Capital Gains Tax (CGT)

By Jason Fittler

Capital gains tax (CGT) is the tax you pay on a capital gain.

It is not a separate tax, just part of your income tax.

The most common way you make a capital gain (or capital loss) is by selling assets such as real estate, shares or managed fund investments.

When you acquire a CGT asset, start keeping records immediately, because you might have to pay tax on the asset in the future. Your records will help ensure you don't pay more tax than necessary.

If you own the asset jointly with someone else, you'll need to establish each owner's share.

Selling an asset or giving it to someone else is called a 'CGT event'. This is the point at which you make a capital gain or capital loss. There are a number of CGT events, for example, if a managed fund or other trust distributes a capital gain to you, it's a CGT event.

For most CGT events, you work out your capital gain or capital loss by subtracting your 'cost base' (what it cost you to get the asset) from your 'capital proceeds' (what you received when you disposed of it). If you have held the asset longer than 12 months a 50% discount is then applied.

For example: You purchase an asset for $100,000 and sell it 2 years later for $200,000. The capital gain is $100,000, as you held the asset for longer than 12 months you only pay tax on half of the capital gain ($100,000 / 2 = $50,000) at your marginal tax rate.  If you hold the asset for less than 12 months then you will pay tax on the whole amount of the gain at your marginal rates.

A number of assets are exempt from CGT, including your home, car, and depreciating assets used solely for taxable purposes. There are a number of other exemptions, rollovers and concessions.

Most real estate is subject to CGT. This includes vacant land, business premises, rental properties, holiday houses and hobby farms. Your 'main residence' (family home) is exempt from CGT unless you rented it out for a time or it's on more than 2 hectares of land.

You may have to pay tax on any capital gain you make on shares or units when a CGT event happens, such as when you sell them. A CGT event also occurs when you redeem units in a managed fund by switching them from one fund to another.

Always you check what the capital gains tax position will be on the asset prior to selling or straight away afterwards.

Ensure that you put money away to pay the tax when you lodge your annual tax return.

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