Capital Gains Tax in Australia: Planning for Gains and Losses
Capital gains tax and losses are critical to any investment strategy, whether for business or personal investments. Selling an investment – such as property or shares – can lead to a large capital gains tax bill. This is also the case with other capital gains tax (CGT) events.
Capital gains tax planning can help you avoid unpleasant surprises at tax time. Applying capital gains tax reduction strategies as part of your financial planning can help you save money and increase your overall investment returns in the long run.
What is capital gains tax?
Capital gains tax is the tax you pay on the profit you gain from selling or disposing of certain assets, including shares, investment properties, some personal use assets, business assets, and some collectibles. Although not a full list of capital gains tax assets, the main ones subject to CGT are:
Shares and managed funds
Investment properties (primary residential properties are exempt)
Foreign currency
Crypto assets
Collectibles costing more than $500 (such as coins, works of art and jewellery)
Personal assets costing more than $10,000 (such as electronic equipment, furniture and boats)
Intangible assets (including goodwill, leases and intellectual property).
In Australia, the Australian Taxation Office (ATO) collects revenue through various taxes, such as income tax, import tax, stamp duty and capital gains tax. When you complete your annual personal tax return, you must report both your capital gains and losses.
What triggers capital gains tax?
Capital gains tax is triggered by what the ATO calls a ‘capital gains tax event’, which can lead to either a capital gain or loss. This most common capital gains tax event is selling an asset. Other CGT events include:
Loss or destruction of an asset
Theft of an asset
Creating a trust over a CGT asset
A company buys back shares
Disposal of inherited property
Shares being declared worthless by a liquidator
Forfeiture of a deposit for the purchase of an asset
A person no longer is considered to be an Australian resident.
Which assets can be exempt from CGT?
In general, the following items are exempt from CGT (but exemptions can apply):
Primary residential property (some conditions apply)
Any asset acquired before 20 September 1985
Granny flat
Assets for personal use costing $10,000 or less
Cars and motorcycles
Depreciating assets (such as business equipment).
How to calculate capital gains tax
Capital gains tax in Australia is determined by the difference between the sale price of an asset and its cost base. The cost base includes the full cost of purchasing an asset plus any other costs of buying, holding or disposing of the asset. These additional costs include:
Brokerage fees
Stamp duty
Legal fees
Asset improvement costs
Any other capital costs connected with selling or buying the asset.
The capital gain or loss is calculated by subtracting the cost base from the selling price. In addition, there’s a 50% CGT discount if you own the asset for more than 12 months. Here are two examples of how CGT works with and without the discount.
Jane purchases a block of land for $250,000. The stamp duty and other fees add up to $35,000, so the cost base is $285,000. Two years later, she sold the land for $315,000. While she made a $30,000 gain in the investment, she held the asset for more than 12 months, so the 50% discount applies. As a result, she will add $15,000 to her taxable income on her tax return and pay at the marginal rate in the year she sold the land. If she’s in the 32.5% marginal tax bracket, she’ll pay $4,875 in CGT ($15,000 x 0.325)*.
Justin purchases shares worth $20,000. After 11 months, he sold the shares for $27,000. He also paid brokerage fees of $400 when purchasing the shares, so his base cost was $20,400. Since he sold the shares before holding them for 12 months, he doesn’t get the 50% discount. His capital gain was $6,600, so he will include this full amount on his tax return and pay tax at the marginal rate*.
Here are a few points that are important to note:
All foreign residents in Australia need to pay capital gains on Australian property, while they are not eligible for the 50% discount on CGT if holding assets for more than 12 months.
Exchanging between crypto assets creates a CGT event. For example, if you purchase Bitcoin and the price goes up, and then exchange it for another crypto asset, you would have to pay CGT even though you didn’t make the gain in cash.
How to reduce capital gains tax in Australia
Since CGT can add up when assets increase in value, you’ll want to consider capital gains tax reduction strategies as part of your financial planning and risk management.
The easiest way to reduce your capital gains tax is to hold the asset for more than 12 months. Conditions apply, so you’ll want to consider the fine print. For example, if there is a contract of sale for a property, the CGT event occurs on the contract date, not on the settlement date.
Superannuation is another way to reduce your capital gains tax, especially with a self-managed super fund (SMSF). When you are in the accumulation phase – still working and making contributions – the CGT rate is 15% and 10% if the super fund owned the asset more than 12 months before being sold.
Another capital gains tax reduction strategy is to sell a non-super investment and pay the CGT on the gain. You can then use some of the funds remaining from the sale as a tax-deductible concessional contribution to your superannuation. Depending on your marginal tax rate, the tax deduction could offset part of the capital gain and reduce your overall tax payment.
In addition to these strategies, you can use capital losses to offset capital gains. Although you can’t deduct a loss by itself, you can use that loss to offset gains. These gains can occur in the same year as the loss and you can carry forward losses from previous years to offset gains. For example, if you had a capital loss in 2020 – 2021 but no capital gain in that year, you couldn’t deduct that loss in that tax year. But if you had a capital gain in 2022-2023, you can apply the earlier loss to reduce your gain.
Getting expert help to optimise you capital gains tax strategy
It can be challenging to keep up with the details of capital gains tax and understand the best ways to reduce what you owe. At Lanteri Partners, we provide traditional accounting and taxation services as well as financial planning services all under one roof. This holistic approach enables us to consider the big picture – which include tax reduction strategies – when assisting our clients with wealth management.
Contact our team to learn about the strategies we employ for our clients and how we can help you achieve your financial goals.
1. *Medicare levy will be applicable.