What is capital gains tax?
Capital gains tax (CGT) is the tax you pay on profits you make from the sale of a capital asset such as real estate or shares.
A capital gain is when you sell a capital asset for more than you originally paid for it. You are required to pay tax on the gain amount. Conversely, if you sell the asset for less than you paid for it, you have a capital loss.
You include a capital gain on your tax return in the financial year the event occurs. This is important in contracts for property where a contract of sale is entered into and the contract “settles” at a later date.
For example, if you enter a sale contract for an investment property on 27th June 2023 and the settlement date is not until 15th August 2023, you will still need to include the capital gain in your 2022-23 tax return as the date you signed the contract is the “capital event” in the ATO’s eyes.
It is important to remember, that tax is generally not withheld when you incur capital gains. Therefore, if you have a capital gains tax event during the year, you should set aside sufficient funds to cover any relevant tax payable come tax time.
How do I calculate a capital gain or loss?
A capital gain or loss occurs when you sell a capital asset. It’s the difference between the capital asset purchase cost and its sale price.
Capital gain example:
- Annie bought an investment property for $500,000 and sold it two years later for $550,000.
- $550,000 – $500,000 = $50,000 gain/profit.
- Therefore, Annie declares a $50,000 capital gain on her return.*
Capital loss example:
- John bought shares for $50,000 and sold them two years later for $45,000.
- $45,000 – $50,000 = -$5,000 loss.
- John includes a capital loss of $5,000 on his tax return.*
A capital gain and a capital loss in the same year:
When you have more than one capital gains tax event during the year, you add them together giving you a final capital gains (or loss) amount.
Here’s an example.
- Mary sold two investment properties during the financial year.
- Property one made a $60,000 capital gain, while property two made a $25,000 capital loss.
- To calculate the final capital gain (or loss), deduct the capital loss from the gain ($60,000 gain – $25,000 loss).
Therefore, Mary’s overall capital gain for the year is $35,000.*
*This is a simplified example of how to calculate a capital gain or loss. When calculating actual capital gains and capital losses, it is recommended to seek advice from a registered tax agent
How much is capital gains tax?
Capital gains or losses are classified as income by the ATO. You include any capital gains or losses on your income tax return for the financial year that the event (sale of the asset) took place.
There is no set rate for capital gains tax. Instead, you add your capital gain to your taxable income. Then, your combined income (employment, investment, capital gains etc) is used to calculate how much tax you pay.
Here’s an example:
- George made a capital gain of $10,000 and earned $80,000 from his job as an urban planner.
- $10,000 (gain) + $80,000 (income) = $90,000 adjusted taxable income.
- This $90,000 is the figure he has to pay tax on.
Capital gains tax exemptions
Capital gains tax began on 20 September 1985 and all assets acquired after this date are subject to capital gains tax. But, there are a few exemptions.
The most common exempt assets are:
- Your main residence
- A car or motorcycle
- Depreciating assets (used only for tax purposes)
- Any asset acquired before 20 September 1985
If you sell any of these items during the year, Capital Gains tax usually does not apply.
However, CGT does apply to:
- Other real estate (secondary residences or investment properties)
- Shares, units and similar investments
- Cryptocurrency (bitcoin etc)
- Collectables and Personal use assets above a certain value
- Major capital improvements made to land
If you are unsure if your asset is exempt, it is best to check with a registered tax agent (like Etax) before submitting your income tax return.
Capital gains tax discount
There are two ways you may be eligible for a capital gains discount.
Capital gain discount method
If you have held capital assets for at least 12 months before the sale event, you may be eligible for a capital gains discount.
With this method, after calculating your capital gain, you then apply a 50% discount.
Capital gain of $10,000 / 50% discount = $5,000. Therefore you pay capital gains tax on the $5000 discounted amount, rather than the full $10,000 profit.
This method applies to any asset you owned BEFORE 11:45am (by legal time in the ACT) on 21 September 1999. You must have held the asset for at least 12 months before the capital gains tax event.
Under the indexation method, you increase the base cost (purchase price) of the asset you sold by applying an indexation factor based on the consumer price index.
Then, instead of using the original base cost (purchase price), you use the indexed amount and calculate your capital gain from that amount.
This method can be tricky to get right. We recommend you speak with an Etax accountant to ensure the correct indexation calculation.
Capital assets owned for less than 12 months
In the event that you held a capital asset for less than 12 months before the sale event, then you are not eligible for a discount via either method.
How can I claim a capital loss?
A capital loss occurs when you sell a capital asset for less than your purchase price.
A capital loss can’t reduce the other taxable income in your tax return, but it can reduce a capital gain.
When you have both capital gains and losses, these are calculated together to work out your net capital gain (or loss) for the year.
However, if you only have a capital loss that year, the loss can be “carried forward” to a future year where you have a capital gain and used to offset the gain then.
The best way to calculate capital gains tax in Australia?
The simple answer here is the way that benefits you the most. But, that answer is different for everyone. The best way to calculate your capital gains tax depends on your individual circumstances.
It’s always best to seek the advice of a registered tax agent (like Etax) to ensure you get the best outcome for your personal situation. Don’t go it alone and risk costing yourself hundreds or even thousands of dollars!
Money has a good capital gains tax calculator to give you an idea of what you’re likely to pay, here: https://www.money.com.au/calculators/capital-gains-tax-calculator
However, it always best to seek the advice of a registered tax agent (like Etax) to ensure you get the best outcome for your personal situation. Don’t go it alone and risk costing yourself hundreds or even thousands of dollars!