CGT - the basics

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Capital gain occurs when you make some money from selling an item like a property asset or an investment. Or to put it a little more succinctly, a capital gain is the difference between the money that is made from selling an asset or investment and the price that you paid for it (less some costs).

The investments or assets that you sell, and that are potentially capital gain generators, can be more recognisable assets (such as property, although the family home is exempt, or artworks) but can also be shares in a company or units in a trust or managed investment fund. An asset can also be intangible, such as contractual rights or even goodwill if you operate as a sole trader or are involved in some other small business.

Of course it's never as simple as that, especially when you throw the word 'tax' into the discussion. And calling it 'capital gains tax' (CGT) is actually a bit of a misnomer, as it is not a seperate 'tax' as such. The 'gain' calculated is added to your assessable income, which is then taxed at your usual marginal rate. Any gain is assessed as income in the year the asset is sold.

The amount of a capital gain that is actually subject to income tax varies with the type of asset, but is also influenced by various other factors, including how long you have owned the asset (because if you have owned an asset for more than a year, the amount calculated as your gain may be reduced).

The tax is triggered by what the tax legislation quaintly calls a CGT 'event', which means in the main that you sell an asset. But these events can also include giving it away, if it's destroyed or lost, or you stop being an Australian resident.

There are always exceptions of course, and in this area the principal exception is the family home, as mentioned above. However the sale of your main residential home is tax-exempt unless you have generated income from there (say, from a home business), in which case the CGT rules would still apply to the income-producing portion. There are limited circumstances where exemption may be retained notwithstanding that the home has been income producing.

Other exemptions to CGT include private cars, minor collectables, the proceeds from gambling or compensation for occupational injury. (You can see an exhaustive list of exemptions here.)

Of course as nice as it would be otherwise, there's no rule that says when you sell an asset you're going to make money on it. So it is possible to make a 'capital loss' if the money you realise from selling an investment is less than what you paid.

And even then, there is no consolation prize of being able to take that capital loss off the total of your income for the year. The Tax Office won't allow deductions of capital losses from your income. What the tax law does allow you to do is to offset your capital losses against capital gains made in the same year, so that you pay less tax on the gains, and to 'carry forward' any remaining capital losses to be deducted from any future capital gains.

To understand more about capital gains tax, and how it impacts upon you, and your investments, see Investment - the taxation of capital gains.

Also, here is the Tax Office's Guide to CGT.

Last reviewed 27/07/2012