

For example, if you sell a capital asset, you typically make a gain or loss on the sale. The gain or loss is generally the difference between what it costs for you to acquire the asset, and the amount that you receive when you sell it.

A capital gain will form part of your assessable income. You can use capital losses to reduce a capital gain, but you cannot claim them against other income. If you have no other capital gains in the particular income year that you incur a capital loss, you can carry the gain forward.

CGT is a residual tax regime which applies after other taxation regimes apply first.

For example, if an asset is both a revenue asset and a capital asset, the other regime will apply first and reduce the CGT that you ultimately have to pay. This is to avoid the payment of double taxation.

How is CGT Different From Income Tax?

Again, Australia does not have a separate CGT regime with its own tax rates. Rather, you report capital gains and losses as part of your income tax return, and any net gains are taxed at your marginal tax rate.

It is important to note that you will need to report your capital gain or loss at the time you enter into a contract of sale, not when you have already settled the sale.

For example, if you enter into a contract to sell property in June 2019, and do not settle until September 2019, you will need to include the capital gain or loss in your 2018-19 tax return.

Can I Reduce How Much Capital Gains Tax I Pay?

In determining the amount of CGT that you have to pay, certain entities are eligible to receive a 50% CGT discount. This is when the transaction relates to assets that you have held for more than 12 months.

Entities eligible to receive the 50% CGT discount include:

  • individuals;
  • trusts; and
  • complying superannuation funds.

Further, if you carry on business, or own an entity that does, you or the entity may be eligible for one or more of the small business CGT concessions. These can operate to reduce or even eliminate any tax payable on the capital gain.