General background information about CGT, whether and how it applies to you.
CGT is the tax that you pay on any capital gain you include in 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 2022–23, minus
- your total capital losses for the year and any unapplied net capital losses from earlier income years, minus
- any CGT discount and small business CGT concessions to which you are entitled.
If your total capital losses for 2022–23 are more than your total capital gains, the difference is your net capital loss for the year. You can carry it forward to later income years to be deducted from future capital gains. You cannot deduct capital losses or a net capital loss from your other assessable 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.
If you are completing a tax return for an individual and want more information on how to apply your capital losses, see in Part B steps 5 and 6. For more information for companies, trusts and funds or for completing the CGT summary worksheet, see Part C step 2.
Capital gain or capital loss
You make a capital gain or capital loss if a CGT event happens. You can also make a capital gain if a managed fund or other trust distributes a capital gain to you.
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 more information, 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. It can 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 (such as 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 is used for a non-taxable purpose (used privately) that you can make a capital gain or capital loss on it.
For more information, 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
- whether you are entitled to any of the small business CGT concessions.
CGT events are the different types of transactions or events that may result in a capital gain or capital loss. Many CGT events involve a CGT asset; some relate directly to capital receipts (capital proceeds).
You need to know which type of CGT event applies in your situation. It affects how you calculate your capital gain or capital loss and when you include it in your net capital gain or net capital loss.
The range of CGT events is wide. Some happen often and affect many people while others are rare and affect only a few people. There is a summary of the various types of CGT events at Appendix 1.
The most common CGT event happens if you dispose of a CGT asset to someone else, (such as if you sell it or give it away, including to a relative).
A CGT event also happens when:
- an asset you own is lost or destroyed (the destruction may be voluntary or involuntary)
- shares you own are cancelled, surrendered or redeemed
- you enter into an agreement not to work in a particular industry for a set period of time
- a trustee makes a non-assessable payment to you from a managed fund or other unit trusts (including a CCIV sub-fund trust)
- you have an annual cost base reduction that exceeds the cost base of your interest in an attribution managed investment trust or attribution CCIV sub-fund trust
- a company makes a payment (not a dividend) to you as a shareholder
- a liquidator or administrator declares that shares or financial instruments you own are worthless
- you receive an amount from a local council for disruption to your business assets by roadworks
- you stop being an Australian resident
- you enter into a conservation covenant
- you dispose of a depreciating asset that you used for private purposes.
Subdividing land does not result in a CGT event if you retain ownership of the subdivided blocks. Therefore, you do not make a capital gain or a capital loss at the time of the subdivision.
Australian residents make a capital gain or capital loss if a CGT event happens to any of their assets anywhere in the world. As a general rule, foreign residents make a capital gain or capital loss only if a CGT event happens to a CGT asset that is taxable Australian property.
Order in which CGT events apply
If more than one CGT event can happen, use the one that is most specific to your situation.
Time of the CGT event
The timing of a CGT event is important because it determines in which income year you report your capital gain or capital loss.
If you dispose of a CGT asset to someone else, the CGT event happens when you enter into the contract for disposal. If there is no contract, the CGT event generally happens when you stop being the asset’s owner.
Example 1: Contract
In June 2023, Sue enters into a contract to sell land. The contract settles in October 2023.
Sue makes the capital gain in 2022–23 (the income year in which she enters into the contract), not 2023–24 (the income year in which settlement takes place).End of example
If a CGT asset you own 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 2: Insurance policy
Laurie owned a rental property that was destroyed by fire in June 2022. He received a payment under an insurance policy in October 2022. The CGT event happened in October 2022.End of example
CGT events relating to shares and units, and the times of the events, are dealt with in Investments in shares and units.
Many CGT assets are easily recognisable, for example, land, shares in a company, and units in a unit trust. Other CGT assets are not so well understood such as contractual rights, options, foreign currency, crypto assets and goodwill. All assets are subject to the CGT rules unless they are specifically excluded.
One example of a crypto asset is bitcoin. For more information on the tax treatment of crypto assets, see Crypto asset investments.
CGT assets fall into one of 3 categories:
Collectables include the following items that you use or keep mainly for the personal use or enjoyment of yourself or your associates:
- paintings, sculptures, drawings, engravings or photographs, reproductions of these items or property of a similar description or use
- coins or medallions
- rare folios, manuscripts or books
- 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
- an option or right to acquire any of those items.
You can only use capital losses from collectables to reduce capital gains (including future capital gains) from collectables. 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 an interest in the collectable for $500 or less before 16 December 1995
- you acquired an interest in the collectable when it had a market value of $500 or less.
If you dispose of a number of collectables individually 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. This does not apply to an individual collectable you acquired before 16 December 1995, which is exempt from CGT if you acquired it for less than $500. This is irrespective of whether or not it would usually be disposed of as part of a set.
A personal use asset is:
- a CGT asset, other than a collectable, that you use or keep mainly for the personal use or enjoyment of yourself or your associates
- 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 or enjoyment
- a debt resulting from you doing something other than gaining or producing your assessable income or carrying on a business.
Personal use assets may include such items as:
- electrical goods
- household items
- crypto assets (if they are acquired and used in a short period of time mainly to purchase items for personal use or consumption).
Land and buildings are not personal use assets. Any capital loss you make from a personal use asset is disregarded.
If a CGT event happened to a personal use asset, disregard any capital gain you make if you acquired the asset for $10,000 or less. If you disposed 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.
Assets that are not collectables or personal use assets include:
- shares in a company
- rights and options
- units in a unit trust
- crypto assets (if they are acquired and held for some time before being used, or only a small proportion is used to buy items for personal use or consumption)
- convertible notes
- your home (see Exemptions)
- contractual rights
- foreign currency
- any major capital improvement made to certain land or pre-CGT assets.
It is the individual partners who make a capital gain or capital loss from a CGT event, not the partnership itself. For CGT purposes, each partner owns a proportion of each CGT asset. Each partner calculates a capital gain or capital loss on their share of each asset and claims their share of a credit for foreign resident capital gains withholding amounts.
Individuals who own an asset as tenants in common may hold unequal interests in the asset. Each tenant in common makes a capital gain or capital loss from a CGT event in line with their interest in the asset. 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. The capital gain or capital loss made when the rental property they dispose of (or another CGT event happens) is split between the individuals according to their legal interest in the property.
For CGT purposes, individuals who own an asset as joint tenants are each treated as if they own an equal interest in the asset as a tenant in common. Each joint tenant makes a capital gain or capital loss from a CGT event in line with their interest in the asset. For example, a couple owning a rental property as joint tenants split the capital gain or capital loss equally between them.
When a 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.
For CGT purposes, there are exceptions to the rule that what is attached to the land is part of the land. In some circumstances, a building or structure is considered to be a CGT asset separate from the land.
Improvements to an asset (including land) acquired before 20 September 1985 may also be treated as a separate CGT asset.
This includes if you acquire land on or after 20 September 1985 which is adjacent to land you already own (purchased before 20 September 1985) and you amalgamate both pieces of land on one title.
Example 3: Adjacent land
On 1 April 1984 Dani bought a block of land. On 1 June 2023, she bought an adjacent block. Dani amalgamated the titles to the 2 blocks into one title.
The second block is treated as a separate CGT asset distinct from the first block. Since the second block was acquired on or after 20 September 1985 it is subject to CGT provisions. Therefore, Dani can make a capital gain or loss from the second block when the whole area of land is sold.End of example
Buildings, structures and other capital improvements to land you acquired on or after 20 September 1985
A building, structure or other capital improvement on land that you acquired on or after 20 September 1985 is a separate CGT asset, not part of the land, if a balancing adjustment provision applies to it. For example, a timber mill building is subject to a balancing adjustment if it is sold or destroyed, so it is treated as an asset separate from the land it is on.
A building or structure on land that you acquired before 20 September 1985 is a separate asset if:
- you entered into a contract for the construction of the building or structure on or after that date, or
- there was no contract for its construction, and construction began on or after that date.
If you make a capital improvement to a CGT asset you acquired before 20 September 1985, this improvement is treated as a separate asset. It is subject to CGT if, at the time a CGT event happens to the original asset, the cost base of the capital improvement is:
- more than the improvement threshold for the year in which the event happens (see table 1)
- more than 5% of the amount of money and property you receive from the event.
If there is more than one capital improvement and they are related, they are treated as one separate CGT asset if the total of their cost bases is more than the threshold.
The improvement threshold is adjusted to take account of inflation. The thresholds for 1985–86 to 2022–23 are shown in table 1.
Whatever you receive as a result of a CGT event are your ‘capital proceeds’. For most CGT events, your capital proceeds are an amount of money or the value of any property you:
- receive, or
- are entitled to receive.
If you receive (or are entitled to receive) foreign currency, you work out the capital proceeds by converting it to Australian currency at the time of the relevant CGT event.
If you receive property (including shares) subject to a deed of escrow (which imposes a restriction on dealing in that property), you include the market value of the property at the time of the relevant CGT event in your capital proceeds.
You reduce your capital proceeds from a CGT event if:
- you are not likely to receive some or all of the proceeds
- the non-receipt of some or all of the proceeds is not due to anything you have done or failed to do
- you took all reasonable steps to get payment.
Provided you are not entitled to a tax deduction for the amount you repaid, your capital proceeds are also reduced by:
- any part of the proceeds that you repay, or
- any compensation you pay that can reasonably be regarded as a repayment of the proceeds.
If you are registered for GST and you receive payment when you dispose of a CGT asset, any GST payable is not part of the capital proceeds.
Market value substitution rule
In some cases, if you receive nothing in exchange for a CGT asset (for example, if you give it away as a gift), you are taken to have received the market value of the asset at the time of the CGT event. You may also be taken to have received the market value if:
- your capital proceeds are more or less than the market value of the CGT asset, and
- you and the purchaser were not dealing with each other at arm’s length in connection with the event.
This is known as the market value substitution rule for capital proceeds.
You are said to be dealing at arm’s length with someone if each party acts independently and neither party exercises influence or control over the other in connection with the transaction. The law looks not only at the relationship between the parties but also at the quality of the bargaining between them.
Example 4: Gifting an asset
On 7 May 2007, Martha and Stephen bought a block of land.
In November 2022, they complete a transfer form to have the block transferred to their adult son, Paul, as a gift.
Because they received nothing for it, Martha and Stephen are taken to have received the market value of the land at the time it was transferred to Paul.End of example
The market value substitution rule for capital proceeds is subject to some exceptions. For example, the substitution rule for capital proceeds does not apply to the following examples of CGT event C2 (about cancellation, surrender and similar endings):
- the expiry of a CGT asset that the taxpayer owns
- the cancellation of a statutory licence held by the taxpayer.
It also does not apply where CGT event C2 happens for interests held in companies and unit trusts that:
- have at least 300 members or unit holders
- do not have concentrated ownership.
It also does not apply if you are a complying superannuation fund, a complying approved deposit fund or a pooled superannuation trust if both of the following apply:
- the capital proceeds from the CGT event exceed the market value of the CGT asset
- assuming the capital proceeds were your statutory income, the proceeds would be non-arm’s length income
There are special rules for calculating the proceeds from a depreciating asset.
If the taxation of financial arrangements (TOFA) rules apply to you, there are special rules for calculating proceeds from a CGT asset, where you start or cease to have a financial arrangement as consideration for providing that CGT asset.
For more information, see:
The cost base of a CGT asset is generally the cost of the asset when you bought it. It also includes certain other costs associated with acquiring, holding and disposing of the asset.
For most CGT events, you need the cost base of the CGT asset to work out whether you have made a capital gain. If you may have made a capital loss, you need the reduced cost base of the CGT asset for your calculation. The columns labelled ‘Capital gain’ and ‘Capital loss’ in the tables at Appendix 1 indicate whether the cost base and reduced cost base of an asset are relevant for a CGT event.
If they are not relevant, the same columns in the tables explain how to work out your capital gain or loss. For example, if you enter into an agreement not to work in a particular industry for a set period of time, CGT event D1 specifies that you calculate your capital gain or capital loss by comparing the capital proceeds with the incidental costs.
Cost base is not relevant when working out a capital gain from a depreciating asset. There are special rules for calculating the cost of a depreciating asset.
For more information, see:
The cost base of a CGT asset is made up of 5 elements:
- money or property given for the asset
- incidental costs of acquiring the CGT asset or that relate to the CGT event
- costs of owning the asset
- capital costs to increase or preserve the value of your asset or to install or move it
- capital costs of preserving or defending your ownership of or rights to your asset.
You need to work out the amount for each element, then add them together to work out the cost base of your CGT asset.
If there is an amount paid in a foreign currency that is part of the cost base you should convert it to Australian currency at the time of the relevant transaction or event.
If you are registered for GST, reduce each element of the cost base of your asset by any related GST net input tax credits. If you are not registered for GST, you do not make any adjustments as the GST is included in the cost base.
Include in the first element:
- the money paid (or required to be paid) for the asset
- the market value of property given (or required to be given) to acquire the asset.
There are 10 incidental costs you may have incurred in acquiring the asset or for the CGT event that happens to it, including its disposal. They are:
- remuneration for the services of a surveyor, valuer, auctioneer, accountant, broker, agent, consultant or legal adviser (you can include the cost of advice concerning the operation of the tax law as an incidental cost only if the advice was provided by a recognised tax adviser and you incurred the cost after 30 June 1989)
- costs of transfer
- stamp duty or other similar duty
- costs of advertising or marketing (but not entertainment) to find a seller or buyer
- costs relating to the making of any valuation or apportionment to determine your capital gain or capital loss
- search fees relating to an asset (such as fees to check land titles and similar fees, but not travel costs to find an asset suitable for purchase)
- the cost of a conveyancing kit (or a similar cost)
- borrowing expenses (such as loan application fees and mortgage discharge fees)
- expenditure that
- is incurred by the head company of a consolidated group to an entity that is not a member of the group
- reasonably relates to a CGT asset held by the head company, and
- is incurred because of a transaction that is between members of the group
- expenditure that is incurred as a direct result of your ownership of a CGT asset ending (also known as termination, exit or similar fees).
You do not include costs if you:
- have claimed a tax deduction for them in any year, or
- omitted to claim a deduction but can still claim it because the period for amending the relevant income tax assessment has not expired.
The costs of owning an asset include rates, land taxes, repairs and insurance premiums. Non-deductible interest on borrowings to finance a loan used to acquire a CGT asset and on loans used to finance capital expenditure you incur to increase an asset’s value are also third element costs.
You do not include such costs if you acquired the asset before 21 August 1991. Nor do you include them if you:
- have claimed a tax deduction for them in any income year, or
- omitted to claim a deduction but can still claim it because the period for amending the relevant income tax assessment has not expired.
You cannot include them at all in the cost base of collectables or personal use assets.
You cannot index these costs or use them to work out a capital loss.
For more information, see Indexation of the cost base.
Fourth element: capital costs to increase or preserve the value of your asset or to install or move it
The 4th element is capital costs you incurred for the purpose or the expected effect of increasing or preserving the asset’s value. For example, costs incurred in applying (successfully or unsuccessfully) for zoning changes. It also includes capital costs you incurred that relate to installing or moving an asset. But, it does not include capital expenditure incurred for goodwill, which may be deductible as a business-related cost.
For more information, see Guide to depreciating assets 2023.
Capital expenses you incur to preserve or defend your ownership of, or rights to, the asset come under this element, for example, you paid a call on shares.
- Assets acquired after 13 May 1997
If you acquired a CGT asset after 13 May 1997, the cost base of the asset excludes
- any expenditure in the first, 4th or 5th element for which you have claimed a tax deduction in any income year, or have omitted to claim but can still claim as a deduction because the period for amending the relevant income tax assessment has not expired
- heritage conservation expenditure and Landcare and water facilities expenditure incurred after 12 November 1998 that give rise to a tax offset.
Special rules apply for land and buildings. For more information, see Cost base adjustments for capital works deductions.
- Reversal of deduction: effect on cost base
In some cases, a deduction you have claimed on a CGT asset can be partly or wholly ‘reversed’. This means that part or all of the deduction may be included in your assessable income in the income year the CGT event happens. In this case, you increase the cost base of the CGT asset by the amount you have to include in your assessable income.
- Indexation of the cost base
If a CGT event happened to a CGT asset you acquired at or before 11:45 am AEST on 21 September 1999, you can use either the indexation method or the discount method to calculate your capital gain.
If you use the indexation method, some of the cost base expenditure you incurred up to this time may be indexed to account for inflation up to the September 1999 quarter. Only expenditure incurred before this time may be indexed because changes to the law mean indexation was frozen at that date.
For more information, see How to work out your capital gain or capital loss.
When a CGT event happens to a CGT asset and you haven’t made a capital gain, you need the asset’s reduced cost base to work out whether you have made a capital loss. Remember, you can use a capital loss to reduce capital gains only, you cannot use it to reduce other income.
Elements of the reduced cost base
The reduced cost base of a CGT asset has the same 5 elements as the cost base, except for the third element:
- money or property given for the asset
- incidental costs of acquiring the CGT asset or that relate to the CGT event
- balancing adjustment amount (any amount that is assessable because of a balancing adjustment for the asset or that would be assessable if certain balancing adjustment relief were not available)
- capital costs to increase or preserve the value of your asset or to install or move it
- capital costs of preserving or defending your title or rights to your asset.
These elements are not indexed.
You need to work out the amount for each element, then add the amounts together to find out your reduced cost base for the relevant CGT asset.
If you are registered for GST, you reduce each element of the reduced cost base of the asset by the amount of any GST net input tax credits for that element. If you are not registered for GST you do not make any adjustment and the GST paid is included in the reduced cost base.
The reduced cost base does not include any costs you:
- have incurred for which you have claimed a tax deduction, or
- have omitted to claim, but can still claim, a deduction because the period for amending the relevant income tax assessment has not expired. For example, capital works deductions for capital expenditure.
Example 5: Capital works deduction: effect on reduced cost base
Danuta acquired a new income-producing asset on 28 September 2005 for $100,000. She sold it for $90,000 in November 2022. During the period she owned it, she claimed capital works deductions of $7,500. Her capital loss is worked out as follows:
less capital works deductions
Reduced cost base
less capital proceeds
End of example
In some cases, the general rules for calculating the cost base and reduced cost base have to be modified. For example, you substitute the market value for the first element of the cost base and reduced cost base if:
- you did not incur expenditure to acquire the asset
- some or all of the expenditure you incurred cannot be valued
- you did not deal at arm’s length with the previous owner in acquiring the asset.
This is known as the market value substitution rule for cost base and reduced cost base.
There are exceptions to the market value substitution rule. One exception is where shares in a company, or units in a unit trust, are issued or allotted to you but you did not pay anything for them.
You do not include expenditure you subsequently recoup (such as an insurance payout you receive or an amount paid for by someone else) in the cost base and reduced cost of a CGT asset except to the extent the recouped amount is included in your assessable income.
John bought a building in 2000 for $200,000 and incurred $10,000 in legal costs associated with the purchase. As part of a settlement, the vendor agreed to pay $4,000 of the legal costs. John did not claim as a tax deduction any part of the $6,000 he paid in legal costs.
He later sells the building. As he received reimbursement of $4,000 of the legal costs, in working out his capital gain, he includes only the $6,000 he incurred in the cost base.End of example
If you acquire a CGT asset and only part of the expenditure relates to the acquisition of the CGT asset, you can only include that part of the expenditure that is reasonably attributable to the acquisition of the asset in its cost base and reduced cost base.
Apportionment is also required if you incur expenditure and only part of that expenditure relates to another element of the cost base and reduced cost base.
Similarly, if a CGT event happens only to part of your CGT asset, you generally apportion the asset’s cost base and reduced cost base to work out the capital gain or capital loss from the CGT event.
The rules that apply to members of a consolidated group modify the application of the CGT rules.
For more information, see Consolidation.
Value shifting generally occurs when a dealing or transaction between 2 parties is not at market value. It results in the value of one asset decreasing and (usually) the value of another asset increasing.
The general value shifting regime (GVSR) rules apply to value shifts that arise:
- because interests in a company or trust are issued or bought back at other than market value, or because their rights are varied so that the value of some interests increases while the value of others decreases (direct value shifts on interests)
- because 2 entities under the same control or ownership conduct dealings or transactions that are neither at market value nor arm’s length, so that the value of interests in one entity decreases while (usually) the value of interests in the other entity increases (indirect value shifting)
- from the creation of a right over a non-depreciating asset in favour of an associate for less than market value (direct value shifts by creating rights).
The rules on direct value shifts on interests target only equity or loan interests held by an individual or entity that controls the company or trust, the controller’s associates and, if the company or trust is closely held, any active participants in the arrangement.
The indirect value shifting rules target only equity or loan interests held by an individual or entity that controls the 2 entities conducting the dealing or transaction and the controller’s associates. But if the 2 entities are closely held, the rules also target equity or loan interests held by 2 or more common owners of those entities, the common owner’s associates and any active participants in the arrangement.
There are also exclusions and safe harbours that limit the operation of the rules.
If the rules apply, you may need to adjust:
- the cost base and reduced cost base of equity and loan interests affected by the value shift, or
- a realised loss or gain on the disposal of the relevant assets.
In some cases, there may also be an immediate capital gain.
For more information, see General value shifting regime – who it affects.
There are other rules that may affect the cost base and reduced cost base of an asset. For example, they are calculated differently:
- if the asset is your main residence and you use it to produce income for the first time after 20 August 1996, see Real estate and main residence
- if you receive the asset as a beneficiary or as the legal personal representative of a deceased estate, see Deceased estates
- for bonus shares or units, rights and options and convertible notes, see Investments in shares and units
- under a demerger, see Investments in shares and units
- where you have been freed from paying a debt, see Debt forgiveness below
- where you start or cease to have a financial arrangement as consideration for acquiring a CGT asset, see Guide to the taxation of financial arrangements (TOFA)
- for eligible shares in an early stage innovation company (ESIC) that have been continuously held for 10 years or the subject of certain CGT rollovers, see How does CGT apply to qualifying shares and How does the modified CGT treatment apply to a rollover?.
A debt is forgiven if you are freed from the obligation to pay it. Commercial debt forgiveness rules apply to debts forgiven after 27 June 1996. A debt is a commercial debt if part or all of the interest payable on the debt is, or would be, an allowable deduction.
Under the commercial debt forgiveness rules, a forgiven amount may reduce (in the following order) your:
- prior income year revenue losses
- net capital losses from earlier years
- deductions for capital allowances and some similar deductions
- assets’ cost base and reduced cost base.
These rules do not apply if the debt is forgiven either:
- as a result of an action under bankruptcy law
- in a deceased person’s will
- for reasons of natural love and affection.
Nor do the rules apply if:
- the debt is waived and the waiver constitutes a fringe benefit
- the amount of debt has been, or will be included in your assessable income in any income year
- the debt is a tax-related liability.
Example 7: Applying a forgiven debt
On 1 July 2022, Josef had available net capital losses from earlier years of $9,000. On 3 January 2023, he sold shares he had owned for more than 12 months for $20,000. They had a cost base (no indexation) of $7,500. On 1 April 2023, a commercial debt of $15,000 that Josef owed to AZC Pty Ltd was forgiven. Josef had no prior income year revenue losses and no deductible capital expenditure.
Josef must use part of the forgiven commercial debt amount to wipe out his net capital losses from earlier years and the rest to reduce the cost base of his shares. He works out the amount of net capital gain to include in his assessable income as follows:
Available net capital losses from earlier years
less debt forgiveness adjustment
Adjusted net capital losses from earlier years
Cost base of shares (no indexation)
less debt forgiveness adjustment
Adjusted cost base (no indexation)
Sale of shares
less adjusted cost base (no indexation)
less adjusted net capital losses from earlier years
Capital gain (eligible for discount)
less discount percentage (50%)
Net capital gain
End of example
Generally, you acquire a CGT asset when you become its owner. You may acquire a CGT asset for the following reasons:
- Someone else has a CGT event (for example, the transfer of land to you under a contract of sale). If you acquired an asset because of a CGT event, you are generally taken to have acquired the asset at the time of the CGT event. For example, if you enter into a contract to purchase a CGT asset, the time of acquisition is when you enter into the contract. However, if you obtain an asset without entering into a contract, the time of acquisition is when you start being the asset’s owner.
- Other events or transactions happen that are not the result of someone else having a CGT event. For example, if a company issues or allots shares to you (which is not a CGT event), you acquire the shares when you enter into a contract to acquire them or, if there is no contract, at the time of their issue or allotment.
- Other special CGT rules apply. For example, if a CGT asset passes to you as a beneficiary of someone who has died, you are taken to have acquired the asset on the date of the person’s death. Also, if you start using your main residence to produce income for the first time after 20 August 1996, you are taken to have acquired it at its market value at the time it is first used to produce income.
Time of acquisition
The time at which a CGT asset is acquired is important for 5 reasons:
- CGT generally does not apply to assets acquired before 20 September 1985 (pre-CGT assets)
- different cost base rules apply to assets acquired at different times. For example, the costs of owning an asset (see Third element: costs of owning the asset) are not included in the cost base if you acquired it before 21 August 1991
- it determines whether the cost base can be indexed for inflation and the extent of that indexation (see How to work out your capital gain or capital loss)
- it determines whether you are eligible for the CGT discount. For example, one requirement is that you need to have owned the CGT asset for at least 12 months (see How to work out your capital gain or capital loss)
- it determines whether you are eligible for modified CGT treatment. For example, a capital gain on eligible shares in an ESIC is disregarded if the shares were held continuously for at least 12 months but less than 10 years (see Exemptions and rollovers).
There can be CGT consequences when you receive compensation.
You disregard some capital gains made as a result of you receiving compensation, for example, compensation for personal injury or compensation payable under certain government programs. For details of other compensation you disregard, see Exemptions. You may defer a capital gain made as a result of compensation for the loss, destruction or compulsory acquisition of an asset.
A compensation payment may relate to the disposal of, or permanent damage to, an underlying asset. The underlying asset is the most relevant asset to which the compensation amount is most directly related. For example, if you receive compensation for damage to a rental property, the most relevant asset (the underlying asset) is the rental property.
- If the payment relates to the disposal (in whole or part) of an underlying asset, the compensation is treated as additional capital proceeds for the disposal of that asset.
- If the payment relates to permanent damage to, or permanent reduction in the value of, an underlying asset, the compensation is treated as a recoupment of all or part of the acquisition cost of the asset (that is, you reduce the cost base and reduced cost base by the amount of the compensation).
- If the payment is not for 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.
For more information, see TR 95/35 Income tax: capital gains: treatment of compensation receipts.
There are special CGT rules that apply if you are a foreign resident or if you become or stop being an Australian resident. (Unless otherwise specified, ‘Australian resident’ means a resident of Australia for tax purposes.) There are also specific rules for temporary residents. These rules do not affect pre-CGT assets.
For periods when you are a foreign resident or temporary resident only certain assets are subject to CGT. Also, when you become an Australian resident or stop being one, the range of assets on which you pay CGT in Australia changes.
You may no longer receive the full 50% discount on capital gains made on taxable Australian property if you are:
- an individual
- a beneficiary of a trust, or
- a partner in a partnership
- a foreign or temporary resident, or
- an Australian resident with a period of foreign residency.
For more information, see CGT discount for foreign residents.
If you are a foreign resident, you are subject to CGT if a CGT event happens to a CGT asset that is ‘taxable Australian property’.
There are specific rules where the CGT asset is a share or right acquired under an employee share scheme and you are or have been a temporary resident.
For more information, see ESS – Foreign income exemption for Australian residents and temporary residents.
Taxable Australian property includes:
- a direct interest in real property situated in Australia or a mining, prospecting or quarrying right to minerals, petroleum and quarry materials situated in Australia
- a CGT asset that you have used at any time in carrying on a business through a permanent establishment in Australia
- an indirect Australian real property interest (which is an interest in an entity, including a foreign entity, where you and your associates hold 10% or more of the entity and the value of your interest is principally attributable to Australian real property).
Taxable Australian property also includes an option or right over one of the above.
For CGT events happening on or after 20 May 2009, a leasehold interest in land situated in Australia is 'real property situated in Australia'.
Certain CGT assets will also be taken to be taxable Australian property. See Choosing to disregard capital gains and capital losses when you cease being an Australian resident.
If you are a foreign resident, or the trustee of a trust that was not a resident trust for CGT purposes, and:
- you acquired a post-CGT indirect Australian real property interest before 11 May 2005; and
- that interest did not have the necessary connection with Australia but is taxable Australian property,
you are taken to have acquired it on 10 May 2005 for its market value on that day.
If you are a foreign resident and have entered into a transaction on or after 1 July 2016 to dispose of a CGT asset of yours that is taxable Australian property, payments made to you in that transaction may be subject to withholding.
For more information, see Foreign residents and capital gains tax.
Temporary residents are subject to the same CGT rules as foreign residents. However, there are specific rules where the CGT asset is a share or right acquired under an employee share scheme and you are, or have been, a temporary resident. For more information, see ESS – Foreign income exemption for Australian residents and temporary residents.
This means, if you are a temporary resident, you will be subject to CGT on CGT events that happen to taxable Australian property.
You are a temporary resident if you:
- hold a temporary visa granted under the Migration Act 1958
- are not an Australian resident within the meaning of the Social Security Act 1991, and
- do not have a spouse who is an Australian resident within the meaning of the Social Security Act 1991.
The Social Security Act 1991 defines an Australian resident as a person who resides in Australia and is an Australian citizen, the holder of a permanent visa, or a protected special category visa holder.
Anyone who is an Australian resident for tax purposes after 6 April 2006, but is not a temporary resident, cannot later become a temporary resident, even if they later hold a temporary visa.
If you cease being a temporary resident and remain an Australian resident, then you are taken to have acquired assets (other than assets you acquired before 20 September 1985) that are not taxable Australian property for their market value at the time you ceased being a temporary resident. There is an exception to this rule for employee shares and rights.
When you become an Australian resident (other than a temporary resident), you are taken to have acquired certain assets at the time you became a resident, for their market value at that time.
This does not apply to assets you acquired before 20 September 1985 (pre-CGT assets) and assets that were taxable Australian property.
If you have become a resident, the general cost base rules apply to any CGT assets that are taxable Australian property.
If you cease being an Australian resident, or ceased being a resident trust for CGT purposes, you are taken to have disposed of each of your assets that are not taxable Australian property for their market value at the time you ceased being a resident. In the case of any indirect Australian real property interests and options or rights to acquire such interests, you are taken to have immediately reacquired these assets for their market value.
For more information, see Taxable Australian property.
If you are a temporary resident when you cease to be an Australian resident, you are not taken to have disposed of any of your assets.
If you are an individual, you can choose to disregard all capital gains and capital losses you made when you stopped being a resident.
If you ceased being a resident and make this choice, the assets are taken to be taxable Australian property until the earlier of:
- a CGT event happening to the assets (for example, their sale or disposal), or
- you again becoming an Australian resident.
The effect of making this choice is that the increase or decrease in value of the assets from the time you cease being a resident to the time of the next CGT event, or of you again becoming a resident, is also taken into account in working out your capital gains or capital losses on those assets.
There are a number of provisions in the CGT laws that allow you to make a choice.
Some of the provisions allow you to defer or roll over a capital gain you make when a CGT event happens (such as exchanging an asset for a replacement asset) until a later CGT event (such as selling the replacement asset).
The general rule under CGT law is that you must make a choice by the day you lodge your income tax return for the income year in which the relevant CGT event happened.
The way you prepare your tax return is sufficient evidence of your choice. However, there are some exceptions:
- companies must make some decisions about replacement asset rollovers earlier
- choices relating to amounts disregarded under the small business retirement exemption must be made in writing
- choices relating to the assessment of capital gains of resident testamentary trusts must be made by a trustee within a specific period.
Once you make such a choice, it cannot be changed. Your choice is binding.
However, there are some circumstances when we consider that you have not made a choice. These are if you lodge your tax return without being aware that:
- events have happened that required you to make a choice, or
- a choice was available.
In these circumstances, we may allow you more time to make a choice.
To determine if more time should be allowed, we consider factors such as whether:
- you have an acceptable explanation for not making the choice by the time it should have been made
- it would be fair and equitable in the circumstances to allow you more time to make a choice
- prejudice to the Commissioner of Taxation (Commissioner) may result from additional time being allowed to you (note that the absence of prejudice by itself is not enough to justify the granting of an extension)
- it would be fair and equitable to people in similar positions and the wider public interest
- any mischief is involved.
Each case is decided on its own merits.
If you have lodged a tax return without knowing a choice was available to you under CGT law and you want to find out how to make a request for more time to make the choice, see Applying for an extension on a capital gain rollover.
CGT choices you can make include:
- You may use the indexation method rather than the CGT discount method if a CGT event happens to a CGT asset you acquired before 21 September 1999 (or are taken to have acquired before that date for the purpose of using those methods). See Choosing the indexation or discount method.
- You may make a capital loss for the income year in which a liquidator or administrator declares in writing that shares or securities held in a company are worthless. See Shares in a company in liquidation or administration.
- You may roll over a capital gain if a company in which you hold shares is taken over and you receive shares in the takeover company and the takeover meets certain conditions. This is known as a scrip for scrip rollover. It can also apply if a trust or fund in which you hold units is taken over and you receive units in the takeover trust or fund. The company, trust or fund will usually advise investors if the conditions for rollover are met. See Scrip for scrip rollover.
- You may roll over a capital gain if you hold shares in a company that demerges (or splits), you receive shares in the demerged company, and the demerger meets certain conditions. A rollover can also apply if you hold units in a trust or fund that demerges and you receive units in the demerged trust or fund. The head company or head trust or fund will usually advise investors if the conditions for a rollover are met. See Demergers.
- You may rollover a capital gain if you receive money or property (or both) as compensation for the loss or destruction of an asset or for the compulsory acquisition of property if certain conditions are met. See Loss, destruction or compulsory acquisition of an asset.
- You may treat a dwelling as your main residence even though
- you no longer live in it (see Continuing main residence status after dwelling ceases to be your main residence), or
- you are yet to live in it but will do so as soon as practicable after it is constructed, repaired or renovated and will continue to live in it for at least 3 months (see Constructing, renovating or repairing a dwelling on land you already own).
You make the choice when you prepare your income tax return for the income year in which you enter into the contract to sell the dwelling. If you own both:
- the dwelling that you can choose to treat as your main residence for one of the periods above, and
- the dwelling you actually lived in during that period
then you make the choice for the income year in which you enter into the contract to sell the first of those dwellings.
There are exemptions and rollovers that may allow you to reduce, defer or disregard your capital gain or capital loss.
There is no general rollover or exemption for a capital gain you make when you sell an asset and:
- put the proceeds into a superannuation fund
- use the proceeds to purchase an identical or similar asset, or
- transfer an asset into a superannuation fund.
For example, if you sell a rental property and put the proceeds into a superannuation fund, or use the proceeds to purchase another rental property, a rollover is not available.
If you are a small business, there are concessions that allow you to reduce, defer or disregard your capital gain when you sell your business assets. These concessions are in addition to the CGT exemptions and rollovers available more widely.
For more information, see Small business CGT concessions.
Generally, capital gains and capital losses from pre-CGT assets (that is, an asset you acquired before 20 September 1985) are exempt. However, CGT event K6 can result in capital gains if certain CGT events happen to pre-CGT shares in a company or to pre-CGT interests in a trust. See TR 2004/18 Income tax: capital gains: application of CGT event K6 (about pre-CGT shares and pre-CGT trust interests) in section 104-230 of the Income Tax Assessment Act 1997.
Another important exemption is for a capital gain or capital loss you make from a CGT event relating to a dwelling that was your main residence. This rule can change depending on how you came to own the dwelling and what you have done with it, for example, if you rented it out. For more information, see Real estate and main residence.
Capital gains and capital losses that are also disregarded include those you make from:
- a car (that is, a motor vehicle designed to carry a load of less than one tonne and fewer than 9 passengers) or motorcycle or similar vehicle
- a decoration awarded for valour or brave conduct, unless you paid money or gave any other property for it
- collectables acquired for $500 or less
- a capital gain from a personal use asset acquired for $10,000 or less
- any capital loss from a personal use asset
- CGT assets used solely to produce exempt income or some amounts of non-assessable non-exempt income (that is, tax-free income)
- a CGT asset that is your trading stock at the time of a CGT event
- certain profits, gains or losses resulting from the disposal of shares in a pooled development fund, see Appendix 7 of the Company tax return instructions 2023
- compensation or damages you receive for any
- wrong or injury you suffer in your occupation
- wrong, injury or illness you or your relatives suffer
- compensation you receive under the firearms surrender arrangements
- winnings or losses from gambling, a game or a competition with prizes
- transferring an asset into a Special Disability Trust for no consideration
- a reimbursement or payment of your expenses (but not for the loss, destruction or transfer of an asset) under a scheme established
- by an Australian Government agency, a local government body or foreign government agency
- under an Act or legislative instrument (for example, regulations or local government by-laws)
- a reimbursement or payment of expenses under the Unlawful Termination Assistance Scheme or the Alternative Dispute Resolution Assistance Scheme
- a reimbursement or payment of your expenses under the General Practice Rural Incentives Program
- a reimbursement or payment made under the M4/M5 Cashback Scheme
- a right or entitlement to a tax offset, deduction or a similar benefit under an Australian law, under the law of a foreign country or part of a foreign country
- some types of testamentary gifts
- assignment of a right under, or for, a general insurance policy held with an HIH company, to the Commonwealth, the trustee of the HIH trust or a prescribed entity
- your rights being created or your rights ending for making a superannuation agreement (as defined in the Family Law Act 1975), the termination or setting aside of such an agreement or such an agreement otherwise coming to an end
- the ending of rights that directly relate to the breakdown of your marriage or relationship, including cash you receive as part of your marriage or relationship breakdown settlement
- a CGT event happening for a segregated current pension asset (made by a complying superannuation entity)
- in certain circumstances, a general insurance policy, a life insurance policy or an annuity instrument
- in certain circumstances, the disposal of eligible venture capital investments made 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 Venture capital and early stage venture capital limited partnerships
- eligible shares in an ESIC you have held continuously for less than 10 years and, in the case of capital gains, the shares were also held for at least 12 months, see How does CGT apply to qualifying shares
- a financial arrangement where gains and losses are calculated under the TOFA rules, see section 118-27 of ITAA 1997
- certain CGT events happening to shares held by an Australian resident company that represents a non-portfolio interest in a foreign company to the extent the foreign company has an underlying active business (Subdivision 768-G)
- ceasing to hold an eligible vessel to the extent it is used to produce certain exempt income, see subsection 104-235(1AA) of ITAA 1997.
You may reduce your capital gain if, because of a CGT event, you have included an amount in your assessable income other than as a capital gain. For example, if you make a profit on the sale of land that is included in your assessable income as ordinary income, you don’t also include that profit as a capital gain.
There is a range of concessions that allow you to disregard part or all of a capital gain made from an active asset you use in your small business.
For more information, see Small business CGT concessions.
You disregard any capital loss you make:
- from the expiry, forfeiture, surrender or assignment of a lease if the lease is not used solely or mainly for the purpose of producing assessable income
- from a payment to any entity of personal services income that 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 entity.
There are special rules for when CGT will apply to assets held by Norfolk Island residents. If:
- on or before 23 October 2015 you
- were a Norfolk Island resident
- acquired and held the CGT asset, and
- any capital gain or loss from a CGT event in relation to the asset would have been disregarded (because you were a Norfolk Island resident) if the CGT event in relation to the asset had instead happened immediately before 24 October 2015
then the references in this guide to 20 September 1985 apply in relation to the asset as if they were references to 24 October 2015.
For more information, see Norfolk Island tax and super.
Other exemptions: granny flat arrangements
From 1 July 2021, no CGT event arises to eligible individuals on certain granny flat arrangements if the arrangement satisfies the requirements of the provisions. The CGT exemption will apply to the creation, variation or termination of a granny flat arrangement.
There are requirements that need to be satisfied for the CGT event not to happen:
- The individual is eligible for the granny flat interest if they have reached pension ageExternal Link or have a disability that means they require assistance for most day-to-day activities for at least 12 months.
- An individual owns the dwelling where the granny flat interest is held, or is to be held, at the time of entering into or varying the arrangement, or agrees to acquire such a dwelling under the arrangement.
- Both the individual who is to hold the granny flat interest, and the individual who owns or agrees to acquire the dwelling where the granny flat interest is to be held, are parties to the arrangement.
- The arrangement is in writing and indicates an intention for the parties to be legally bound by it.
- The arrangement is not of a commercial nature.
Granny flat interest
A ‘granny flat interest’ in a dwelling is a right (put in place under a granny flat arrangement) to occupy that dwelling for life.
A granny flat interest does not have to relate to properties often referred to as ‘granny flats’ as it is not a description of the type of property. An individual can have a granny flat interest in a wide range of properties, such as a family home, or a family’s rental property or holiday home.
The property that an individual has the right to occupy for life will not change its CGT status as a result of the granny flat arrangement. For example, if the property is eligible for the main residence exemption, the granny flat arrangement will not change this. If the property is not eligible for the main residence exemption, a granny flat arrangement will not make it eligible. This is because the asset arising from the granny flat arrangement is the right to occupy a property, not the property itself.
Under this measure, the term refers to the dwelling the individual has the right to occupy because of the granny flat interest.
‘Dwelling’ is a unit of accommodation, such as a residential home, and includes the land beneath the home.
For more information see Granny flat arrangements and CGT.
You may defer or disregard (that is, rollover) a capital gain or capital loss until a later CGT event happens. The types of rollovers available are listed below. Only the first 4 types are covered in detail in this guide. If you would like information on the others, contact us.
In certain 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 a later CGT event happens. For example, until the former spouse sells the asset to someone else. For more examples of how CGT obligations are affected by marriage or relationship breakdown, see Marriage or relationship breakdown.
You may defer a capital gain in some cases where a CGT asset has been lost, destroyed or is compulsorily acquired.
For more information, see Loss, destruction or compulsory acquisition of an asset.
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, see Investments in shares and units.
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, see Investments in shares and units.
You may be able to defer a capital gain or capital loss when you replace an asset in the following circumstances:
- an individual or trustee disposes of assets to, or creates assets in, a wholly owned company
- partners dispose of assets to, or create assets in, a wholly owned company
- a CGT event happens to small business assets and you acquire replacement assets
- your statutory licence ends and is replaced with another statutory licence or licences which authorises substantially similar activity to the original licence or licences
- you are a financial service provider who had assets (for example, licences) replaced on transition to the financial services reform (FSR) regime
- your property is converted to strata title
- you exchange shares in the same company or units in the same unit trust
- you exchange rights or options to acquire shares in a company or units in a unit trust
- you exchange shares in one company for shares in an interposed company
- you exchange units in a unit trust for shares in a company
- a body is converted to an incorporated company
- you acquire a Crown lease
- you acquire a depreciating asset
- you acquire prospecting and mining entitlements
- you dispose of a security under a securities lending arrangement
- a trust restructure ends your ownership of units or interests
- 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.
If you would like information on these rollovers, contact us or your recognised tax adviser.
You may be able to defer a capital gain or capital loss when you transfer or dispose of assets in the following circumstances:
- an individual or trustee transfers a CGT asset to a wholly owned company
- a partner transfers their interest in a CGT asset to a wholly owned company
- a CGT asset is transferred between related companies
- a trust disposes of a CGT asset to a company under a trust restructure
- a CGT event happens because of a change to a trust deed of a complying approved deposit fund, a complying superannuation fund or a fund that accepts worker entitlement contributions
- a CGT asset is transferred from one small superannuation fund to another complying superannuation fund because of a marriage or relationship breakdown
- 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.
If you would like information on these rollovers, contact us or your recognised tax adviser.
A CGT asset can be denominated in a foreign currency and foreign currency cash itself can be a CGT asset. Gains or losses that you make during the period that you hold such assets will generally be taxed as a capital gain or capital loss respectively. However, if dealings with foreign currency denominated assets give rise to rights to receive or obligations to pay foreign currency, the rights or obligations may be subject to the foreign exchange (forex) provisions when a right or obligation ceases. For example, if a contract you enter into to sell an overseas rental property is denominated in foreign currency, you will have a right to receive foreign currency (being the sale price of the rental property). The right ceases on payment of the foreign currency. Such rights and obligations will usually arise on the acquisition or disposal of a CGT asset.
A forex gain or loss commonly arises for the acquisition or disposal of a CGT asset denominated in foreign currency, where there is a currency exchange rate fluctuation between the date you entered into the contract and the date of settlement of the contract (when payment occurs). Currency fluctuations between the date of acquisition and date of disposal of a CGT asset are taken into account when the cost base and capital proceeds are translated into Australian currency.
It may be that the gain or loss you make on the ending of rights for foreign currency, a disposal of foreign currency or a right to receive foreign currency is taxable under both CGT and the forex measures. Generally, to the extent that both the forex measures and CGT bring to account a forex gain or loss, the forex measures take precedence. That is the forex gain or loss is brought to account only under the forex provisions.
In addition, if the TOFA rules apply to you, your foreign exchange gains and losses may be brought to account under those TOFA rules instead of the forex measures.
For more information, see Guide to the taxation of financial arrangements (TOFA).
Short-term foreign exchange gains and losses rules
Some short-term foreign exchange (forex) gains or losses will be treated as capital gains or capital losses. This arises under transactions for the acquisition or disposal of certain CGT assets. In such cases, CGT events K10 or K11 will happen, which will result in the forex gain or loss being integrated into the tax treatment of the CGT asset. Or they are matched to the character of the gain or loss that would arise from the disposal of the asset. For the short-term rules to apply, the due date for payment must be within 12 months of acquiring or disposing of the asset.
For more information, see Capital assets and the 12-month rule.
Translating (converting) foreign currency denominated CGT assets to Australian dollars
For information on what exchange rates to use in translating foreign currency amounts into Australian currency, see Translation (conversion) rules.
Examples of the application of forex rules to CGT assets
For examples of the application of the forex rules to acquisitions and disposals of foreign currency denominated CGT assets, see Common forex transactions.
Under the uniform capital allowance (UCA) system, a capital gain or capital loss may arise from the disposal of a depreciating asset. It will only arise to the extent that you have used the asset for a non-taxable purpose (for example, for private purposes).
You calculate a capital gain or capital loss from a depreciating asset used for a non-taxable purpose using the UCA concepts of cost and termination value. You do not use the concepts of capital proceeds and cost base found in the CGT provisions.
If a balancing adjustment event occurs for a depreciating asset that you have at some time used for a non-taxable purpose, a CGT event happens. See CGT event K7 in appendix 1. The most common balancing adjustment event for a depreciating asset occurs when you stop holding it (for example, you sell, lose or destroy it) or stop using it.
You make a capital gain if the termination value of your depreciating asset is greater than its cost. You make a capital loss if the reverse is the case, that is, the asset’s cost is more than its termination value.
You use different formulas to calculate a capital gain or capital loss depending on whether the asset is in a low-value pool or not.
If your depreciating asset is not a pooled asset, you calculate the capital gain as follows:
You calculate the capital loss from a depreciating asset that is not a pooled asset as follows:
Example 8: Capital gain on depreciating asset
Larry purchased a truck in August 2021 for $25,000 and sold it in June 2023 for $27,000. He used the truck 10% of the time for private purposes. The decline in value of the truck under the UCA system up to the date of sale was $2,000. Therefore, the sum of his reductions relating to his private use is $200 (10% of $2,000). Larry calculates his capital gain from CGT event K7 as follows:
($27,000 − $25,000) × (200 ÷ 2,000)
Capital gain from CGT event K7 = $200 (before applying any discount).End of example
You calculate the capital gain from a depreciating asset in a low-value pool as follows:
(termination value − cost) × (1 − taxable use fraction (note 3))
You calculate the capital loss from a depreciating asset in a low-value pool as follows:
(cost − termination value) × (1 − taxable use fraction (note 3))
- The sum of the reductions in your deductions for the asset’s decline in value that is attributable to
- your use of the asset, or
- having it installed ready for use, for a non-taxable purpose.
- The decline in the value of the depreciating asset since you started to hold it.
- Taxable use fraction is the percentage of the asset’s use that is for producing your assessable income, expressed as a fraction. This is the percentage you reasonably estimate at the time you allocated the asset to the low-value pool.
A capital gain from a depreciating asset may qualify for the CGT discount if the relevant conditions are satisfied. If the CGT discount applies, there is no reduction of the capital gain under the indexation method.
The small business CGT concessions do not apply to a capital gain made from the disposal of a depreciating asset. This is because a capital gain can only arise out of such an asset’s use for non-taxable purposes (for example, to the extent it is used for private purposes).
For more information, see How to work out your capital gain or capital loss.
Exemptions may apply to a capital gain or capital loss made from the disposal of a depreciating asset:
- pre-CGT assets – you disregard a capital gain or capital loss from a depreciating asset if the asset was acquired before 20 September 1985
- assets of small business entities - you disregard a capital gain or capital loss from a depreciating asset if you are a small business entity and you can deduct an amount for the depreciating asset’s decline in value under the small business entity capital allowance provisions for the income year in which the balancing adjustment event occurred
- personal use asset
- if a depreciating asset is a personal use asset (that is, one used or kept mainly for personal use and enjoyment), you disregard any capital loss from CGT event K7
- you also disregard a capital gain under CGT event K7 from a personal use asset costing $10,000 or less
- collectables – you disregard a capital gain or a capital loss from a depreciating asset that is a collectable costing $500 or less
- balancing adjustment event and CGT event - you only include a balancing adjustment event that gives rise to a capital gain or capital loss under CGT event K7. However, capital proceeds received under other CGT events (for example, CGT event D1) may still be relevant for a depreciating asset as CGT events are not the equivalent of balancing adjustment events.
Under the capital allowance rules, intellectual property is a depreciating asset.
If you grant or assign an interest in an item of intellectual property, you are treated as if you had stopped holding part of the item. You are also treated as if, just before you stop holding that part, you had split the original item of intellectual property into 2 parts. That is, the part you stopped holding and the rest of the original item. You determine a first element of the cost for each part.
This treatment applies if a licence is granted over an item of intellectual property. To this extent, the treatment of intellectual property is different from other depreciating assets. The granting of a licence in respect of other depreciating assets would result in CGT event D1 (about creating contractual rights) happening.
For more information, see Guide to depreciating assets 2023.
How to work out your capital gain or capital loss in part A explains how to calculate a capital gain using one of the 3 methods:
Trust distributions in part A explains how to calculate your capital gain if a managed fund or trust has distributed a capital gain to you. You must take into account capital gains included in trust distributions in working out your net capital gain or net capital loss.
For more specific directions on how to complete your tax return, see:
- Part B for individuals
- Part C for companies, trusts and funds (individuals who use the worksheets may find steps 1, 2 and 3 in part C useful, ignore the word ‘entity’).
Continue to: How to work out your capital gain or capital loss