Capital Gains Tax Basics: What You Need to Know
Capital Gains Tax Basics: What You Need to Know
Short answer: capital gains tax (CGT) is the tax on the profit you make when you dispose of an asset - and in Australia it is not a separate tax. Your net gain is added to your taxable income for the year and taxed at your marginal rate. The good news is the generous concessions: the 50% discount for assets held over 12 months, and the main residence exemption for your home, which can reduce or wipe out the tax altogether.
Here at MJE Business Services in Mortdale, we help individuals, investors and small business owners across the St George area work out their CGT position before they sell, so there are no nasty surprises at tax time. Below is a friendly run-through of the essentials.
What is capital gains tax?
A capital gain is the difference between what an asset cost you and what you got for it on disposal. You make a gain (or loss) the moment a "CGT event" happens - usually when you sell or otherwise dispose of an asset. Because CGT is part of income tax, your net gain for the year is reported in your return, added to your other income, and taxed at your marginal rate.
Common CGT events
A CGT event is the trigger point. The most common one is simply selling an asset. Typical examples we see for everyday taxpayers include:
- Selling an investment property (your family home is usually treated differently - see below).
- Selling shares or managed fund units.
- Selling or swapping crypto assets - yes, crypto is a CGT asset, and disposing of it (including trading one coin for another) can trigger a gain or loss.
Some assets are exempt, such as your car and most personal-use items under certain thresholds, but the general rule is that gains on investments are caught.
The 50% CGT discount for individuals
This is one of the most valuable concessions. If you are an Australian resident individual and you have owned an asset for at least 12 months before the CGT event, you generally only pay tax on half of the net capital gain. You reduce the remaining gain by 50% and report that smaller amount in your return.
A couple of points worth knowing:
- You exclude both the day you acquired the asset and the day of the CGT event when counting the 12 months.
- Companies cannot use the discount - it is for individuals (and trusts, with some rules).
So if you bought shares, held them for 18 months and made a $20,000 gain, only $10,000 would typically be added to your taxable income.
The main residence exemption
Your main residence - your home - is generally exempt from CGT, provided you are an Australian resident and you meet the conditions. If you qualify, you do not pay tax on the gain when you sell, and you ignore any loss.
To count as your main residence, the property must have a dwelling on it and you must have actually lived in it. A few things can affect the exemption:
- Renting it out or running a business from home may mean you only get a partial exemption.
- If you move out, you may be able to keep treating it as your main residence for up to 6 years if you rent it out, or indefinitely if you do not earn income from it.
- The exemption covers land up to 2 hectares.
These rules get fiddly fast, so it is worth a quick chat before you sell.
Cost base - what it cost you
Your capital gain is broadly the sale price less your cost base. The cost base is more than just the purchase price - it can also include costs of acquiring, holding and disposing of the asset, such as stamp duty, legal fees and agent commissions. Keeping good records of these costs is what lets you legitimately reduce your gain.
Capital losses
Not every sale makes a profit. If you make a capital loss, you cannot deduct it against your wages or other income - but you can use it to offset capital gains. Even better, net capital losses can be carried forward indefinitely to reduce gains in future years. You apply losses in the order you make them. (Note: losses on collectables can only offset gains on collectables.)
Records you need to keep
CGT record-keeping is where many people come unstuck. Keep:
- Purchase and sale contracts and dates.
- Receipts for buying, improving, holding and selling costs.
- Brokerage statements, crypto transaction histories and dividend reinvestment records.
You generally need to keep these for at least five years after the CGT event. For more on property specifically, see our guide to rental property tax.
How MJE Business Services can help
Whether you are an investor in Mortdale, a homeowner in Hurstville or a business owner anywhere in the St George area, getting your CGT right before you sell can save real money. We can model your likely gain, check whether the 50% discount or main residence exemption applies, and make sure your records stack up. Explore our individual tax returns and tax planning services, or, if you hold assets through a trust or SMSF, our trust and SMSF support.
Frequently asked questions
Do I pay CGT on my family home? Usually no. Your main residence is generally exempt from CGT if you are an Australian resident and meet the conditions, though renting it out or running a business from it can reduce the exemption.
Is cryptocurrency subject to CGT? Yes. Crypto is a CGT asset, so selling it - or even swapping one crypto for another - is a CGT event that can produce a gain or loss.
What happens if I make a loss? You cannot offset a capital loss against your salary or other income, but you can use it against current or future capital gains, carried forward indefinitely.
Talk to us before you sell
A short conversation before a sale is far cheaper than fixing things afterwards. Book a callback through our contact page or call MJE Business Services on (02) 9580 1167, and we will help you understand your CGT position.
This is general information, not personal advice. Tax rules and dates change - please check your situation with us or at ato.gov.au.
Sources (ATO)
Have a question about your situation?
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