What is capital gains tax and how does it work? - NAB
What is capital gains tax?
Capital gains tax (CGT) is the tax treatment that may apply when you make a capital gain from a CGT event, such as selling or disposing of an asset.
CGT is not usually a separate tax. Instead, a capital gain may form part of your taxable income for the relevant year.
What is a capital gain or capital loss?
A capital gain is the profit you make when you sell an asset for more than you paid for it. On the other hand, a capital loss occurs when you sell an asset for less than what you paid for it.
How to work out a gain or loss
Working out a gain or loss starts with the difference between what you paid and what you received.
The calculation
- Start with the sale price
- Subtract the original cost
- Include any eligible costs
- Work out if the result is a gain or loss
Example
- You purchased an investment property for $500,000
- You spent $20,000 on improvements
- You sold it for $600,000
Your capital gain would be $80,000:
($600,000 minus $500,000 minus $20,000 equals $80,000)
Can you avoid capital gains tax?
In some situations, CGT may not apply, or the amount included in your taxable income may be lower. This depends on factors like the asset, how it’s used, and your individual circumstances.
At a high level:
- Some assets like your main residence may be exempt.
- Capital losses may reduce gains. This can reduce the total amount considered for tax purposes.
- The way an asset is used can affect the outcome.
- Different rules may apply in certain situations.
Because of this, CGT doesn’t apply in the same way to every asset.
Common CGT situations
Selling an investment property
If you sell an investment property for more than it costs you, you make a capital gain. If you sell it for less, you may make a capital loss.
Selling shares or other investments
If you sell shares or managed investments, the sale may result in a gain or loss that needs to be worked out.
Disposing off an inherited asset
Inherited assets can also raise CGT questions, particularly if they are later sold or transferred.
Can CGT rules change?
Yes, tax rules can change over time through government updates or legislation. While the core idea of CGT remains consistent, the way gains are treated or assessed may be updated.
For example, in certain situations, only part of a capital gain may be included in your taxable income using the CGT discount method. Alternatively, for some assets the original cost may be adjusted to reflect changes over time using the indexation method. The method that applies depends on factors like when the asset was acquired and your individual circumstances.
Get support from the experts
Navigating the complexities of capital gains tax can be challenging. That's why it's important to seek expert advice for personalised financial planning and tax advice.
A financial adviser can provide you with tailored strategies to manage your capital gains and losses effectively and help you understand your tax obligations.
A tax professional can help when it comes to completing your tax return, especially if your investment portfolio is more complex.
The Australian Tax Office (ATO) has simple information to also help you understand your obligations around capital gains tax.
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The information contained in this article is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, NAB recommends that you consider whether it is appropriate for your circumstances. NAB recommends that you seek independent legal, financial and taxation advice before acting on any information in this article.