Capital Gains Tax (CGT) is an important consideration when selling assets such as investment properties, shares, or business assets. Understanding how CGT works and what exemptions or discounts may apply can help you plan your financial strategy and reduce your tax obligations.
What Is Capital Gains Tax (CGT)?
CGT is the tax you pay on the profit (capital gain) when you sell an asset for more than its purchase price. While CGT is not a separate tax, it forms part of your income tax and is calculated when you lodge your annual tax return with the Australian Taxation Office (ATO).
When Does CGT Apply?
CGT generally applies when you sell, gift, or otherwise dispose of an asset and make a financial gain. Here are some common scenarios where CGT is applicable:
✔️ Selling an investment property for more than the original purchase price.
✔️ Profiting from the sale of shares or managed funds.
✔️ Disposing of a business asset, including goodwill.
✔️ Transferring ownership of certain personal assets over $10,000, such as collectibles and valuable items.
CGT does not apply to:
- The sale of your main residence (if eligible for the main residence exemption).
- Personal assets such as your car, home furniture, or clothing.
- Assets purchased before 20 September 1985 (pre-CGT assets).
How to Calculate Capital Gains Tax
Your capital gain is calculated as:
Capital Gain = Selling Price – Purchase Price – Associated Costs
You add this capital gain to your taxable income for the financial year and pay tax according to your income tax bracket.
Ways to Reduce Your CGT Liability
The ATO provides several ways to minimise your CGT liability, including:
1. 50% CGT Discount
If you’ve owned the asset for more than 12 months, you may qualify for a 50% CGT discount, meaning you only pay tax on half of the capital gain.
2. Main Residence Exemption
If the asset you’re selling is your primary home, you may be eligible for a full or partial exemption from CGT. This applies if you have lived in the home for the entire ownership period and have not used it to generate rental income.
3. Offsetting Capital Losses
If you sell an asset at a loss, you can offset this loss against any capital gains made in the same financial year, reducing your taxable amount. If you have more losses than gains, you can carry forward unused capital losses to offset future capital gains.
CGT and Property Sales
For property investors, CGT is a key consideration when selling real estate. Here are some factors to keep in mind: ✔️ If you rent out your home and later sell it, you may still be partially exempt under the six-year rule.
✔️ Renovations and capital improvements may affect your cost base and CGT calculation.
✔️ Inherited properties may be subject to CGT, depending on when the deceased acquired the asset and whether it was used as their main residence.
CGT and Shares
If you invest in shares, CGT applies when you sell shares at a profit. However, if you reinvest dividends through a dividend reinvestment plan (DRP), these purchases count as separate acquisitions and may impact your CGT calculation.
When to Pay CGT
CGT is reported in your annual tax return for the financial year in which the asset was sold. If your CGT liability is significant, you may be required to pay tax instalments throughout the year via the PAYG system.
Plan Your CGT Strategy
Strategic tax planning can help you minimise your CGT liability and take advantage of available exemptions. Some key strategies include:
✔️ Timing your asset sales to align with lower-income years.
✔️ Holding assets for over 12 months to qualify for the 50% discount.
✔️ Structuring investments through a trust or superannuation fund for potential tax benefits.
✔️ Seeking professional tax advice to optimise your financial position.
Need Help Navigating Capital Gains Tax?
CGT can be complex, but the right planning can reduce your tax liability and maximise your profits. If you’re selling an investment property, shares, or other assets, we can help you understand your CGT obligations and develop a tax-effective strategy.
