How does capital gains tax work in Australia?

Firstly, what is capital gains tax?

The Australian Taxation Office (ATO) collects revenue through different forms of taxes, such as income tax, stamp duty, import tax, and capital gains tax. Capital gains tax (CGT) is the tax paid on any profits gained from selling or disposing of certain assets. These include stocks, investment properties, business assets, some personal use assets, and some collectibles.

While capital gains tax has its own classification, it is still part of an individual's income tax. Both capital gains and capital losses must be reported on your annual income tax return.

How does capital gains tax work in Australia?

Similar to income tax, capital gains tax is reported on an individual's income tax return. If you make a capital gain on an asset, it is added to your taxable income and taxed at your marginal tax rate. If you make a capital loss, it can be used to offset any capital gains made in the same income year or carried forward for future years to offset future capital gains.

Capital gains tax applies when a transaction involving a CGT asset counts as a CGT event. The following sections will outline what assets are liable for CGT, what assets are exempt, and what events count as CGT events.

What is a capital gains tax event?

A capital gains tax event or CGT event is the ATO's term for an event that triggers the calculation of a capital gains transaction on an individual's tax return. This can be for a capital gain or a capital loss.

There are different types of CGT events, including but not limited to:

• When an asset gets sold (most common)
• When an asset is lost or destroyed
• When an asset is stolen
• When an inherited property is disposed
• When a trust is created over a CGT asset
• When shares are bought back by the company
• When shares are declared by a liquidator as worthless
• When a deposit for an asset is forfeited
• When an individual ceases to be considered as an Australian resident

And many more, for a complete list see the CGT events page of the ATO.

List of capital gains tax assets

The ATO provides an exhaustive list of all the assets that may be subject to capital gains tax, but here are some of the most relevant ones:

• Shares and managed funds
• Investment properties
• Crypto assets
• Personal use assets that cost more than $10,000 (e.g. boats, furniture, electronics)
• Collectibles that cost over $500 (e.g. artwork, jewellery, coins)
• Intangible assets (e.g. leases, goodwill)
• Foreign currency

🎓 Learn more: What capital gains tax on shares will I pay?→

What assets may be exempt from CGT?

The below items are generally CGT-exempt. There are certain situations when any gains on the sale of the below items may be liable to CGT (e.g. when you rent out a portion of your main residence), so this list only provides a general reference.

• Any asset acquired prior to 20 September 1985
• Your primary residential property
• Granny flat
• Cars and motorcycles
• Personal use assets that cost $10,000 and under
• Depreciating assets (e.g. business equipment)

How is capital gains tax calculated in Australia?

Now that you understand CGT events and know what assets are eligible, let's move on to how capital gains tax is calculated.

The capital gains tax in Australia is calculated based on the difference between the sale price of the asset and its cost base. The cost base includes all purchase costs on the asset, as well as any incidental costs incurred in buying, holding, and disposing of the asset, such as:

• Legal fees and stamp duty
• Advertising and agent fees
• Brokerage fees
• Cost of improvements made to the asset
• Any other capital costs associated with buying and selling the asset

To calculate the capital gain or loss, the calculated cost base is subtracted from the selling price. If the result is a positive number (i.e. a profit), you have made a capital gain, and this amount is added to your taxable income for the financial year in which the asset was sold. If the result is negative, you have made a capital loss, and this loss can be used to offset any capital gains you made in the same financial year or carried forward to offset future capital gains.

🎓 Learn more: Understand the tax implications on shares→

What is that 50% CGT discount?

The difference between capital gains tax and your ordinary income tax is that the ATO offers a 50% discount on the gains you make on an eligible CGT sale.

To be eligible for the discount, you must meet two main criteria:

1. Be an Australian resident for tax purposes.
2. Held the CGT asset for more than 12 months before the CGT event happens.

The CGT discount means that you only pay tax on 50% of your capital gain.

Example of CGT without a discount

Assets held for less than 12 months would be ineligible for the CGT discount. This means that the net gain calculated on your CGT asset will be taxed at your marginal income tax rate.

For example, if you earn a capital gain of $50,000 from the sale of an asset and your marginal income tax rate is 32.5%, you would need to pay $16,250 in capital gains tax.

Example of CGT with a discount

Being eligible for the CGT discount could save you a substantial amount.

Following the above example, making a $50,000 capital gain on the sale of an asset, you would only include $25,000 ($50,000 x 50%) in your taxable income which is taxed at your marginal income tax rate. 

In this case above, with a 32.5% marginal tax rate, you would only need to pay $8,125.

NB: The two examples above provide a simple theoretical illustration of the impact of the CGT discount on your tax payable, all other things held constant. In reality, having capital gains eligible for the discount may affect other variables (e.g. your tax bracket, Medicare levy & surcharge, HECS-HELP repayment, etc), which may make your tax calculation more complex than illustrated above.

Who is subject to capital gains tax?

As with all forms of tax, Australia's capital gains tax is applied or calculated differently depending on your tax residency. The ATO has three categories of tax residency:

• Australian Resident
• Foreign Resident
• Temporary Resident

It is important to understand how your income is categorised by the ATO, as even non-Australian citizens may be considered Australian residents for tax purposes depending on their circumstances.

Generally, Australian residents for tax purposes are subject to paying capital gains tax. Foreign and temporary residents are subject to CGT only on taxable Australian property. Additionally, foreign and temporary residents are generally ineligible for the 50% CGT discount provided to Australian residents for tax purposes. Foreign residents are also ineligible for the main residence exemption on CGT in certain instances.

What happens if I don't pay taxes on time?

Important dates to note for your individual tax returns are the due date for the lodgement of your return, and the due date for any amount owing to the ATO. Generally, the due date for lodgement is on the 31st of October (i.e. 31 October lodgement due date for FY2023), while the due date for paying any outstanding tax balances with the ATO is 21 days (3 weeks) after you have lodged your tax return.

If you are unable to pay your tax by the due date, the ATO will begin to take action by first attempting to contact you through SMS, email, letters and phone. After a certain time period, your liability will also begin to occur interest charges which compound daily – the ATO publishes their interest rates here.

In addition to that, the ATO may take the following actions:

• Using any future refunds to pay back your debt
• Refer your debt to external debt collection agencies
• Issue a Garnishee Notice
• File a claim to summon you to court
• File a creditor's petition to make you bankrupt

While the above sounds intimidating, the ATO takes action reasonable to your circumstances. If you are experiencing hardship or cannot pay the full amount by the due date, the ATO may offer solutions such as a payment plan. It is important to communicate your situation to the ATO in order to work towards settling any debt.

Frequently asked questions about capital gains tax in Australia

How to reduce capital gains tax in Australia?

There are a few ways to reduce your tax liability that are allowed by the ATO. Here are some of the most commonly-used ways:

1. Main residence exemption: If you sell your primary home, you may be eligible for the main residence exemption, which allows you to exclude any capital gain from this sale from your taxable income.
2. Hold assets for more than 12 months: If you hold an asset for more than 12 months before selling it, you may be eligible for the CGT discount. The discount allows you to reduce the amount of capital gain that is subject to your marginal tax rate by 50%.
3. Use superannuation: If you sell an asset and the proceeds are invested in your superannuation fund, you may be able to reduce or avoid CGT. This is because capital gains made within a superannuation fund are taxed at a lower rate than the individual tax rate.
4. Offset capital gains with capital losses: If you have made a capital loss in the same financial year as a capital gain, you may be able to use the loss to offset the gain and reduce your CGT liability. Additionally, eligible capital losses declared in previous tax years can be carried forward to the current year to offset capital gains. There is no time limit on how long you can carry forward capital losses.

Additionally, if you own a small business, there are several concessions available for you to reduce your capital gains tax. The ATO has prepared a thorough guide here.

Do foreign residents pay capital gains tax?

As mentioned in a previous section, foreign residents are subject to capital gains tax on taxable Australian property, such as real estate, mining and quarrying rights, CGT assets used to carry on a business, and indirect interests in Australian real estate entities.

The CGT rate for foreign residents is generally 32.5%, with no eligibility for the 50% CGT discount, even after holding an asset for a certain period of time. However, there are some exceptions and concessions available, such as the main residence exemption for foreign residents who meet certain criteria.

Foreign residents are also subject to a withholding tax regime when they dispose of certain taxable Australian property, which requires the purchaser to withhold a portion of the sale price and remit it to the ATO to cover any potential CGT liabilities.

Is there a capital gains tax calculator I can use?

It may be intimidating to calculate capital gains tax on your own, but fortunately, the ATO has provided an online tool that may help. Anyone, including foreign residents, may use the tool, and it calculates your net capital gain or loss for the year based on the information you provide.

The contents of this article are intended to be of a general informative nature only. Any material relied upon in connection with the preparation of this article is believed to be accurate and current as at the time of publication. This article has been prepared without considering your personal circumstances and does not take into account your specific tax needs or objectives. Please consider seeking independent tax advice prior to making any investment decisions.