What is capital gains tax, or CGT? Investment terms explained
Capital gain, or the amount you manage to sell the property for, minus what you paid for it, is a taxable income.
The tax you pay on this extra earning is referred to as capital gains tax, or CGT, and is part of your income tax and must be declared on your tax return.
CGT was brought in on 20 September 1985, and anything purchased since this time is subject to the tax, unless they’re specifically excluded. Specific exclusions include your home and car, and most of your personal use assets, according to the ATO. This includes items such as furniture.
“CGT also doesn’t apply to depreciating assets used solely for taxable purposes, such as business equipment or fittings in a rental property,” they explain.
However, shares, real estate and other assets and investments are the most common things hit up for tax.
The family home
If you move out of the home, for up to six years, you may still find yourself exempt from capital gains tax. If you rent out a room in your PPOR, you may find yourself up for a portion of the tax.
If you haven’t owned the property for a whole year, then there is another outcome. Margaret Lomas explains to one investor what tax they’ll be incurring in this Q&A article.
Keeping records
You must keep records proving the acquisition date (when you bought the property), and how much you purchased it for. You should also keep records about the sale, and when it became transferred into another person’s name. Be aware of lurking too close to the end of financial year – you may find that this changes your plans to minimise CGT.
Speak to your accountant before selling any asset. This is important, as often it is the date on the contract, not settlement date, which can be some months later, that the ATO will look at.
Read these nine tax tips, from Ken Raiss, for more information on preparing yourself for tax time.
How much will you have to pay?
There are three ways to work out CGT – the indexation method, the discount method and the ‘other’ method. These three methods apply in different situations, as outlined by the ATO. Property and shares held for more than 12 months are entitled to a 50% CGT discount.
A capital loss, or the amount that you perhaps lose on a property compared to what you purchased it for, can offset a capital gain and reduce tax. Savvy accountants may suggest that you sell a loss-making asset in the same year as one of your best growing properties, if you’re looking to offload both, to help bring down the tax you pay. Capital losses can be carried forward, but not backward.
If you’re looking to work out how much capital gains tax you have payable, then we have a free calculator online (that doesn’t keep your details) that will quickly calculate what you will need to give to the government.
The length of ownership can heavily affect CGT. Guest observer Terry Hayes describes more about understanding CGT in this article.
Incorrectly stating or wrongly outlining your capital gains and related information to the ATO could land you in severely hot water, so it's worth having an accountant give your information a good look.