Capital Gains Tax (CGT) is a term you’ll often hear as tax time draws near. Here’s the basics of CGT, when you're required to pay it and what happens if you make a capital loss instead of a capital gain on your shares.
Basically, if you buy shares for one price and sell them for another price then the difference between the two is your capital gain or capital loss.
In the event you receive more for your shares than you paid for them, you'll have made a capital gain and you may need to pay tax on it.
How much tax will you pay?
The amount of tax you pay on your capital gain depends on a number of things, including how long you owned the shares, what your marginal tax rate is, and whether you have 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 year.
The length of time you hold your shares is relevant because individuals can usually discount a capital gain by 50%, where you have held the asset for more than 12 months.
What is a CGT event?
Selling shares and some other assets such as an investment property, or disposing of 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.
What happens if you make a capital loss?
You would make a capital loss on shares if you sold them for less than you paid for them.
But what’s important to note is that if you make a capital loss, you can use it to reduce a capital gain in the same income year.
What's more, 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 you have inherited shares?
A CGT event is triggered only when you sell inherited shares.
If the person who passed away bought the shares after CGT was introduced on 20 September 1985, then the person inheriting the shares will also inherit the cost base of the person who bought them at the time they want to sell the shares.
If however, the person who passed away acquired the shares before 20 September 1985 then the person inheriting them is said to have acquired the asset at the time of death, so the cost base will be the market value of the shares at that time.
Things you should know
- The Australian income year ends on 30 June. You have from 1 July to 31 October to lodge your tax return for the previous income year. If you use a registered tax agent to prepare and lodge your tax return, you may be able to lodge later than 31 October
- Tax law is subject to change. Double-check on the ATO website
- The information provided is of a general nature and doesn’t take into account your personal, financial situation – we suggest you seek independent taxation and financial advice