Capital gains tax is what you pay when you profit on the sale of certain assets. These could be assets you own or that you’ve inherited.
Capital gains tax applies to shares, land and property, unless it’s your primary residence. It may even apply to certain collectibles and personal items depending on what you paid for them.
The good news is if you understand the general ins and outs of capital gains tax in Australia, you could reduce what you pay by up to 50%. We break it down in simple terms.
Capital gains tax in a nutshell
The first thing to understand is that capital gains tax actually forms part of your income tax. While it has its own name, it’s not a standalone tax.
For example, when you declare any capital gains, which you’ll need to do when you lodge your tax return, any capital gains you’ve received will be looked at as part of your total income for the year.
The amount of tax you pay on your income will vary depending on what income bracket you fall into.
In the instance you have a shared asset—you need to work out each owner’s individual interest in the asset as this is how capital gains and losses are determined for each party involved.
The assets exempt from capital gains tax
If you make a profit on an asset, there are instances where you won’t be hit with capital gains tax.
Capital gains tax generally does not apply to:
- Assets acquired before 20 September 1985
- A property that is your main residence
- A car, motorcycle or similar vehicle
- Winnings or losses from gambling and prizes.
The Australian Tax Office (ATO) has further details as to which assets are subject to capital gains tax and which assets are exempt on its website.
Ways to calculate capital gains tax
Generally, you can calculate your net capital gain by adding up your capital gains over the financial year and then subtracting your capital losses (including any net capital losses from previous years) and any capital gains discounts (or any small business CGT concession6 you may be entitled to).
A capital gain is typically reduced by 50% when an asset has been held for at least 12 months. So, if you sell an asset you've owned for less than a year—an investment property or shares in a business for example—the tax bite will be a lot bigger.
The importance of record keeping
You must keep records of everything—every transaction, event or circumstance—that may be relevant to working out whether you’ve made a capital gain or loss from an asset for a period of five years.
There is no time limit on how long you can carry forward a net capital loss and it can be deducted against capital gains in future years.
This could help to reduce the tax you pay in future years and assist any beneficiaries you’re leaving assets to.
For more information, speak to your accountant or we can help you find one who specialises in taxation.