What is Capital Gains Tax?

So, what is Capital Gains Tax?

Capital Gains Tax (CGT) is a tax that applies when a Capital Gains Tax event happens to a Capital Gains Tax asset. Each CGT event sets out how the capital gain or loss that that event will be calculated within that income year.

Most commonly, when you sell or dispose of a capital asset, this is classed as a CGT event.

A Capital Gain is made when the termination value is above the original cost.

A Capital Loss is made when the termination value is below the original cost.

A CGT asset covers any form of property, including intangible assets such as rights, options, and leases. There is no actual ‘going’ rate of Capital Gains Tax.

CGT application is subject to a range of capital gains tax exemptions, exceptions and concessions. The most common exception is for CGT assets acquired before 20 September 1985.

How do I know if my asset is a Capital Gains Tax Asset?

If an asset is used for taxable purposes or generating income, the asset becomes a Capital Gains Tax Asset.

Specific examples of CGT Assets include land and buildings, company shares, units in a unit trust, options, debts owed to the taxpayer, rights to enforce contractual obligations and foreign currency.

Capital gains assets are classified by time held. Assets held for over 12 months are classified as long term, while assets held for less than 12 months are classed short term. This impacts the tax rate for each asset.

Confusingly, CGT can also apply to assets used primarily for personal use of a taxpayer or associate. Known as personal-use assets and collectibles, they’re subject to different rules to other CGT assets. For example, capital losses cannot be claimed on personal-use assets; while losses on collectibles can only be offset against realised gains on other collectibles.

It’s best to query assets with your tax agent before making a financial decision regarding capital assets.

Capital Gains Tax Event types

Each CGT event is influenced by:

  • Whether a capital gain or loss has arisen and how it is calculated;
  • Any exceptions to the event;
  • How the event occurs;
  • When the event occurs;
  • Any changes to the cost base of the asset as a result of the event; and
  • How it was calculated.

You need to know the type of CGT event your situation is categorised as, as it affects how your gain or loss is calculated as well as its timing. In a case where more than one CGT event happens, apply the rules most specific to your situation.

Event types are grouped in the following 12 categories:

  1. Disposal
  2. Hire purchase and similar agreements
  3. End of a CGT asset
  4. Bringing a CGT asset into existence
  5. Trusts
  6. Leases
  7. Shares
  8. Special capital receipts
  9. Cessation of residency
  10. Rollovers
  11. Other CGT events
  12. Consolidations

CGT application is subject to a range of capital gains tax exemptions, exceptions and concessions. The most common exception is for CGT assets acquired before 20 September 1985.

For specific information regarding the details of each category, see the ATO website.

Online Tax Return

For local, speedy help with your annual tax return or other taxation tasks, contact the team at Online Tax Return. We have a Perth office filled with experienced, dedicated tax agents ready to help you to make the most of your tax this financial year.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice.