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 that are subject to the CGT rules 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 CGT assets than you paid for them, you'll have made a capital gain and you may need to pay Capital Gains Tax on it.

Not all assets are subject to CGT – information about which assets are is available at the ATO website.

You can also find other useful information about CGT at the ATO website. 

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 them for over 12 months, certain taxpayers, such as individuals, can usually get a 50% discount on their 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 on the ATO website.

What happens if I make a capital loss?

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

If you make a capital loss, you can only use it to reduce a capital gain (i.e. you cannot apply a capital loss to reduce the tax you pay on other types of assessable income).

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, but not all inherited assets are subject to CGT.

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.

For more information on inherited assets and CGT, visit the ATO website.