Capital gains tax (CGT) is the tax that you pay on any capital gain you include on your annual income tax return. It is not a separate tax, merely a component of your income tax. You are taxed on your net capital gain at your marginal tax rate.
Your net capital gain is:
- your total capital gains for the year
- your total capital losses for the year and any unapplied net capital losses from earlier income years
If your total capital losses for the income year are more than your total capital gains, the difference is your net capital loss for the year. It can be carried forward to later income years to be deducted from future capital gains. (You cannot deduct capital losses or a net capital loss from your income). There is no time limit on how long you can carry forward a net capital loss. You apply your net capital losses in the order that you make them.
There are special rules for capital losses made on collectables. You cannot make a capital loss on a personal use asset.
If you are completing a tax return for an individual and want more information on how to apply your capital losses, see steps 5 and 6 in part B of this guide. For more information for companies, trusts and funds or for completing the CGT summary worksheet, see step 2 in part C of this guide.
Capital gain or capital loss
For most CGT events, your capital gain is the difference between your capital proceeds and the cost base of your CGT asset - for example, if you sell an asset for more than you paid for it, the difference is your capital gain. You make a capital loss if your reduced cost base of your CGT asset is greater than the capital proceeds.
Generally, you can disregard any capital gain or capital loss you make on an asset if you acquired it before 20 September 1985 (pre-CGT). For details of some other exemptions, see Exemptions and rollovers.
There are special rules that apply when working out gains and losses from depreciating assets. A depreciating asset is a tangible asset (other than land or trading stock) that has a limited effective life and can reasonably be expected to decline in value over the time it is used. Certain intangible assets are also depreciating assets.
If you use a depreciating asset for a taxable purpose (for example, in a business) any gain you make on it is treated as ordinary income and any loss as a deduction. It is only when a depreciating asset has been used for a non-taxable purpose (for example, used privately) that you can make a capital gain or capital loss on it. For details on the CGT treatment of depreciating assets, see CGT and depreciating assets.
To work out whether you have to pay tax on your capital gains, you need to know:
- whether a CGT event has happened
- the time of the CGT event
- what assets are subject to CGT
- how to calculate the capital gain or capital loss (how to determine your capital proceeds, cost base and reduced cost base; how to apply capital losses and the methods available to calculate a capital gain)
- whether there is any exemption or rollover that allows you to reduce or disregard the capital gain or capital loss
- whether the CGT discount applies, and
- whether you are entitled to any of the small business CGT concessions.