What is capital gains tax and when do you pay it?

Summary

Capital Gains Tax (CGT) is a levy on the profit earned from selling certain types of assets. In Australia, this tax comes into play when you make a capital gain, meaning the sale price exceeds the original purchase price of the asset. Whether you've invested in shares, acquired property, or inherited valuable items, CGT can affect a wide range of possessions, including land, investments, and even personal collectibles, depending on what you paid for them¹.

Understanding how CGT works is crucial for managing your finances effectively and making informed decisions about your investments and assets, and if you understand the general ins and outs of CGT in Australia you could reduce the amount you have to pay².

When is CGT payable?

When you sell an asset and make a capital gain, the amount is included as part of your personal income for tax purposes.

CGT isn’t a standalone tax. Any capital gains you’ve received need to be declared and will then be assessed as part of your total income for the year. The amount of tax you pay will vary depending on what income bracket you fall into.

If you have a shared asset, you need to work out each owner’s individual interest in the asset to determine their personal capital gain or loss³.
 

How can you reduce CGT

Strategies that lower your total income could help to reduce the amount of tax you pay on any capital gains you make.

One example is making a tax-deductible super contribution. If you’ve sold an asset that you have to pay CGT on and you contribute some or all of that money into super – and claim a tax deduction – this could reduce or even eliminate the CGT that’s owing altogether. There are even catch-up rules that could allow you to tip more tax deductible contributions into super from up to five previous years.

It’s a good idea to get across all the rules and limits around tax deductible super contributions.
 

What happens when you transfer a property

Making a cash gift to family or friends doesn’t trigger CGT. But gifting assets (such as property and shares) generally will trigger CGT, even if no cash changes hands. If you sell, transfer or gift a property for less than it’s worth, you still need to use market value to calculate the capital gain.

There are special cases when it comes to marriage breakdowns and special disability trusts but understanding how it works can be complex. So, it’s a good idea to make sure you’re across the rules and get some expert advice before making any decisions.
 

How to calculate your capital gain

Got your calculator ready? Right. Here goes…

Generally, you can calculate your net capital gain by adding up your capital gains over the financial year and subtracting your capital losses (including any from previous years that haven’t been used already) and any CGT discounts or small business concessions you may be entitled to⁴.

A capital gain is typically reduced by 50% when an asset has been held for at least 12 months⁵. So if you sell an asset you've owned for less than a year – such as an investment property or shares – the entire gain will need to be included in your taxable income.

Reviewing your portfolio before EOFY

The end of financial year is fast approaching so it could be a good idea to do a stocktake of your finances to minimise your CGT exposure.

If you received a capital gain from selling any assets during the year you could consider selling underperforming assets. This would realise a capital loss to offset the capital gain.

But you need to be very careful, particularly if you’re planning to immediately buy back the same assets. The ATO monitors these sort of ‘wash sales’ and could disallow the capital loss. Your best approach is to speak to your adviser or tax accountant to work out the best approach that’s within the rules.

Assets exempt from CGT

CGT generally doesn’t apply to:

• assets acquired before 20 September 1985

• a property that’s your main residence

• cars, motorcycles or similar vehicles

• personal-use assets, which you paid under $10,000 for

• winnings or losses from gambling and prizes.

Check the ATO website to find out more about which assets are subject to CGT and which assets are exempt.

How long you should keep records

You need to keep records of every transaction, event or circumstance that may be relevant to working out whether you’ve made a capital gain or loss for at least five years⁶.

There’s no time limit on how long you can carry forward a net capital loss and it can be deducted against capital gains in future years⁷, helping to reduce the tax you pay.
 

Where to go for more help

• To find out more about how AMP can help you with your property, book a call or contact one of our home lending specialists today.