Capital gains
Capital gain
A capital gain is the positive difference between what you receive when a CGT event happens and the cost base of the asset, before any discount or loss offsets.
A capital gain arises when you dispose of or otherwise trigger a CGT event on an asset and the capital proceeds are greater than the asset's cost base. It is the raw profit, calculated before any CGT discount, before capital losses are applied and before any small business concessions. Only after those steps do you arrive at the net capital gain that is added to your assessable income.
The calculation starts with the capital proceeds, which is the money or the market value of property you receive, or are entitled to receive, for the asset. From that you subtract the cost base, which includes what you paid for the asset plus certain costs such as legal fees, agent commissions and stamp duty. If you received more than the cost base, the difference is the gain. If you received less than the reduced cost base, you have a capital loss rather than a gain.
A gain is not always cash in hand. If you give an asset away or sell it to a related party at less than its worth, the market value substitution rule can treat you as receiving market value for the purposes of the calculation. Likewise, a gain may be recognised in one year even though you are paid in instalments afterwards. This catches many people out when a sale is spread across more than one year.
Several things can reduce a gain before tax is worked out. Capital losses from the current year or carried forward from earlier years must be applied against gains first. After that, an eligible individual or trust can apply the 50% CGT discount to a gain on an asset held for at least 12 months. Small business concessions and rollovers can then reduce or defer what remains.
Capital gains are different from ordinary business income. If you are in the business of buying and selling, for example trading stock, the proceeds are ordinary income and the CGT rules do not apply. The intention and activity behind the sale matter. Likewise, the gain on a GST-free going concern sale is still a capital gain even though no GST applies to the supply.
For record keeping, keep documents showing the purchase price, additional costs, the contract date and the sale proceeds. The ATO requires these to be kept for five years from the time you work out the gain, which may be many years after you bought the asset. As always this is general information, and you should confirm how a particular gain is treated with the ATO or a registered tax professional.
Worked example
Marcus buys an investment unit for $400,000 and pays $20,000 in stamp duty and legal costs. Years later he sells it for $560,000 and pays $11,000 in agent fees and advertising. His cost base is $400,000 + $20,000 + $11,000 = $431,000. His capital gain is $560,000 - $431,000 = $129,000. Any capital losses are applied before the 50% discount reduces what is added to his taxable income.
Practical tips
- Work out the gain first, then apply losses, then the discount, in that order, because the sequence changes the result.
- Selling to a family member for less than market value does not avoid CGT, since market value may be used instead.
- Keep sale records for five years from when you work out the gain, not from when you bought the asset.