What is capital gains tax?
Capital gains tax (CGT) is the tax you pay on any capital gain you make that you include in your annual income tax return.
There is no separate tax on capital gains – rather, it forms part of your income tax. You are taxed on your net capital gain at your marginal tax rate.
Your net capital gain is the difference between your total capital gains for the year and your total capital losses (from your business and other assets), less any relevant CGT discount or concessions. You must include any net capital gain you make for an income year in your assessable income.
CGT events
You make a capital gain or capital loss when certain events or transactions (called CGT events) happen. Most CGT events involve a CGT asset.
Some CGT events, such as disposing of a CGT asset, happen often and affect many different taxpayers. Other CGT events are rare and affect only a few taxpayers – for example, events concerned directly with capital receipts and not involving a CGT asset.
CGT assets
The most common CGT assets are:
- land and buildings
- shares in a company
- units in a unit trust.
Less well-known CGT assets include:
- contractual rights
- options
- foreign currency
- leases
- licences
- goodwill.
Capital gains and losses
In general, you make a capital gain if you receive an amount from a CGT event (such as the sale of a CGT asset) that is more than your total costs associated with that event.
You make a capital loss if you receive an amount from a CGT event that is less than the total costs associated with that event.
In some cases, we take you to have received the market value of the CGT asset even if you received a different amount or nothing at all. This may be the case, for example, when you give an asset away.
You can use a capital loss only to reduce a capital gain – not to reduce other income. You can generally carry forward any unused capital losses to a later income year and apply them against capital gains in that year.
Generally, you can disregard any capital gain or loss you made on an asset you acquired before 20 September 1985.
Depreciating assets
There are special rules that apply to depreciating assets. A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time you use it. Plant and equipment you use in your business are examples of depreciating assets.
You make a capital gain or capital loss from a depreciating asset only to the extent you have used the depreciating asset for a non-taxable purpose (for example, for a private purpose).