April 24, 2023 | 3 min read
Summary: Capital gains tax: what it is, how it works and current rates. Discover what happens to your investment profits.
Capital gains tax (CGT) is a term you’ll often hear as tax time draws near. When you sell an asset, it can be all too easy to forget about the tax implications related to your sale.
However, selling assets, like shares and investment properties, can involve capital gains tax. Here’s what you should know.
Basically, if you buy shares, property or other assets for one price and sell them for another price, the difference between the amounts is your capital gain or capital loss. If you receive more for your assets than you paid for them, you'll have made a capital gain and you may need to pay capital gains tax on it. It is owed for the tax year during which the investment is sold.
The amount of capital gains tax you’ll pay depends on factors including how long you’ve owned the asset, what your marginal tax rate is, and whether you’ve also made any capital losses. Your marginal tax rate is important because your capital gain will be added to your assessable income in your tax return for that financial year.
There is a capital gains tax discount of 50% for Australian individuals who own an asset for 12 months or more. This means you pay tax on only half the net capital gain on that asset.
If you own the investment for one year or less, short-term capital gains tax applies. The short-term rate is determined by the taxpayer's ordinary income bracket. For all but the highest-paid taxpayers, that is a higher tax rate than the capital gains rate.
Susan buys some shares for $6,000.
She owns the shares for 6 months and sells them for $6,600. She has no other capital gains or losses.
Susan declares a capital gain of $600 in her tax return. She will pay tax on this gain at her individual income tax rate.
Ben, an Australian resident, buys a block of land. He owns it for 18 months and sells it, making a profit of $10,000. He has no capital losses.
Ben is entitled to the 50% capital gains tax discount for the land. He will declare a capital gain of $5,000 in his tax return.
Stephen bought $2,000 worth of shares (50 shares at $40 per share) in a technology company.
After 18 months he sold the shares. They had fallen in price to $20 per share. He made a capital loss of $1,000.
Stephen also made a profit of $1,500 from selling other shares he held. He had held these shares for five years.
Stephen can deduct the $1,000 he made a loss on from the $1,500 capital gain. This leaves him with a profit of $500. As Stephen held the shares from more than 12-months, he only included half the capital gain in his tax return. He’ll pay tax on this $250 at his marginal tax rate.
You’d make a capital loss on your assets if you sold them for less than you paid for them.
If you make a capital loss, you can use it to reduce a capital gain in the same financial year.
If your capital losses are greater than your capital gains, or if you make a capital loss in a financial year in which you don’t make a capital gain, you can generally carry the capital loss forward and deduct it against any capital gains you make in future years.
There are always exceptions of course. And with capital gains tax the principal exception is if the gain is also assessable under another part of the tax law, for example, if it qualifies as ordinary income. In this situation, the capital gains tax rules take last place. As prime examples, sales of depreciating assets and trading stock are not taxed under the capital gains tax rules because they have their own tax regimes.
Another common exception relates to the disposal of your family home. Provided the house you’re selling is your main residence – basically the house you live in on a daily basis – no capital gains tax will arise when it’s sold.
Find out more about capital gains tax transactions, assets and exceptions at the ATO website.
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This article has been prepared by NULIS Nominees (Australia) Limited ABN 80 008 515 633 AFSL 236465 (NULIS) as trustee of the MLC Super Fund ABN 70 732 426 024. NULIS is part of the Insignia Financial group of companies comprising Insignia Financial Ltd ABN 49 100 103 722 and its related bodies corporate (‘Insignia Financial Group’). The information in this article is current as at November 2023 and may be subject to change. This information may constitute general advice. The information in this article is general in nature and does not take into account your personal objectives, financial situation or needs. You should consider obtaining independent advice before making any financial decisions based on this information. It is recommended that you consider the relevant Product Disclosure Statement (PDS) and Target Market Determination (TMD) before you make any decisions about your superannuation. You can obtain the latest copy of the PDS (or other disclosure documents) and TMD by calling us on 132 652 or by searching for the applicable product at mlc.com.au. You should not rely on this article to determine your personal tax obligations. Please consult a registered tax agent for this purpose. Opinions constitute our judgement at the time of issue. The case study examples (if any) provided in this article have been included for illustrative purposes only and should not be relied upon for decision making. Subject to terms implied by law and which cannot be excluded, neither NULIS nor any member of the Insignia Financial Group accept responsibility for any loss or liability incurred by you in respect of any error, omission or misrepresentation in the information in this communication.