Written byCapital gains tax (CGT) is the income tax you pay on the net profit from selling or disposing of an asset, added to your income rather than charged separately.
Also known as: CGT, capital gains, tax on capital gains
Key points
- The net gain is added to your income for the year and taxed at your marginal rate, not as a separate tax.
- A CGT event triggers it: most often a sale or disposal, but also an asset being lost or destroyed.
- The gain is the proceeds minus the cost base, being what you paid plus certain buying, holding and selling costs.
- Individuals and trusts holding an asset over 12 months may qualify for a 50% CGT discount; complying super funds get one third, companies none.
- Capital losses offset capital gains and can be carried forward, so records matter. The ATO lists which assets are exempt.
How capital gains tax works
CGT applies when a CGT event happens. Selling is the common one, but an asset being lost, destroyed or otherwise disposed of can also count. You work out the capital gain by taking the proceeds and subtracting the cost base: the purchase price plus capital expenditure such as stamp duty, legal fees, agent commission and certain improvement costs.
Gains and losses for the year are then netted off. If the result is a gain, any discount you are eligible for is applied and the balance goes into your tax return as income. If the result is a loss, it cannot reduce salary or business income, but it can be carried forward and used against capital gains in later years.
What is caught and what is exempt
Most assets acquired since CGT began are covered: shares, units in a trust, investment property, crypto assets, collectables above a set value, and business assets such as goodwill. Your main residence is generally exempt, though conditions apply if you have rented it out or used part of it to run a business.
Business assets you claim depreciation on are usually handled under the depreciating asset rules instead, with a balancing adjustment on sale rather than a capital gain. Small businesses may also be able to access CGT concessions on active assets. The ATO publishes the full list of assets and exemptions, and it is worth confirming the position with your accountant before you sell.
Records, valuations and finance
Records decide the outcome. Keep contracts, invoices, receipts for improvements and evidence of your ownership share while you hold the asset and after you sell, because the cost base is rebuilt from those documents years later. Where a valuation is required, the ATO expects it to be objective and supportable rather than an estimate.
Finance sits alongside CGT rather than inside it. If you sell an asset with a loan over it, the payout clears the debt and any refinance settles at the same time, but the capital gain is still worked out from the proceeds and the cost base. Interest on the borrowing is generally an income tax question, with limited exceptions.
Example
A sole trader buys a small commercial unit for $400,000 and sells it years later for $560,000. Stamp duty, legal fees and agent commission across both transactions total $40,000, so the cost base is $440,000 and the gross capital gain is $120,000. A carried forward capital loss from an earlier share sale is applied against that gain first. Because the unit was held for more than 12 months, any discount they qualify for is worked out on what is left, and the result goes into their return as income. Their accountant checks whether small business concessions also apply.
Not to be confused with
- Depreciation
- writes an asset's value down over its life, where CGT looks at the gain when you dispose of it
- Goods and services tax (GST)
- a transaction tax on the sale itself, separate from tax on the gain you make
Frequently asked questions
How does capital gains tax work?
When you sell or dispose of an asset, you compare the proceeds with the cost base. The difference is a capital gain or loss. Gains and losses for the year are netted off, any discount is applied, and the remaining gain is included in your income tax return.
How is a capital gain calculated?
Take what you received for the asset and subtract the cost base. The cost base is the purchase price plus incidental costs such as stamp duty, legal fees, agent commission and certain capital improvements. Accurate records of those amounts are what make the calculation defensible.
Do I pay CGT on my home?
The main residence is generally exempt, but the exemption can be reduced if you rented the property out, used part of it for business, or lived elsewhere for a period. The rules are detailed, so check the ATO guidance or ask your accountant about your situation.
When do I have to pay capital gains tax?
There is no separate CGT bill. The net gain goes into your income tax return for the year the CGT event happened, usually the year of the contract date rather than settlement, and it is paid with the rest of your income tax assessment.
Can capital losses reduce capital gains tax?
Yes. Capital losses are applied against capital gains before any discount is worked out, which is why order matters. Losses cannot be offset against salary or business income, but unused losses carry forward indefinitely until there are gains to use them against.
Related terms
ATO
The ATO is the Australian Taxation Office, the national tax authority that collects income tax, GST and PAYG, administers superannuation rules, issues rulings and enforces compliance.
Read definitionDepreciation
Depreciation is the fall in an asset's value over time, spread across the years the asset is used so the cost can be claimed as a tax deduction.
Read definitionAsset disposal
Asset disposal is the sale, trade-in, scrapping or retirement of a business asset, which takes it off the asset register and triggers accounting and tax adjustments.
Read definitionCapital expenditure (CapEx)
Capital expenditure (CapEx) is money a business spends to buy or improve fixed assets such as buildings, plant and vehicles, rather than on day-to-day running costs.
Read definitionCapital allowances
Capital allowances are the tax deductions you can claim for the decline in value of depreciating assets, such as plant and equipment, that you hold to produce assessable income.
Read definitionWrite-off
A write-off is an accounting entry that removes an asset or unpaid customer invoice from the books because it no longer has recoverable value, recording the loss against profit.
Read definitionGo deeper
Sources
This article is general information only and is not financial advice.