Lexi Webster
Australia imposes a capital gains tax (CGT) on the disposal of assets, with the family home being the most notable exemption. The tax rate is determined by the duration of ownership, with assets held for less than a year taxed at the income tax rate, and those held for over a year receiving a 50% discount. Capital gains are treated as taxable income, meaning that a large capital gain could push an individual into a higher tax bracket.
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What You'll Learn
Calculating capital gains tax
Capital gains tax (CGT) in Australia is payable as part of your income tax assessment for the relevant income year. It is not a separate tax, instead, it forms part of your assessable income. This means you'll pay capital gains tax at the same time as you pay your income tax.
There are certain circumstances when you don't have to pay capital gains tax. For instance, if you make a net capital loss in an income year, you won't have to pay capital gains tax for that year. Also, some assets and events are exempt from capital gains tax, such as selling your principal home or personal car, or selling an asset purchased before capital gains tax was introduced on 20 September 1985.
If you’re a foreign resident and selling certain Australian taxable property (e.g. residential property), you may be required to pay foreign residents capital gain withholding tax (FRCGWHT). If you’re an Australian resident, you can apply for a variation to reduce FRCGWHT by submitting a clearance certificate to the ATO.
To calculate your CGT, you can use a calculator or follow the steps outlined by the Australian Taxation Office (ATO). The steps involve working out your capital proceeds and cost base. Capital proceeds refer to the money and other types of proceeds you receive when you sell the asset or another CGT event happens to it, such as receiving an insurance payout if the asset is destroyed.
The cost base of an asset includes foreign currency and excluded amounts. Capital works deductions cannot be included in the cost base or reduced cost base of an asset. If you acquired an asset before 21 September 1999, you can index its cost base for inflation to reduce capital gains.
There is a 50% CGT discount for Australian resident individuals who own an asset for 12 months or more. This means you pay tax on only half of the net capital gain on that asset. For complying super funds, the discount is 33.33%. Companies cannot use the discount. If you owned an affordable housing fixed domestic residential property, such as a house, unit, or apartment, the discount can be up to 60%.
It's important to note that any capital gains amount will be added to your current income before calculating the tax rate, which could force you into a higher tax bracket. The total costs of purchasing, owning, and selling the asset will also be factored in.
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Exemptions
Capital gains tax (CGT) in Australia is a tax applied to the capital gain made on the disposal of any asset. While there are specific exemptions, the most significant one is the family home.
Family Home
The principal place of residence or main home is generally exempt from CGT, regardless of how long it was owned or the profit made. However, if the home was rented out, used to run a business, or the owner was absent for extended periods, a partial CGT liability may apply.
Personal Car
Selling one's personal car is also exempt from CGT.
Assets Acquired Before 20 September 1985
Assets acquired before 20 September 1985 are generally CGT-free.
Small Business Concessions
Four capital gains tax concessions for small businesses have been available since 21 September 1999:
- 15-year exemption: Exemption from CGT for a small business owner who has owned the business for 15 years and is selling due to retirement (over 55 years old) or permanent incapacitation.
- 50% active asset reduction: Capital gains are reduced by 50% for assets actively used in the business (including intangibles).
- Small business retirement exemption: When selling a small business and not over 55, CGT is not payable on net capital gains paid into a superannuation fund, with a lifetime limit of $500,000 on this exemption.
- Small business rollover: The net capital gain resulting from the sale of an active asset can be reduced by the amount spent on a nominated replacement asset.
Original Creative Works
Original creative works that qualify as personal use assets may be exempt from CGT. There are specific provisions for creators of intellectual property, such as musicians, producers, artists, and designers.
Other Exemptions
Other exemptions include:
- Bonds and notes sold at a discount, including zero-coupon bonds and certain interest-bearing notes convertible to shares.
- Medals and decorations for bravery and valour, provided they are acquired at no financial cost.
- Shares in a pooled development fund and certain other eligible venture capital investments.
- Payments under designated government schemes, such as industry restructuring programs.
- Trading stock, which is subject to ordinary income tax instead of CGT.
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Foreign resident capital gain withholding tax
Foreign resident capital gains withholding tax (FRCGW) is a tax that applies to foreign residents selling certain Australian taxable properties, such as residential property. The purchaser of the property must withhold a certain percentage of the sale price and pay it to the Australian Taxation Office (ATO). The rate of FRCGW can vary and may change periodically, so it is important to check the ATO website for the most up-to-date information.
For example, let's consider a foreign resident, Franz, who wants to sell his property in Australia. The market value of the property at the time of signing the contract in March 2025 is $800,000. In this case, a rate of 15% is applied to the market value, resulting in a withholding amount of $120,000. The sale price minus the withholding amount is what Franz will receive.
Another example is Jane, a foreign resident selling her apartment. The market value of the property at the time of signing the contract in December 2024 is $1.2 million. In this case, a rate of 12.5% is applied to the market value, resulting in a withholding amount of $150,000. This is because the contract was signed before 1 January 2025. If the contract had been signed after that date, the withholding rate would have been 15%, resulting in a withholding amount of $180,000.
It is important to note that the residency test for individuals for tax purposes is different from that for social security and immigration purposes. Generally, an individual is considered an Australian resident for tax purposes if they have always lived in Australia or have come to Australia to live permanently, have been in Australia continuously for 6 months or more with the same job and residence, or have been in Australia for more than 6 months of the year unless their usual home is overseas.
Foreign residents can apply for a variation to reduce the FRCGW by submitting a clearance certificate to the ATO. It is recommended to seek expert advice from a financial adviser to navigate the complexities of capital gains tax and understand personalized tax obligations.
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Cost base indexation
The indexation method is one of the ways to calculate capital gains tax (CGT) in Australia. It is used to adjust the cost base of a CGT asset for inflation, which can reduce the capital gains tax payable.
The indexation method is based on the Consumer Price Index (CPI) and is applied to each element of the cost base of a CGT asset. The formula for calculating the indexation factor is:
CPI for the quarter of the CGT event ÷ CPI for the quarter when expenditure occurred = Indexation Factor
The cost base of a CGT asset includes various elements, such as the purchase price, brokerage fees, and other incidental costs associated with acquiring the asset. By multiplying the cost base by the indexation factor, the effect of inflation on the value of the asset is taken into account, potentially reducing the capital gains tax liability.
It's important to note that the indexation method applies specifically to assets acquired before 11:45 am (ACT time) on 21 September 1999 and held for at least 12 months before the relevant CGT event. For assets acquired after this date, the indexation method is not applicable, and other methods, such as the discount method, may be used to calculate capital gains tax.
The Australian Taxation Office (ATO) provides resources and worksheets to help individuals and businesses calculate their capital gains tax liability using either the indexation or discount methods. The choice between the two methods depends on which one results in a more favourable outcome for the taxpayer. In some cases, individuals may choose to apply both methods to different portions of their capital gains or losses to optimise their tax position.
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Capital gains tax on shares
Capital gains tax (CGT) in Australia is a tax applied to the capital gain made on the disposal of assets acquired after 20 September 1985. CGT is payable as part of your income tax assessment for the relevant income year. It is not a separate tax, and you pay it concurrently with your income tax.
There are certain circumstances when you don't have to pay CGT. For instance, if you make a net capital loss in a year, you won't have to pay CGT for that year. Some assets and events are also exempt from CGT, such as selling your primary residence or personal car, or selling an asset purchased before CGT was introduced on 20 September 1985. Other exemptions include life insurance policies, gambling winnings, and certain government-designated schemes.
If you are an Australian resident, you may apply for a variation to reduce foreign residents' capital gain withholding tax (FRCGWHT) by submitting a clearance certificate to the Australian Taxation Office (ATO). The ATO also provides information on CGT obligations and offers appointments with mobile bankers to help you understand your obligations.
When it comes to shares, there are a few specific considerations for CGT. If you are a shareholder in a company that is being wound up or goes into administration, you may claim a capital loss on the shares as if you disposed of them for nil consideration. If you sell apparently worthless shares to a third party for a nominal sum, you can also realise a loss. However, short selling is covered under ordinary income tax, not CGT.
If you are an Australian citizen who has become a resident of another country, there are specific considerations for CGT when it comes to your share portfolio. You may choose to take a deemed disposal, which involves comparing the purchase price of the shares to their market value on the date that your residency ceased. Alternatively, you may choose to treat the shares as Taxable Australian Property, in which case any future sale of these shares must be reported in your Australian income tax return, even as a non-resident.
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Frequently asked questions
Capital gains tax (CGT) in Australia is applied to the capital gain made on the disposal of assets, with several specific exemptions, including the family home. The rate depends on how long you have held the investment. If you have owned the asset for less than 12 months, you will pay tax at your income tax rate. If you have owned the asset for longer than 12 months, you will pay 50% of the capital gain.
You can use a capital gains tax calculator, which will take into account the purchase price, length of ownership, sold price, and your current taxable income.
Capital gains tax is a tax on the profit or gain realised on the sale of an asset. Income tax, on the other hand, is a tax levied on income generated by an individual or entity. In Australia, capital gains are taxed at the same rate as taxable income, and the capital gains amount is added to your current income before calculating the tax rate.
