If you’re making or selling an investment in Australia, it’s a good idea to factor in the implications of Capital Gains Tax (CGT). This will help you make better investment decisions and strategically manage your finances.

What is Capital Gains Tax?

Capital Gains Tax is the tax you pay on the profit you make from selling an asset that has increased in value. When you sell something like a property, shares, or an investment, and you sell it for more than what you paid for it, that extra money is your "capital gain." CGT is the tax on that gain.

For example, if you bought an asset for $1,000 and sold it for $1,500, your capital gain would be $500. CGT is applied to this $500 profit. The amount of tax you pay depends on several factors, like how long you’ve held the asset and your overall income level.

How much is capital gains tax in Australia?

Capital gains tax is not a separate tax you pay directly; instead, it’s included as part of your income tax. The amount of CGT you owe depends on the capital gain you make from selling an asset, such as shares or real estate.  

The gain is taxable at contract date not settlement date.

There is a potential tax benefit for individuals who hold an asset for more than 12 months. Under the "CGT discount" rule, you could qualify for a 50% reduction in the taxable amount of your capital gain if you’re an individual or trust.

For example, if you sold an asset for $100,000 and made a capital gain of $50,000 after holding it for more than a year, only $25,000 (half of the gain) would be included in your taxable income.

Complying super funds can discount a capital gain by 33.33%.

For companies, the CGT discount does not apply, so the full gain is subject at the company tax rate.

Calculating your Capital Gains Tax

To calculate CGT, you’ll need to know both your capital gain and your taxable income. Here’s a simple breakdown of the process:

1. Determine your capital gain:

• Start by calculating the difference between the cost of the asset and the amount you received when you sold it.
• Don’t forget to factor in any associated costs, such as broker fees, legal fees, or other costs of acquiring and selling the asset.
  

Learn more about calculating cost base of assets.

2. Apply any discounts:

• If you’ve held the asset for more than 12 months, you can apply the 50% CGT discount (for individuals and trusts). This effectively reduces the capital gain that is added to your income.
• You may also be able reduce your gain using an indexation method. We suggest you speak to your accountant to help work through this method for you.
• There are also a number of other exemptions that may be able to be applied, some of which we list below.
  

3. Include the gain in your tax return:

• The capital gain is then added to your taxable income, and you’ll pay tax based on your overall income for the financial year. For example, if you earned $80,000 from your job and made an additional $25,000 in capital gains, your taxable income would be $105,000, which would be taxed according to your marginal rate.
  

How to reduce Capital Gains Tax

There are some strategies that can help you reduce or defer your tax liability. Here are a few key situations where you might not have to pay CGT:

1. Primary Residence Exemption

If you sell your primary residence, you typically don’t have to pay CGT on the capital gain from the sale, provided that the property has been your main home for the entire period of ownership. This exemption is designed to protect homeowners from being taxed on the sale of their family home. Please check this with your accountant as there are a number of scenarios when CGT is applicable on the family home, including if the property, was used for income-producing purposes (e.g., renting out part of the property), is greater than 5 acres, is not held in personal names for example a Trust, and more.

Learn more about Capital Gains Tax on property.

2. Offsetting Gains with Losses

If you have made a capital loss in the past or in the current financial year, you can use that loss to offset capital gains you’ve made in the current year. For example, if you sell a share for a loss of $10,000 and make a gain of $20,000 on another investment, you’ll only be taxed on the net gain of $10,000. If your losses exceed your gains, the excess loss can be carried forward to future years to offset against future capital gains.

3. Gifting Assets or Passing on Inheritance

There are lot of tax rules surrounding gifts and inheritance, so we suggest you book an appointment with your accountant.

4. Small Business CGT Concessions

For small businesses, there are a number of concessions that can reduce or even eliminate CGT on the sale of business assets. These include the "15-year exemption", the "50% active asset reduction", and the "retirement exemption". These concessions can significantly reduce the tax liability for small business owners selling their assets, making it essential for business owners to be aware of them when planning the sale of their business.

Summary

Understanding how capital gains tax works in Australia is an important part of managing your finances, especially if you're selling investment assets or property. While CGT is an inevitable part of a capital gain, there are strategies to reduce it. If you’re unsure about your CGT obligations, it’s always a good idea to speak with a registered accountant to help you navigate your specific situation. We suggest that you speak to your accountant prior to selling any assets to plan your best strategy.

Disclaimer: The information in this blog is for general guidance and informational purposes only. It is not intended as tax advice. Please consult a professional for advice on your individual circumstances.