What is capital gains tax and what rate of tax do you pay?
Some terms in this section may be new to you. These words are explained in Explanation of terms.
While we have used the word 'bought' rather than 'acquired' in our examples, you may have acquired your shares or units without paying for them (for example, as a gift or through an inheritance or through the demutualisation of an insurance company such as AMP or NRMA or a demerger such as the demerger of BHP Steel Limited). If you acquired shares or units in any of these ways you may be subject to capital gains tax (CGT) when you sell them.
Similarly, we refer to 'selling' shares or units when you may have disposed of them in some other way (for example, giving them away or transferring them to someone else). All of these disposals are CGT events.
CGT is the tax you pay on any capital gain that 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 (including any net capital losses from previous years)
- any CGT discount and CGT small business concessions to which you are entitled.
You make a capital gain or a capital loss if a CGT event happens. The disposal of an asset is an example of a CGT event. You can also make a capital gain if a managed fund or other trust distributes a capital gain to you.
You show the total of your current year capital gains at H item 17 on your 2004 tax return for individuals (supplementary section), or at H item 9 if you use the 2004 tax return for retirees. (Note: You cannot use the tax return for retirees if you had a distribution from a managed fund during the year.) You show your net capital gain at A item 17 on your tax return, or at A item 9 if you use the tax return for retirees.
This guide only covers capital gains or capital losses from CGT assets that are shares, units or other interests in managed funds.
Australian residents can make a capital gain or capital loss if a CGT event happens to any of their assets anywhere in the world.
How to meet your CGT obligation
To meet your CGT obligations, you need to follow these three main steps:
- Decide whether a CGT event has happened.
- Work out the time of the CGT event.
- Calculate your capital gain or capital loss.
Keep your records
You need to keep good records of any assets you have bought or sold so you can correctly work out the amount of capital gain or capital loss you have made when a CGT event happens. You must keep these records for five years after the CGT event has happened or, where you have a net capital loss, five years after the time you apply the net capital loss against a capital gain.
Step 1 Decide whether a CGT event has happened
CGT events are the different types of transactions or events which may result in a capital gain or capital loss. A CGT event has happened if you have sold (or otherwise disposed of) your shares or units or other assets during 2003-04. Certain assets, such as a motor vehicle and assets acquired before 20 September 1985, are disregarded.
Examples of other CGT events that can happen to shares or units include:
- when a company makes a payment other than a dividend to you as a shareholder, or when a trust or fund makes a non-assessable payment to you as a unit holder
- when a liquidator declares that shares in a company are worthless (see appendix 1 for examples), and
- when shares in a company are cancelled because the company is wound up.
For information about other CGT events, see the Guide to capital gains tax.
If a managed fund makes a capital gain and distributes part of that gain to you, you are treated as if you made a capital gain from a CGT event.
If you did not make a capital gain or capital loss from a CGT event during 2003-04, print X in the NO box at G item 17 on your tax return, or at G item 9 if you use the tax return for retirees. (Note: You cannot use the 2004 tax return for retirees if you had a distribution from a managed fund during the year.)
If you did make a capital gain or capital loss from a CGT event during 2003-04, print X in the YES box. If the CGT event happened to your shares or units and the event is covered in this guide (see About this guide), read on. Otherwise, see the Guide to capital gains tax.
Step 2 Work out the time of the CGT event
The timing of a CGT event is important because it determines which income year you show your capital gain or capital loss in. If you sell an asset to someone else, the CGT event happens when you enter into the contract of sale. If there is no contract, the CGT event happens when you stop being the asset's owner.
If you received a distribution of a capital gain from a managed fund, you are taken to have made the capital gain in the income year shown on your statement from the managed fund.
There are three ways of calculating your capital gain from the sale of your shares or units:
The indexation method allows you to increase the amount that your asset has cost (the cost base) by applying an indexation factor that is based on increases in the Consumer Price Index (CPI) up to September 1999.
The indexation method can only apply to assets that you acquired before 11.45am (by legal time in the ACT) on 21 September 1999.
If you use the discount method, you do not apply the indexation factor to the cost base but you can reduce your capital gain by the CGT discount of 50% (after deducting any capital losses you have) provided you have owned the shares or units for at least 12 months.
For assets that qualify for both the indexation and discount methods, you can choose the method that gives you the better result. You do not have to choose the same method for all your shares or units even if they are in the same company or fund.
You must use the 'other' method for any shares or units you have bought and sold within 12 months (that is, when the indexation and discount methods do not apply). To calculate your capital gain using the 'other' method, you simply subtract your cost base from what you have received - your capital proceeds.
You make a capital loss from the sale of your shares or units if their reduced cost base is greater than your capital proceeds. You cannot index amounts included in your reduced cost base.
If you received a distribution of a capital gain from a managed fund, part C of this guide explains how you calculate the amount of that capital gain. You must use the same method as that chosen by the fund.
The following table explains and compares the three methods of calculating your capital gain.
Description of method
When to use the method
How to calculate your capital gain using the method
Allows you to increase the cost base by applying an indexation factor based on CPI.
Use for shares or units held for 12 months or more, if this method produces a better result than the discount method. Use only with assets acquired before 11.45am (by legal time in the ACT) on 21 September 1999.
Allows you to halve your capital gain
Use for shares or units held for 12 months or more, if this method produces a better result than the indexation method.
Subtract the cost base from the capital proceeds, deduct any capital losses, then divide by two (see the worked examples in chapter B2).
Basic method of subtracting the cost base from the capital proceeds
Use for shares or units if you have bought and sold them within 12 months (that is, when the indexation and discount methods do not apply).
Subtract the cost base from the capital proceeds (see the worked examples in chapter B2).
Exemptions and rollovers
There may be an exemption that allows you to disregard your capital gain or capital loss. For example, generally you disregard any capital gain or capital loss associated with any pre-CGT assets (that is, those you acquired before 20 September 1985).
There may be a rollover that allows you to defer your capital gain or capital loss. For example, if a company in which you hold shares is taken over or merges with another company, you may have a CGT obligation if you are required to dispose of your existing shares. If you exchanged your existing shares for shares in the takeover company this income year, you may be able to defer or roll over some or all of your capital gain (but not a capital loss) until a later CGT event happens to your replacement shares. This is known as scrip-for-scrip rollover. Another example of a rollover is in relation to transferring a CGT asset to your former spouse under a court order after a marriage breakdown. In this case, you may not have to pay CGT on the transfer, but CGT may need to be paid by your former spouse when a later CGT event happens to the asset. Rollover is also available for demergers of corporate or trust groups.
Selling a rental property
If you have sold a rental property, have assets from a deceased estate or have several CGT events this income year, this guide does not provide you with enough detail. You need to read the Guide to capital gains tax to find out how to calculate and report your CGT obligation.
Records you need to keep
Most of the records you need to keep to work out your capital gain or capital loss 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 in relation to your shares and units.
These records will generally provide the following important information:
- the date of purchase of the shares or units
- the amount paid to purchase the shares or units
- details of any non-assessable payments made to you during the time you owned the shares or units
- 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 them.