Introduction to capital gains tax
Introduction to capital gains tax
Overview
A capital gain - or capital loss - is the difference between what it cost you to get an asset and what you received when you disposed of it.
You pay tax on your capital gains. It forms part of your income tax and is not considered a separate tax, although it is generally referred to as capital gains tax (CGT).
If you make a capital loss, you cannot claim it against income but you can use it to reduce a capital gain in the same income year. If your capital losses exceed your capital gains or you make a capital loss in an income year you don't have a capital gain, you can generally carry the loss forward and deduct it against capital gains in future years.
All assets you've acquired since tax on capital gains came into effect (on 20 September 1985) are subject to CGT unless specifically excluded.
Selling assets such as real estate or shares is the most common way you make a capital gain or capital loss. CGT also applies to intangible assets such as business goodwill.
Some of your main personal assets are exempt from CGT, including your home, car, and most personal use assets, 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.
If you're an Australian resident, CGT applies to your assets anywhere in the world.
Acquiring and owning CGT assets
When you acquire a CGT asset, you need to start keeping records immediately because you might have to pay tax on it in the future. Your records will help ensure you don't pay more tax than necessary. If you own the asset jointly with someone else, you'll need to establish each owner's share.
Selling an asset and other 'CGT events'
When you sell an asset or give it to someone else it's called a 'CGT event'. This is the point at which you make a capital gain or capital loss. There are a number of other CGT events, for example, if a managed fund or other trust distributes a capital gain to you, it's a CGT event.
Working out your capital gain/loss
For most CGT events, you work out your capital gain or capital loss by subtracting your 'cost base' (what it cost you to get the asset) from your 'capital proceeds' (what you received when you disposed of it). The amount you declare on your income tax return is the total of your capital gains for the year, less any capital losses you incurred and any CGT discounts or concessions you're entitled to.
CGT exemptions, rollovers and concessions
A number of assets are exempt from CGT, including your home and car, and depreciating assets used solely for taxable purposes.
Individuals and small businesses can generally discount a capital gain by 50% if they hold the asset for more than one year. In certain circumstances a capital gain on a CGT event can be deferred, or 'rolled over', until another CGT event happens. There are a number of other CGT concessions specifically for small business.
Your home and other real estate
Most real estate is subject to CGT. This includes vacant land, business premises, rental properties, holiday houses and hobby farms. Your 'main residence' (family home) is generally exempt from CGT unless you rented it out for a time or it's on more than two hectares of land.
Shares and units
You may have to pay tax on any capital gain you make on shares or units when a CGT event happens, such as when you sell them. A CGT event also occurs when you redeem units in a managed fund by switching them from one fund to another.
Contents: Introduction to capital gains tax
Contents: Introduction to capital gains tax
Overview
Acquiring and owning CGT assets
Date of acquisition
Joint ownership
Record keeping for CGT
Records relating to inheritance
Selling an asset and other 'CGT events'
Types of CGT events
Timing of a CGT event
Compensation payments
Residency and CGT events
Working out your capital gain/loss
Working out your capital gain
Working out your capital loss
Working out your net capital gain/loss
CGT exemptions, rollovers and concessions
Exemptions
Rollovers
Small business CGT concessions
Your home and other real estate
Timing of a real estate CGT event
Selling your home
Dwellings, adjacent land and associated structures
Keeping records of costs associated with your home
Keeping records for an inherited main residence
Selling your rental property
Shares and units
CGT events affecting shares and units
Records relating to shares and units
Acquiring and owning CGT assets
Date of acquisition
The time you acquire a CGT asset (your 'acquisition date' for CGT purposes) is generally when you become its owner, although there are situations where these things might happen on different dates. You need to know the date of acquisition because it affects how you work out your capital gain.
Joint ownership
If you own a CGT asset jointly with other parties (for example, your spouse), you'll need to establish each owner's share in the asset.
Record keeping for CGT
You must keep records of every act, transaction, event or circumstance that may be relevant to working out whether you have made a capital gain or capital loss from a CGT event. Your records will help you work out your capital gain or capital loss correctly and ensure you don't pay more CGT than necessary.
Records relating to inheritance
For an asset you inherit, you'll need to keep specific records depending on when you inherited the asset and when the previous owner acquired the asset.
Date of acquisition
Generally, the time you acquire a CGT asset (your 'acquisition date' for CGT purposes) is when you become its owner, most commonly because you have bought it or received it as a gift or it was transferred to you.
However, there are two situations where your acquisition date is likely to be different from the date you become the owner: when you inherit a CGT asset and when you buy one under contract and don't take immediate possession.
Knowing when you got your CGT asset is important because:
- you aren't liable for CGT if you owned it before CGT was introduced (a pre-CGT asset)
- the rules about how you work out the cost base of your asset have changed over time
- how long you have had it affects what methods you can use to work out your capital gain, and
- you need to keep records starting from your acquisition date to ensure you don't pay more tax than you need to.
Inherited CGT assets
The date you inherit an asset is the date of the death of the person who bequeathed the asset to you.
CGT assets bought under contract
Purchases under contract, such as land, houses, businesses, shares, one-tonne utilities and boats, don't always result in the date of contract and the date of possession being the same. In these instances, your acquisition date is the time you enter into the contract (normally the date on the contract) and not the date you take possession or the date of settlement.
Joint ownership
When you share the ownership of a CGT asset with others, you need to establish what each owner's share or interest in the asset is.
Partnerships
For CGT purposes, a partnership itself does not own assets. Instead, each partner owns a proportion of each CGT asset. The partners use their proportion to work out their capital gain or capital loss from a CGT event affecting any asset.
Tenants in common
Those who own an asset as tenants in common may hold unequal interests in the asset. Each owner makes a capital gain or capital loss from a CGT event in line with their interest. For example, a couple could own a rental property as tenants in common with one having a 20% interest and the other having an 80% interest. When they sell the rental property (or any other CGT event occurs to it), they split the resultant capital gain or capital loss between them according to their legal interest.
Joint tenants
For CGT purposes, joint tenants are treated as tenants in common having equal shares in the asset. Each party therefore has an equal share of any capital gain or capital loss from a CGT event. For example, a couple that owns a rental property as joint tenants splits the capital gain or capital loss equally when they sell the property.
When one joint tenant dies, their interest in the asset is taken to have been acquired in equal shares by the surviving joint tenants on the date of death.
Record keeping for CGT
You must keep records of every act, transaction, event or circumstance that may be relevant to working out whether you have made a capital gain or capital loss from a CGT event. Penalties can apply if you do not keep the records for at least five years after the relevant CGT event.
Keeping adequate records will help you work out your capital gain or capital loss correctly when a CGT event happens. It will also help make sure you do not pay more CGT than is necessary.
Good records can also help your beneficiaries deal with the impact of CGT after you die. If you leave an asset to another person, it may be subject to CGT as a result of a future CGT event - for example, if your daughter sells shares you have left her in your will she needs your records to determine her cost base. Without them she will have difficulty working out her cost base and may pay more CGT than she needs due to the lack of records.
You should also keep records relating to a net capital loss you carry forward, which you may be able to apply against a capital gain in a later year. There is no time limit on how long you can carry forward a net capital loss. If you use information from these records in a later tax return, you may have to keep records for longer. If you have applied a net capital loss, you should generally keep your records of the CGT event that resulted in the loss until the end of any period of review for the income year in which the net capital loss is fully applied.
Your records must be in English (or be readily accessible in or translatable to English) and must show:
- the nature of the act, transaction, event or circumstances
- the date it happened
- the parties to the transaction, and
- how the act, transaction, event or circumstances are relevant to working out the capital gain or capital loss.
The following are examples of the types of records you may need to keep:
- receipts of purchase or transfer
- details of interest on money you borrowed relating to this asset
- records of agent, accountant, legal and advertising costs
- receipts for insurance costs, rates and land taxes
- any market valuations
- receipts for the cost of maintenance, repairs and modifications, and
- accounts showing brokerage fees on shares.
You should also keep records to establish whether you have claimed an income tax deduction for an item of expenditure. In many cases, if you have claimed a deduction for an amount, you can't also include the expenditure in the cost base or reduced cost base of a CGT asset.
You do not need to keep records for a capital gain or capital loss that is disregarded unless it is disregarded because of a rollover. For example, you do not need to keep records for a car that is an exempt asset except because of roll-over.
It's never too late
If you acquired assets after CGT started (that is, after 19 September 1985) and did not keep records, or your records have inadvertently been destroyed, you can still do something about it.
If you bought real estate, your solicitor or estate agent may have copies of most of the records you need. You should be able to get copies if you ask for them.
If you made improvements to an investment property - for example, if you built an extension - ask the builder for a copy of the receipt for payment.
If you bought shares in a company or units in a unit trust, your stockbroker or investment adviser may be able to give you the information you need.
If you received an asset as a gift and you did not get a market valuation at the time, a professional valuer can tell you what its market value was at the relevant date.
If you lost your records in a natural disaster, we can help you reconstruct them.
The main thing is to get as many details as possible so you can reconstruct your records.
For more information, see:
Records relating to inheritance
When you inherit an asset you must keep special records (this does not include pre-CGT assets - assets you inherited before 20 September 1985).
If it was a pre-CGT asset for the person you inherited it from (that is, they acquired it before 20 September 1985), you need to know the asset's market value at the date they died, and any relevant costs incurred by the executor or trustee. This is the amount the asset is taken to have cost you. If the executor or trustee has a valuation of the asset, ask for a copy of the valuation report. If not, you will need to get your own valuation.
If it was not a pre-CGT asset for the person who died, you may need details of all relevant costs they incurred as well as those incurred by the executor or trustee. The executor or trustee should be able to give you those details.
Since 21 August 1996, if you inherit a house that was the 'main residence' of the person you inherited it from, you may be able to claim a full CGT exemption for it. If you can't, you will need the market value of the house at the date of their death and details of all relevant costs incurred after that.
Selling an asset and other 'CGT events'
A 'CGT event' is the point at which you make a capital gain or capital loss.
Types of CGT events
The most common CGT event is the disposal of an asset by selling it or giving it away. There are a number of other CGT events, including the receipt of a capital gain distributed to you from a managed fund or a compensation payment for the destruction of a CGT asset.
You need to know what type of CGT event you're dealing with, because it affects how you work out your capital gain or capital loss.
Timing of a CGT event
The timing of a CGT event is important because it tells you:
- which income year to report your capital gain or capital loss in
- whether or not you're entitled to the CGT discount.
Compensation payments
A compensation payment may give rise to a CGT event. If you make a capital gain resulting from compensation for the loss, destruction or compulsory acquisition of a CGT asset, you may be able to defer it.
Residency and CGT events
The scope of CGT events is different for Australian and foreign residents. Special rules also apply if you become, or stop being, an Australian resident for tax purposes.
Types of CGT events
There are a number of possible CGT events. You need to know what type of CGT event you're dealing with, because it affects how you work out your capital gain or capital loss and may determine the timing of it. If more than one CGT event happens, you use the one most specific to your situation.
The most common CGT event is the disposal of an asset - selling it or giving it away (for example, to a relative).
Other examples of CGT events that may give rise to a capital gain or capital loss are:
- the loss or destruction (voluntary or involuntary) of an asset
- the disposal of a depreciating asset used partly or fully for non-taxable purposes
- shares being cancelled, surrendered or redeemed
- payment of compensation
- a person entering into an agreement not to work in a particular industry for a set period of time
- a trustee making a non-assessable payment from a managed fund or other unit trust
- a company making a payment (other than a dividend) to a shareholder
- a liquidator or administrator declaring that shares or financial instruments are worthless
- a person ceasing to be an Australian resident
- an entity entering into a conservation covenant
- a local council making a payment to a business for disruption to its assets caused by roadworks.
Subdividing land is not itself a CGT event; the sale of one or more of the blocks created by the subdivision is.
Rollovers
When some CGT events occur, such as exchanging an asset for a replacement asset, the law allows you to defer or roll over any capital gain you make on that event until another CGT event occurs (such as selling the replacement asset).
Timing of a CGT event
The timing of a CGT event is important because it tells you which income year to report your capital gain or capital loss in and governs whether or not you are entitled to the CGT discount.
If you dispose of a CGT asset, the CGT event happens when you enter into the contract for disposal. (For real estate transactions, see Timing of a real estate CGT event.) If there is no contract, the CGT event generally happens when you stop being the asset's owner.
If your CGT asset is lost or destroyed, the CGT event happens when you first receive compensation for the loss or destruction. If you do not receive any compensation, the CGT event happens when the loss is discovered or the destruction occurred.
Example: Insurance policy
Laurie owned a rental property that was destroyed by fire in June. He received a payment under an insurance policy in the following October. The CGT event was the insurance payment, not the fire, so Laurie reports his capital gain or capital loss in the income year he received the payment, not the income year his house was destroyed.
The CGT events relating to shares and units, and the timing, are dealt with in Shares and units.
Compensation payments
A compensation payment may give rise to a CGT event.
You don't have to worry about CGT for some compensation payments - for example, compensation for personal injury or compensation payable under some government programs.
If you make a capital gain resulting from compensation for the loss, destruction or compulsory acquisition of a CGT asset you may be able to defer it.
A compensation payment may relate to the disposal (in whole or part) of an 'underlying asset'. (An underlying asset is the asset the compensation amount is most relevant to, or most directly related to. For example, if you receive compensation under an insurance policy for damage to a rental property, the most relevant asset - the underlying asset - is the rental property). If the compensation is in relation to an underlying asset, the payment is treated as capital proceeds from the asset's disposal.
If the payment relates to permanent damage to, or permanent reduction in the value of, an underlying asset, it is treated as a recoupment of all or part of the asset's acquisition cost (that is, the cost base and reduced cost base are reduced by the amount of the compensation).
If the payment is not in relation to an underlying asset, it relates to the disposal of the right to seek compensation. The capital gain or capital loss will be the difference between the incidental costs and the compensation received.
Residency and CGT events
Australian residents make a capital gain or capital loss if a CGT event happens to any of their assets anywhere in the world.
Foreign residents make a capital gain or capital loss if a CGT event happens to an asset that is 'taxable Australian property'.
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Before 12 December 2006 foreign residents made a capital gain or capital loss if their CGT asset had the 'necessary connection with Australia'.
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Special CGT rules apply when you become or stop being a resident of Australia for tax purposes.
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For more information, refer to:
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Working out your capital gain/loss
As part of doing your tax for a year, you need to work out your capital gain or capital loss from every CGT event that happened to your assets that year. If you have both capital gains and capital losses, you also have to work out your net capital gain/loss.
If you have a distribution from a managed fund, the fund has already worked out your capital gain or capital loss and should have given you the information on a distribution statement.
Working out your capital gain
For most CGT events, your capital gain is the difference between your capital proceeds and the cost base of your CGT asset - that is, where you receive more for an asset than it cost you. (The cost base of a CGT asset is largely what you paid for it, together with some other costs associated with acquiring, holding and disposing of it.)
If you own an asset for 12 months before you dispose of it, you may be able to reduce the amount of your capital gain.
Working out your capital loss
If you haven't made a capital gain, you will need to work out the asset's 'reduced cost base' before you can work out whether you've made a capital loss. Generally, you make a capital loss if your reduced cost base is greater than your capital proceeds.
Working out your net capital gain/loss
Once you have your capital gains and capital losses, you need to work out your net capital gain or net capital loss for the year. This is the amount that goes on your income tax return.
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If you include an amount that arose from a CGT event somewhere in your assessable income on your tax return, you do not also include it as a capital gain. For example, if you make a profit on the sale of land and you include in your assessable income as ordinary income, you don't also include that profit as a capital gain.
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There are three ways to work out your capital gain, explained in the table below. You choose the method that gives you the best result (that is, gives you the smallest capital gain).
Although two of the methods reduce the amount of your capital gain, you need to have owned the asset for at least 12 months before you disposed of it. When working out whether you acquired the asset at least 12 months before the CGT event, exclude both the day of acquisition and the day of the CGT event.
Example
Sally buys a CGT asset on 2 February one year. Her 12-month ownership period starts on 3 February (the day after she bought the asset) and ends 365 days later (366 in a leap year), 2 February the following year.
If a CGT event happens in relation to the asset before 3 February the following year, Sally cannot claim the discount or use indexation because she has not owned the asset for more than 12 months.
To help you decide which method to use, see Choose your calculation method.
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You may find the Capital gain or capital loss worksheet helpful for working out a capital gain or capital loss and for comparing the results of using the discount and indexation methods to reduce your gain.
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Calculation methods
Method
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Description
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How to do it
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CGT discount:
For assets held for 12 months or more before the relevant CGT event.
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Allows you to reduce your capital gain by:
- 50% for individuals (including partners in partnerships) and trusts
- 33 1/3% for complying super funds.
Not available to companies.
There are more rules for beneficiaries who are entitled to a share of a trust capital gain.
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Subtract the cost base from the capital proceeds, deduct any capital losses, then reduce by the relevant discount percentage (see the examples in Using the capital gain or capital loss worksheet).
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Indexation:
For assets acquired before 11.45am (by legal time in the ACT) on 21 September 1999 (and held for 12 months or more before the relevant CGT event).
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Allows you to increase the cost base by applying an indexation factor based on CPI up to September 1999.
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Apply the relevant indexation factor, then subtract the indexed cost base from the capital proceeds (see the examples in Using the capital gain or capital loss worksheet).
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'Other':
For assets held for less than 12 months before the relevant CGT event.
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Basic method of subtracting the cost base from the capital proceeds.
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Subtract the cost base (or the amount specified by the relevant CGT event) from the capital proceeds (The 'other' method of calculating your capital gain).
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For more information about capital proceeds and the cost base, refer to:
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Choose your calculation method
To help you determine which method you should use to work out your capital gain or capital loss, work through the following questions:
1. Does the CGT event involve an asset? If you make a capital gain from a CGT event that creates a new asset - for example, receiving a payment for agreeing not to do something (entering into a restrictive covenant) - you cannot satisfy the 12-month ownership rule so your CGT event does not qualify for the CGT discount.
2. Have you owned the asset for less than 12 months?
3. Did you acquire the asset as the legal personal representative or as a beneficiary of a deceased estate? (Read Deceased estate and capital gains tax.)
3a: Did the person who died acquire it before 20 September 1985?
3b: Did you dispose of the asset less than 12 months after they died?
3c: Did you dispose of the asset less than 12 months after they acquired it?
4. Did you acquire the asset as the result of a marriage or relationship breakdown? (Read Marriage or relationship breakdown and transferring of assets.)
4a: Did the period that your spouse owned the asset before it was transferred to you plus the period you owned the asset total less than 12 months?
5. Is the asset a rollover asset? That is, does it replace an asset that was compulsorily acquired, lost or destroyed, disposed of as a result of a mining lease being compulsorily granted, or acquired following negotiations rather than compulsorily? (Read Involuntary disposal of a CGT asset.)
5a: Was the total period of ownership of the original asset and the replacement asset less than 12 months?
6. Did you acquire the asset before 21 September 1999?
Working out your capital loss
If you haven't made a capital gain, you may have made a capital loss. You need to know your reduced cost base before you can establish whether you have made a capital loss.
If your reduced cost base is greater than the capital proceeds you received (or are entitled to receive) for your asset - that is, you have sold an asset for less than what it cost you - you have usually made a capital loss. The difference between the two amounts is your capital loss.
Working out your net capital gain/loss
Once you have your capital gain or capital loss for each CGT asset, you need to work out your net capital gain or capital loss for the year.
Net capital gain
Your net capital gain is:
your total capital gains for the year (including those distributed by a managed fund or trust)
your total capital losses (including any net capital losses from previous years)
any CGT discount and CGT small business concessions you are entitled to.
Net capital loss
If your total capital losses for the year exceed your total capital gains, your net capital loss is:
your total capital losses (including any net capital losses from previous years)
your total capital gains for the year (including those distributed by a managed fund or trust).
You cannot deduct a net capital loss directly from your income, but you can carry it forward and deduct it from capital gains in later income years.
There is no time limit on how long you can carry forward a net capital loss.
You must apply your capital losses against your capital gains in the order in which you made them. You can't choose not to apply capital losses against capital gains if you have them, however, you can choose which capital gains to deduct your losses from.
Net losses from collectables can only be deducted from capital gains made from collectibles, not from other capital gains.
There are some restrictions on whether or how companies and trusts handle capital losses and there are some capital losses that you must disregard.
Company losses
Your company is entitled to deduct net capital losses from current year capital gains as long as it has either:
- substantially maintained the same ownership and control, or
- carried on the same business.
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For more information, refer to Continuity of ownership, control, and same business tests in the Guide to tax losses.
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Trust losses
Capital losses made by a trust cannot be distributed to the trust's beneficiaries. They can be carried forward and applied against capital gains in future years.
Capital losses you must disregard
You must disregard any capital loss you make:
- from a personal use asset
- from some collectables
- from a lease (whether the result of expiry, forfeiture, surrender or assignment) unless it is used solely or mainly for producing assessable income, for example, a lease on a commercial rental property or a car
- from paying personal services income if the income is included in an individual's assessable income under the alienation of personal services income provisions, or any other amount attributable to that income
- as an exempt (from income tax) entity - this rule ensures that if the status of an exempt entity changes and it becomes taxable, its losses are not carried forward to become deductible from assessable capital gains.
CGT exemptions, rollovers and concessions
Exemptions
A number of assets are exempt from CGT, including your home, car, some collectables and personal use assets, and depreciating assets used solely for taxable purposes.
Rollovers
In certain circumstances you can defer or disregard a capital gain on a CGT event until another CGT event happens. This is called a 'rollover'. For example, if an asset is transferred from one spouse to another following a marriage or relationship breakdown, any tax payable is automatically deferred until another CGT event happens, such as selling the asset to someone else.
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There is generally no rollover or exemption for a capital gain when you sell an asset and put the proceeds into a super fund or use them to purchase an identical or similar asset, or when you transfer an asset into a super fund. For example, if you sell a rental property and put the proceeds into a super fund or use the proceeds to purchase another rental property, rollover is not available.
However, you may transfer an asset or the capital proceeds from the sale of an asset into a super fund to satisfy certain conditions under the small business retirement exemption.
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Small business CGT concessions
In addition to the exemptions and rollovers available more widely, there are concessions that may allow you to disregard or defer some or all of a capital gain from an active asset that you use in your small business.
You may also be eligible for the 50% CGT discount, which discounts or reduces your capital gain if you owned the asset for at least 12 months before disposing of it.
Exemptions
There are some capital gains you can disregard (that is, you do not have to include them in your assessable income) and some capital losses you must disregard (that is, you can't use them to offset a capital gain and therefore reduce your assessable income).
Some of the more common exemptions include capital gains or capital losses for:
- your main residence (but there are some exceptions)
- your car (that is, a motor vehicle designed to carry a load of less than one tonne and fewer than nine passengers), motorcycle or similar vehicle
- pre-CGT assets (assets you acquired before 20 September 1985, when tax on capital gains came into effect) with the exception of some pre-CGT shares in private companies, or pre-CGT interests in private trusts, where a combination of factors can occasionally trigger a CGT event giving rise to a taxable capital gain
- some collectables and other items for personal use
- depreciating assets used solely for taxable purposes
- a decoration awarded for valour or brave conduct, unless you paid money or gave any other property for it
- CGT assets used solely to produce exempt income or some types of non-assessable non-exempt income
- shares in a pooled development fund
- compensation or damages you receive for any
- wrong or injury you suffered in your occupation
- wrong, injury or illness you or your relatives suffered
- gambling, a game or a competition with prizes
- payments made under the German Forced Labour Compensation Programme (GFLCP), and certain payments or property received by Australian residents as a result of persecution during the Second World War
- reimbursement or payment of your expenses under the following
- Unlawful Termination Assistance Scheme
- Alternative Dispute Resolution Assistance Scheme
- M4/M5 Cashback Scheme
- a scheme established by an Australian government agency, a local government body or foreign government agency under an Act or other legislative instrument (for example, regulations or local government by-laws) - 'expenses' in this context does not include a payment for the loss, destruction or transfer of an asset
- a payment or grant under prescribed industry re-establishment or exit grants (for example, the dairy, sugar and tobacco industry exit programs)
- some things you inherit
- your rights in relation to a superannuation agreement (as defined in the Family Law Act 1975), being created or ended
- the transfer of a super interest in one small super fund to another small super fund on the breakdown of the relationship between spouses or former spouses
- a CGT event happening to the segregated current pension asset of a complying super fund
- some payouts under a general insurance policy, life insurance policy or annuity instrument
- a CGT asset that is your trading stock at the time of the CGT event
- your share of certain profits , gains or losses arising from disposal of investments by a venture capital limited partnership (VCLP), an early stage venture capital limited partnership (ESVCLP) or an Australian venture capital fund of funds (AFOF) (see the publication Venture capital tax concession: overview
- a financial arrangement where gains and losses are calculated under the TOFA rules
- some types of testamentary gifts.
Main residence
A capital gain or capital loss you make from a CGT event relating to a dwelling that was your 'main residence' (your home) is generally exempt. However, the exemption depends on how you came to own the dwelling and what you have done with it - for example, whether you have rented it out at any time, including having a lodger (see Selling your home).
Collectables
Collectables include the following items used or kept mainly for the personal use or enjoyment of you or your associates:
- paintings, sculptures, drawings, engravings or photographs; reproductions of these items; or property of a similar description or use
- jewellery
- antiques
- coins or medallions
- rare folios, manuscripts or books, and
- postage stamps or first day covers.
A collectable is also:
- an interest in any of the items listed above
- a debt that arises from any of those items, or
- an option or right to acquire any of those items.
You disregard any capital gain or capital loss you make from a collectable if any of the following apply:
- you acquired the collectable for $500 or less
- you acquired your interest in the collectable for $500 or less before 16 December 1995, or
- you acquired an interest in the collectable when it had a market value of $500 or less.
If you dispose of individual collectables that you would usually dispose of as a set, you are exempt from paying CGT only if you acquired the set for $500 or less on or after 16 December 1995.
Capital losses from collectables can be used only to reduce capital gains (including future capital gains) from collectables. As is the case with any capital loss, there is no time limit on how long you can carry forward a net capital loss from a collectible.
Personal use assets
Personal use assets are CGT assets, other than collectables, used or kept mainly for the personal use or enjoyment of you or your associates. Any personal use asset you acquired for less than $10,000 is disregarded for CGT purposes.
Personal use assets include:
- boats
- furniture
- electrical goods
- household items.
A personal use asset is also:
- an option, or a right, to acquire a personal use asset
- a debt resulting from
- a CGT event involving a CGT asset kept mainly for your personal use and enjoyment
- you doing something other than gaining or producing your assessable income or carrying on a business (for example, making a private loan to a family member or friend).
Assets that are not considered to be personal use assets include:
- land and buildings
- shares in a company
- rights and options
- units in a unit trust
- leases
- convertible notes
- your home
- foreign currency
- goodwill
- contractual rights
- any major capital improvement made to certain land or pre CGT assets.
If you dispose of personal use assets individually that would usually be sold as a set, you get the exemption only if you acquired the set for $10,000 or less.
All capital losses you make on personal use assets are disregarded. This means you cannot use capital losses on personal use assets to reduce your capital gains on other personal use assets.
Depreciating assets
CGT does not apply to depreciating assets you use solely for taxable purposes. Gains (or losses) made on these assets are treated as assessable income (or claimed as deductions). Such assets may include business equipment or fittings in a rental property. However, if you have used a depreciating asset for a non-taxable purpose (for example, used it for private purposes) the CGT rules apply.
Rollovers
When some CGT events happen to an asset you are allowed to roll over (defer or disregard) any capital gain that results until another CGT event happens to the asset. Rollover is possible in the case of assets involved in the following events:
Note that the small business concessions also include a rollover.
Marriage or relationship breakdown
In some cases where an asset or a share of an asset is transferred from one spouse to another after their marriage or relationship breaks down, any CGT is automatically deferred until another CGT event happens (for example, until you sell the asset to someone else).
Loss, destruction or compulsory acquisition
In some situations where your CGT asset has been lost or destroyed or compulsorily acquired you may defer a capital gain.
Mining lease
If you dispose of your land (and any asset affixed to it) to an entity who holds a compulsory mining lease over it that would significantly affect your use of the land, you can defer a capital gain. (This also applies if the entity could have held a compulsory mining lease over your land.)
Scrip for scrip
You may be able to defer a capital gain if you dispose of your shares in a company or interest in a trust as a result of a takeover.
Demergers
You may be able to defer a capital gain or capital loss if a CGT event happens to your shares in a company or interest in a trust as a result of a demerger.
Other replacement-asset rollovers
You may be able to defer a capital gain or capital loss when you replace an asset in the following circumstances:
- you, as a individual (sole trader), trustee, or the partners in a partnership, disposed of assets to a wholly owned company and assumed assets in the company, for example, shares (that is, you changed your business status by becoming a company)
- you acquired replacement assets as a result of a CGT event happening to your small business assets
- your statutory licence was renewed, extended or replaced
- you are a financial service provider and you had assets - for example licences - replaced on transition to the financial services reform (FSR) regime
- your strata title was converted
- your shares or units were exchanged for shares or units in the same company or unit trust
- your rights or options to acquire shares or units in a company or unit trust were exchanged for shares or units in the company or trust
- your shares in one company were exchanged for shares in an interposed company
- your units in a unit trust were exchanged for shares in a company
- your unincorporated body (such as a club or association) was converted to an incorporated company
- you disposed of an existing crown lease and replaced it with another
- you disposed of depreciating assets and replaced them
- you disposed of prospecting and mining entitlements and replaced them
- you disposed of a security under a securities lending arrangement
- your ownership of units or interests was ended under a trust restructure
- a membership interest in a medical defence organisation (MDO) is replaced with a similar membership interest in another MDO and both MDOs are companies limited by guarantee
- you replace an entitlement to water with one or more different water entitlements.
Other same-asset rollovers
You may be able to defer a capital gain or capital loss when assets are transferred or disposed of in the following circumstances:
- an individual or trustee transfers a CGT asset to a wholly owned company
- partners transfer their interest in a CGT asset to a wholly owned company
- related companies transfer a CGT asset between them
- a trust disposes of a CGT asset to a company under a trust restructure
- a change to the trust deed of a complying approved deposit fund, a complying super fund or a fund that accepts worker entitlement contributions triggers a CGT event for the fund
- a CGT asset is transferred from one small super fund to another because of a breakdown of the relationship between spouses or former spouses
- a trustee of a trust creates a trust over a CGT asset or transfers a CGT asset to another trust where both the transferring and receiving trusts meet certain requirements.
Small business CGT concessions
In addition to the exemptions and rollovers available more widely, the following concessions may allow you to disregard or defer some or all of a capital gain from an active asset that you use in your small business:
To use the concessions you must first satisfy the basic conditions that apply to all four concessions, and then satisfy any conditions that apply specifically to a particular concession.
You can apply as many concessions as you are entitled to until the capital gain is reduced to nil, enabling you to achieve the best tax result for your circumstances.
There are rules about the order you apply the CGT small business concessions, any current year or prior year capital losses and the CGT discount.
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Make sure you refer to information relating to the appropriate income tax year as there have been several changes to the CGT concessions for small business since 2006.
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15-year exemption
If your business has continuously owned an asset for 15 years and you are aged 55 years or over and are retiring or are permanently incapacitated, you won't have an assessable capital gain when you sell the active asset.
50% active asset reduction
You can reduce the capital gain on an active asset by 50%. This is in addition to the 50% CGT discount if you have owned the asset for 12 months or more.
Retirement exemption
Capital gains from the sale of active assets are exempt up to a lifetime limit of $500,000. If you are under 55 years of age, the exempt amount must be paid into a complying super fund or a retirement savings account.
Rollover
If you sell an active asset, you can defer your capital gain until another CGT event happens that crystallises the gain. For example, you don't acquire a replacement asset within the required period (two years), or you sell the replacement asset or stop using it in your business. When a CGT event crystallises a previously deferred gain, all or part of the gain becomes assessable.
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For more information on the CGT concessions for small business, refer to:
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Your home and other real estate
Most real estate - but generally not your 'main residence' (family home) - is subject to the same capital gains (CGT) rules as other assets. This includes vacant land, business premises, rental properties, holiday houses and hobby farms.
Timing of a real estate CGT event
When you sell or otherwise dispose of real estate, the time of the CGT event is generally when you enter into the contract, not when you settle. If there's no contract, the CGT event is when the change of ownership occurs.
Selling your home
You can generally claim the main residence exemption to ignore a capital gain or capital loss from a CGT event that happens to your home. To get the exemption, the property must have a dwelling on it and you must have lived in the dwelling.
Dwellings, adjacent land and associated structures
If you're selling your home, you can generally claim the main residence exemption for:
- the dwelling you live in - a dwelling is anything that is used wholly or mainly for residential accommodation
- the land sold with the dwelling, up to a limit of 2 hectares - additional land is subject to CGT
- any associated structures, such as a separate laundry or garage.
The dwelling, land and associated structures must be used for private or domestic purposes to qualify for the exemption.
Keeping records of costs associated with your home
While your family home is generally exempt from CGT, when you get a home you should try to keep all records relating to it in case your circumstances change. If they do, your home may cease to be fully exempt and you will need to know its full cost so that you don't pay more CGT than necessary.
Keeping records for an inherited main residence
If you inherit a house that was the main residence of the person who left it to you, a capital gain on its subsequent disposal may be exempt from tax. However, until you know this, keep records of relevant costs incurred by you and the previous owner.
Selling your rental property
You may make a capital gain or capital loss when you sell (or otherwise cease to own) a rental property. If the sale of your rental property includes depreciating assets, you'll need to apportion your capital proceeds between the property and the depreciating assets.
Timing of a real estate CGT event
In the case of the sale or other disposal of real estate, the time of the event is:
- when you enter into the contract (generally the date on the contract), not when you settle - the fact that a contract is subject to a condition, such as finance approval, generally does not affect this date
- when the change of ownership occurs if there is no contract, or
- if the real estate is compulsorily acquired - the earliest of
- when you received compensation from the acquiring entity
- when the entity became the property's owner
- when the entity entered the property under a power of compulsory acquisition, or
- when the entity took possession of the property under that power.
Although you must include your capital gain or capital loss in the income year in which the contract was made, you are not required to do this until settlement occurs. If settlement occurs after you have lodged your tax return and been assessed for the relevant income year, you will have to request an amendment.
A liability for shortfall interest charge (SIC) can arise due to an amended assessment for a capital gain. We generally remit it in full if the request for amendment is lodged within a reasonable time after settlement (considered to be one month in most cases). However, remission is not automatic, you must request it and we consider each request on a case-by-case basis. If you consider that the SIC should be remitted, you should provide your reasons when you request the amendment to your assessment.
Example: Sale contract
Sue enters into a contract to sell land in June, the last month of the income year. The contract is settled in October, in the next income year.
Sue makes the capital gain in the income year she enters into the contract, not the next income year when settlement takes place.
Selling your home
You can generally claim the main residence exemption to ignore a capital gain or capital loss from a CGT event that happens to your home. To get the exemption, the property must have a dwelling on it and you must have lived in the dwelling. If your property is a vacant block of land, you are not entitled to the exemption.
Generally, a dwelling is considered to be your main residence if:
- you and your family live in it
- your personal belongings are in it
- it is the address your mail is delivered to
- it is your address on the electoral roll, and
- services are connected (for example, telephone, gas or electricity).
The main residence exemption is not based on one factor alone, and the weight given to each factor may vary depending on individual circumstances. The length of time you stay there and your intention in occupying it may also be relevant.
In this section you can find out about:
Full exemption
You are likely to be eligible for a full main residence exemption if the dwelling:
- has been the family home for you, your partner and other dependants for the whole period you have owned it (ownership period)
- has not been used to produce assessable income - that is, you have not run a business from it or rented it out, and
- is on land of 2 hectares or less.
If the exemption applies your capital gain or capital loss is disregarded and you don't pay tax on any capital gain you make (but nor can you use the capital loss to reduce your assessable income).
Partial exemption
You may be eligible for a partial main residence exemption if:
- the dwelling was your main residence for only part of the period you owned it
- your partner or dependants have separate homes
- you have used part of the property (either the dwelling or the land) to produce assessable income, or
- the land is more than 2 hectares.
If you are eligible for partial exemption, part of the capital gain or capital loss you make is ignored for tax purposes.
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For more information, refer to:
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Main residence you don't occupy
As a general rule, a dwelling is no longer your main residence once you stop living in it. However, in some cases you can choose to have a dwelling treated as your main residence for CGT purposes even though you no longer live in it.
You only need to make this choice for the income year the CGT event happens to the dwelling - for example, the year you enter into a contract to sell it.
More than one property
Usually you are only entitled to the main residence exemption on one property for any particular period.
If for a period you have two homes that could be regarded as your main residence - such as your home and a holiday home - you must choose one of the homes for this exemption and CGT will apply to the other property. (You don't have to make the choice until you sell one of the homes.)
If you make this choice, you cannot treat any other dwelling as your main residence for that period (except for a limited time if you are moving from one home to another, see Moving from one main residence to another, below).
Moving from one main residence to another
If you acquire a new home before you dispose of your old one, both dwellings are treated as your main residence for an overlap period of up to six months if:
- you lived in your old home and it was your main residence for a continuous period of at least three months in the 12 months before you disposed of it
- you did not use it to produce assessable income (such as rent) in any part of that last 12 months when it was not your new main residence, and
- the new dwelling becomes your main residence.
The overlap period ends at the earlier of six months and when settlement occurs on the contract to sell your old home.
Selling a home you inherited
If you inherit a house that was the main residence of the person who left it to you, any capital gain on its subsequent disposal may be exempt.
Dwellings, adjacent land and associated structures
If you're selling your home, you can generally claim the main residence exemption for:
What is a dwelling?
A dwelling is anything that is used wholly or mainly for residential accommodation, such as:
- a home or cottage
- an apartment or flat
- a strata title unit
- a unit in a retirement village, or
- a caravan, houseboat or other mobile home.
Land adjacent to a dwelling
Land is adjacent to a dwelling if it is close to, near, adjoining or neighbouring the dwelling. The land a dwelling is actually on is included as part of the dwelling and is not part of adjacent land.
Land adjacent to a dwelling may also qualify for the main residence exemption if it and the dwelling are sold together and the following applies:
- during the period you owned it, you used the land mainly for private and domestic purposes in association with the dwelling, and
- the total area of the adjacent land and the land on which the dwelling stands is not greater than 2 hectares (4.94 acres).
If the adjacent land is used for private purposes and is greater than 2 hectares, you can choose which 2 hectares are exempt. The remainder is subject to CGT.
Land you sell separately from the dwelling is subject to CGT unless an exception applies. The exceptions are where:
If any part of the land around a dwelling is used to produce income, it is not exempt, even if the total land area is less than 2 hectares. However, the dwelling and any buildings and other land used in association with it remain exempt if you do not use them to produce income.
Example: Land used for private purposes
Tim buys a home with 15 hectares of land in the November of a year. He uses 10 hectares of the land to produce income and 5 hectares for private purposes. Tim can get the main residence exemption for the house and 2 hectares of land he selects out of the 5 hectares that he uses for private purposes.
After nine years, Tim decides to sell. He obtains a valuation which states that the dwelling and 2 hectares of land that he has selected were worth two-thirds of the total value of the property at the time he bought it, and this has not changed over the nine years. If he makes a capital gain when he sells, Tim can therefore claim the main residence exemption on the two-thirds of the capital gain attributable to the house and 2 hectares of land.
Because he owned the land for at least 12 months, Tim can reduce any capital gain attributable to the 13 hectares of land not covered by the main residence exemption by the CGT discount of 50%.
Other structures associated with a dwelling
A flat or home unit often includes areas that are physically separate from the flat or unit (for example, a laundry, storeroom or garage).
As long as you use these areas primarily for private or domestic purposes in association with the flat or unit for the whole period you own it, they are exempt from CGT on the same basis as the flat or unit.
However, if you dispose of one of these structures separately from the flat or home unit (for example, you sell the garage), your capital gain or capital loss from the sale is not exempt from CGT. The exception to this rule is compulsory acquisition of an associated structure. In this case, the main residence exemption may still apply - see Compulsory acquisitions of part of your main residence.
Compulsory acquisition of part of your main residence
The CGT main residence exemption also covers compulsory acquisition (or similar arrangement) of part of your main residence. For example, where vacant land adjacent to your home or a structure associated with your flat or unit is compulsorily acquired without the dwelling itself being acquired.
The exemption applies to CGT events that happen on or after 29 June 2011. You can choose to apply it from the start of the 2004-05 income year if you are eligible.
Keeping records of costs associated with your home
Even though your family home is usually exempt, you should try to keep all records relating to it, just as you would for other items of real estate. If the property ceases to be fully exempt at some time in the future, you may need to know its full cost so that you do not pay more CGT than necessary. If you do not have sufficient records, reconstructing them later could be difficult.
You need to keep:
- a copy of the purchase contract and all receipts for expenses relating to the purchase of the property - for example, stamp duty, legal fees, survey and valuation fees
- all records relating to the CGT event and all relevant expenses - for example, the sale contract and records of legal fees and stamp duty, and
- records of your costs of owning the property, and
- records of capital expenditure on improvements and maintaining title or right to it during your period of ownership.
Examples of costs of owning real estate include interest, rates and taxes, insurance premiums and the cost of repairs such as replacing broken items. (You will only be able to include these costs if you acquired your home after 20 August 1991, and have not and cannot claim a tax deduction for them.)
Capital expenditure on improvements may include extensions, additions or improvements, including initial repairs.
These costs form part of the cost base, which you use to work out whether you have made a capital gain or capital loss when the CGT event happens.
If the property is your home and you use it to produce income (such as by renting out part or all of it), you will need to keep records of the income-producing period and the proportion of the property used to produce income.
Since 20 August 1996, if you use your home for income-producing purposes, the first time you do this you are taken to have acquired the home at that time for its market value. You use the market value as your acquisition cost to work out a capital gain or capital loss at the time of any subsequent CGT event. You will need to keep details of expenses relating to your home after the date it started producing income.
Records held by former spouse
If CGT rollover applies to a home transferred to you because your marriage or relationship breaks down, make sure you get any records you need from your former spouse (or the company or trust that owned it), including records that show:
- how and when they acquired it, and
- its cost base when they transferred it to you.
If marriage or relationship breakdown rollover applies to the transfer of a property that was your former spouse's home and it was transferred to you under a CGT event that happened after 12 December 2006, make sure you also get a copy of records from them that show:
- the extent (if any) to which they used it to produce income during their ownership period - for example, the periods it was rented out or available for rent and, the proportion of the dwelling that was used for that purpose, and
- the number of days (if any) it was their main residence during their ownership period.
You will need these records to show you are entitled to the main residence exemption for the whole period (starting from when your former spouse became owner of the property). If you can't show this, you will be liable for capital gains tax on periods that it may have qualified for exemption.
Keeping records for an inherited main residence
If you inherit a house that was the main residence of the person who left it to you, any capital gain on its subsequent disposal may be exempt. However, until this is known, you should keep records of relevant costs incurred by you and the previous owner, or their trustee or executor.
You will not need to keep records of the previous owner's costs if:
- you inherited the house after 20 August 1996
- the house was their main residence just before they died, and
- they were not using the house to produce income at the time of their death.
In these circumstances, you will be taken to have acquired the house at its market value at the date of death. If the executor or trustee has a valuation of the asset, get a copy of that valuation report. Otherwise, you will need to get your own valuation.
Selling your rental property
You may make a capital gain or capital loss when you sell (or otherwise cease to own) a rental property, unless you acquired it before capital gains tax came in (20 September 1985).
You can also make a capital gain or capital loss from some capital improvements made since 20 September 1985 to a property you acquired before that date.
You make a capital gain from the sale of your rental property to the extent that the capital proceeds you receive are more than the cost base of the property (see Working out your capital gain/loss).
You make a capital loss to the extent that the property's reduced cost base exceeds those capital proceeds.
If you are a co-owner of an investment property, you will make a capital gain or capital loss in accordance with your interest in the property.
The cost base and reduced cost base of a property includes the amount you paid for it together with some incidental costs associated with acquiring, holding and disposing of it (such as legal fees, stamp duty and real estate agent's commissions). Amounts that you have claimed as a tax deduction or that you can claim are excluded from the property's cost base or reduced cost base.
Your capital gain or capital loss may be disregarded if a rollover applies - for example, if your property was destroyed or compulsorily acquired or you transferred it to your former spouse under a court order following a marriage or relationship breakdown.
Depreciating assets
If the sale of your rental property includes depreciating assets, a 'balancing adjustment event' will happen to those assets.
You should apportion your capital proceeds between the property and the depreciating assets to determine the separate tax consequences for them.
General value shifting regime
A loss you make on the sale of a rental property may be reduced under the value shifting rules if, at the time of sale, a continuing right to use the property was held by an associate of yours (for example, a 10-year lease granted to your associate immediately before you enter into a contract of sale). The rules only apply if the market value of the right when it was created was more than $50,000 greater than what you received for creating it.
Shares and units
For CGT purposes, shares in a company or units in a unit trust (including a managed fund) are treated in the same way as any other CGT asset. You may have to pay tax on any capital gain you make on shares or units when a CGT event happens, such as when you sell them (unless you acquired them before CGT came in on 20 September 1985).
Profits on the sale of shares held in carrying on a business of share trading are included as ordinary income rather than as capital gains.
CGT events affecting shares and units
If you own shares or units, some events which may result in a capital gain or loss include:
- switching units in a managed fund from one fund to another
- acquiring or disposing of shares as a result of a takeover or merger
- receiving bonus shares or units.
Records relating to shares and units
Make sure you keep detailed records of all share transactions, not only for CGT purposes but also to meet your other income tax obligations.
CGT events affecting shares and units
You may have to pay tax on any capital gain you make on shares or units when a CGT event happens, such as when you sell them (unless you acquired them before CGT came in on 20 September 1985).
A CGT event also occurs when you redeem units in a managed fund by switching them from one fund to another.
A CGT event can happen to shares even if a change in their ownership is involuntary - for example, if the company in which you hold shares is taken over by or merges with another company. This may result in a capital gain or capital loss for you.
A CGT event occurs if you receive non-assessable payments from a company or trust, or own shares in a company that has been placed in liquidation or administration and the liquidator or administrator has declared the shares (or other financial instruments) worthless.
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For more information, refer to:
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Special CGT rules apply if you:
- receive, from a company or trust, bonus shares, bonus units, or rights or options to acquire shares or units
- buy convertible notes or participate in an employee share scheme or a dividend reinvestment plan.
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For more information, refer to:
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Corporate restructures
We may publish a class ruling or fact sheet on our website detailing the tax consequences of a company action: these are listed under Events affecting shareholders.
Listed investment companies
Since 1 July 2001, you may be entitled to an income tax deduction if a listed investment company (LIC) pays you a dividend that includes an LIC capital gain amount. If you have received such an amount, read You and your shares.
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Records relating to shares and units
Most of the records you need to work out your CGT when you dispose of shares in companies or units in unit trusts (including managed funds) will be given to you by the company, the unit trust manager or your stockbroker. It is important for you to keep everything they give you on your shares and units as this will make sure you don't pay more tax than you should.
These records will generally provide the following important information relating to the shares or units:
- the date of purchase
- the purchase amount
- details of any non-assessable payments made to you
- the date and amount of any calls (if shares were partly paid)
- the sale price (if you sell them), and
- any commissions paid to brokers when you buy or sell.
Special CGT rules affect the records you need to keep for some types of shares and units, including bonus shares and units, rights and options, and employee shares.
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For more information, refer to:
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Records relating to bonus shares
To be safe, always keep all the documents the company gives you when you receive any bonus shares. Keep a record of any amounts you paid to acquire bonus shares and any amounts taxed as a dividend when they were issued.
For any bonus shares issued before 1 July 1987, you need to know when the original shares were acquired. If you have acquired them since 20 September 1985, you will also need to know what they cost.
Last Modified: Wednesday, 30 January 2013
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