Capital Gains Tax (CGT) – Individuals
Overview:
- If you sell a capital asset, such as real estate or shares, you usually make a capital gain or a capital loss. This is the difference between what it cost you to acquire the asset and what you receive when you dispose of it.
- You need to report capital gains and losses in your income tax return and pay tax on your capital gains. Although it’s referred to as capital gains tax (CGT), this is actually part of your income tax, not a separate tax.
- “Capital gains tax (CGT) is not a separate tax but the amount of income tax that you pay on any capital gain that you make. The capital gain is then added to any other income you earned during the financial year and you pay tax on that total taxable income”.
- If you make a capital loss, you cannot claim it against your other income but you can use it to reduce a current or future capital gain.
- All assets acquired since tax on capital gains started (on 20 September 1985) are subject to CGT unless specifically excluded.
- Most personal assets are exempt from CGT, including your home, car and personal use assets such as furniture.
- CGT also does not apply to depreciating assets used solely for taxable purposes, such as business equipment or fittings in a rental property.
- The point at which you make a capital gain or loss is usually when you enter into the contract for disposal, not when you settle. So if you sign a contract to sell an investment property in June 2020, and settle in August 2020, you need to report the capital gain or loss in your 2020 tax return.
- If you are an Australian resident, CGT applies to your assets anywhere in the world. For Norfolk Island residents, CGT applies to assets acquired from 23 October 2015. Foreign residents make a capital gain or loss if a CGT event happens to an asset that is ‘taxable Australian property’.
Types of CGT events:
- CGT events are the different types of transactions or events that may result in a capital gain or loss. Many CGT events involve a CGT asset – for example, a sale of shares. Some relate directly to capital receipts (capital proceeds).
- You need to know which type of CGT event you are dealing with, because it affects how you work out your capital gain or loss and may determine its timing. If more than one CGT event happens, you apply the rules for the one most specific to your situation.
- Events are grouped into the following categories:
- Disposal (A)
- Hire purchase and similar agreements (B)
- End of a CGT asset (C)
- Bringing a CGT asset into existence (D)
- Trusts (E)
- Leases (F)
- Shares (G)
- Special capital receipts (H)
- Cessation of residency (I)
- Rollovers (J)
- Other CGT events (K)
- Consolidations (L)
- Please use the below link to see a detailed list and explanation of all the CGT events.
CGT assets and exemptions:
- All assets acquired since capital gains tax (CGT) started (on 20 September 1985) are subject to CGT unless specifically excluded. For example, CGT applies to:
- Real estate
- Shares, units and similar investments
- Cryptocurrency
- Leases, goodwill, licences, foreign currency, contractual rights, and major capital improvements made to land or pre-CGT assets
- Collectables and personal use assets above a certain value (there are restrictions on using any capital losses from these items).
- Some capital gains are exempt (that is, you do not include them in your assessable income). Also, you must disregard some capital losses (that is, you cannot use them to offset a capital gain and therefore reduce your assessable income). Exemptions include capital gains or losses for:
- Your main residence (but there are exceptions).
- Your car (as defined by the ATO), motorcycle or similar vehicle.
- Personal use items acquired for less than $10,000.
- Collectables acquired for $500 or less, or worth $500 or less when acquired.
- Depreciating assets used solely for taxable purposes, and trading stock.
- Assets you acquired before 20 September 1985, these are called ‘pre-CGT assets’. Except for some pre-CGT shares in private companies, or pre-CGT interests in private trusts.
- A decoration awarded for valour or brave conduct, unless you paid or exchanged property for it.
- Assets used solely to produce exempt income or some types of non-assessable non-exempt income.
- Compensation or damages received for any wrong or injury you or your relatives suffered in your occupation.
- Winnings or losses from gambling, a game or a competition with prizes.
- Reimbursement of your expenses under Unlawful Termination Assistance Scheme, Alternative Dispute Resolution Assistance Scheme, M4/M5 Cashback Scheme, and a scheme established by an Australian Government agency.
- Transfer of a super interest in one small super fund (a complying fund that has fewer than five members) to another on the breakdown of a relationship between spouses or former spouses.
- Rights in relation to a superannuation agreement (as defined in the Family Law Act 1975) being created or ended.
- CGT event happening to the segregated current pension asset of a complying super fund.
- Some payouts under a general insurance policy, life insurance policy or annuity instrument.
- Payment you received on surrender of an insurance policy where you are the original beneficial owner of the policy.
- Shares in a pooled development fund.
- Shares of certain profits, gains or losses arising from disposal of investments by certain venture capital entities.
- Financial arrangement where gains and losses are calculated under the taxation of financial arrangements (TOFA) rules.
- Some types of testamentary gifts (gifts made through a will).
Your main residence:
- Your ‘main residence’ (your home) is generally exempt from capital gains tax (CGT). To get the exemption, the property must have a dwelling on it and you must have lived in it. You are not entitled to the exemption for a vacant block.
- If you were not a resident of Australia for tax purposes while you were living in the property, you are unlikely to satisfy the requirements for the main residence exemption.
- If you are a foreign resident when a CGT event happens to your residential property in Australia you may no longer be entitled to claim the main residence exemption.
- To work out how the main residence exemption applies, you look at the period from when you acquire your ‘ownership interest’. If you purchase the dwelling, this would generally be the date of settlement.
- A dwelling is considered to be your main residence from the time you acquire your ownership interest in it if you move in as soon as practicable after that time. The period between entering and settling the contract of purchase is ignored for this purpose.
- If your home is only partially exempt under the main residence rules, you calculate the taxable part of the capital gain as follows:
- A × (B ÷ C)
- A is the total capital gain from the CGT event.
- B is the number of days in your ownership period when the dwelling was not your main residence.
- C is the total number of days in your ownership period.