Quick guide to Capital Gains Tax (CGT)

Capital Gains Tax (CGT) is a term you’ll often hear as tax time draws near. Here are some of the basics of CGT and when you're required to pay it.

What is Capital Gains Tax?

Basically, if you buy shares, property, or other assets for one price and sell them for another price, the difference between the amounts is your capital gain or capital loss.

If you receive more for your assets than you paid for them, you'll have made a capital gain and you may need to pay Capital Gains Tax on it.

How much Capital Gains Tax will I pay?

The amount of Capital Gains Tax you’ll pay depends on factors including how long you’ve owned the asset, what your marginal tax rate is, and whether you’ve also made any capital losses.

Your marginal tax rate is important because your capital gain will be added to your assessable income in your tax return for that financial year.

The length of time you’ve held your asset is relevant because if you’ve held shares for over 12 months, for example, you can usually get a 50% discount on your capital gain.

What is a CGT event?

Selling assets, such as shares or an investment property, or transferring them to someone else, triggers what’s called a ‘CGT event’.

The CGT event marks the point in time at which you make a capital gain or incur a capital loss.

Other CGT events could include when a managed fund in which you own units distributes a capital gain to you.

You can find out more about CGT events at the ATO website.

What happens if I make a capital loss?

You’d make a capital loss on your assets if you sold them for less than you paid for them.

If you make a capital loss, you can use it to reduce a capital gain in the same financial year.

If your capital losses are greater than your capital gains, or if you make a capital loss in a financial year in which you don’t make a capital gain, you can generally carry the capital loss forward and deduct it against any capital gains you make in future years.

What happens if I inherit assets?

A CGT event is generally only triggered when you sell inherited assets.

If the person who passed away bought the assets after CGT was introduced on 20 September 1985, then the person inheriting the assets will need to determine the cost base. Depending on the asset, the cost base could be:

• The existing cost base of the deceased person who originally bought the assets; or
• The market value of the assets at the time of death

If, however, the person who passed away acquired the assets before 20 September 1985, then the person inheriting them is said to have acquired the asset at the time of death. In most cases, the cost base will then be the market value of the assets at that time.