Capital gains
CGT event
A CGT event is a specific happening, most commonly selling an asset, that triggers a capital gain or capital loss under the capital gains tax rules.
The capital gains tax rules only come into play when a CGT event happens. The legislation lists dozens of different events, each identified by a letter and a number, and each with its own rules for timing and for calculating the gain or loss. The most familiar is the disposal of an asset, known as CGT event A1, which covers selling or giving away an asset.
Other events cover situations that do not look like a sale at first glance. An asset can be lost or destroyed, a company can pay a distribution that exceeds its cost base in shares, a lease can be granted or surrendered, or a trust can make a payment to a beneficiary. In each case the law specifies when the event happens, how to calculate the result, and whether a gain or loss is recognised.
Timing is crucial because the income year in which the event happens is the year in which the gain or loss is reported. For a disposal under a contract, the event normally happens when the contract is entered into, not at settlement. If you sign a contract in late June and settle in July, the gain is generally in the earlier financial year. The financial year runs from 1 July to 30 June.
Not every change in ownership is a CGT event with a taxable outcome. Some events qualify for a rollover, deferring the gain. Examples include transfers on marriage breakdown and certain business restructures. Transfers on death generally do not trigger an immediate CGT event for the deceased in the way a sale would, though the asset is passed on to the beneficiary with particular cost base rules.
Where a business is involved, a CGT event can also have GST consequences. Selling a business asset may be a taxable supply, while selling a business as a going concern can be GST-free when the conditions are met. The CGT event and the GST outcome are determined separately, and the BAS and income tax return deal with each. Records of contracts, dates and amounts support both.
Because there are so many events and the rules differ for each, identify the exact event before calculating the result. Where more than one event could apply, the law has ordering rules. This entry is general information only, so confirm which event applies to your transaction with the ATO or a registered tax professional.
Worked example
Sam signs a contract on 20 June to sell a rental property for $900,000, with settlement on 25 July. The CGT event, a disposal, happens on 20 June, the contract date, so the gain is reported in the financial year ending 30 June, not the following year when settlement occurs. If his cost base is $600,000, the capital gain is $300,000 before any discount.
Practical tips
- Use the contract date, not settlement, to decide which financial year a sale falls into.
- Identify the specific CGT event before calculating, because different events have different rules for gain or loss.
- Check for a rollover before paying tax on a transfer, since some events qualify for deferral.