Capital Gains Tax (CGT) in Australia applies to profits made from selling assets acquired after 19 September 1985. While most assets are subject to CGT, your primary residence generally has an exemption.

The capital gains tax discount

The CGT discount allows Australian residents to reduce their capital gains by 50% if they've held the asset for at least 12 months. This rate applies to individuals, and to qualify you must meet specific criteria.

If the asset is your home and you first started using it for rental or business purposes for less than 12 months before selling, you are not eligible for the CGT discount. If you used your home for rental or business for more than 12 months, the exemption may only apply to a portion of the gain. Foreign residents may also have limited access.

Please note, the ATO treats the contract date as the date of sale, not the settlement date, so the CGT event happens on the contract date. 

To apply the discount, first, subtract any capital losses carried forward from previous years or incurred in the current tax year against capital gains that are not eligible for the discount. Then subtract the remaining losses, if any, against capital gains eligible for a discount.  The discount will then apply to the balance of any eligible capital gain. The discounted amount is reported as income in your tax return. 

For more information on the discount, please visit the ATO here.

Treating a former home as your main residence for CGT purposes:

The key points to consider here are:

Main Residence Exemption: 

Your primary home is generally exempt from CGT.

Continued Exemption:

Even after moving out, you can continue to treat your former home as your main residence for CGT purposes:

• Up to 6 years: If you used it to produce income e.g. rented it out.
• Indefinitely: If you didn't use it to produce income e.g. left it vacant.

Eligibility:

• The property must have been your main residence before you stopped living in it.
• The exemption doesn't apply to periods before the property became your main residence.

Limitations:

• You can only treat one property as your main residence at a time.
• Foreign residents generally don't qualify for the main residence exemption.

• You make this choice in the income year a CGT event occurs i.e. the year you sell your property.

In essence, this allows you to maintain the CGT exemption on your former home for a period after you move out, provided certain conditions are met. This can be beneficial for homeowners who need to rent out their property temporarily or use it for other purposes while maintaining the tax advantages of the main residence exemption.

For more information, please visit Treating former home as main residence & Capital gains tax on the sale of Property.

CGT on trust distribution:

For individuals, capital gains included in a trust distribution are treated as if you owned the asset yourself. This means you're subject to the same tax rules, including the 50% discount for assets held over a year and taxation at your marginal income tax rate.

How to calculate your CGT

Calculating Capital Gains Tax for individuals 

Calculating capital gains tax involves several steps:

1. Determine the Cost Base:

• Purchase Price: The original price paid for the asset.
• Purchase Costs: Expenses incurred when acquiring the asset e.g. brokerage fees, stamp duty.
• Holding Costs: Costs associated with owning the asset e.g. rates, insurance. These costs can only be included in the cost base if they are not deductible, e.g. if they were incurred for vacant land. 
• Capital cost to improve or preserve the value of the asset: For example, the costs associated with property renovations or additions. 
• Calculate: Cost Base = Purchase Price + Purchase Costs + Holding Costs + Capital improvement costs

2. Calculate the Capital Gain:

Capital Gain = Sale Proceeds - Cost Base

3. Apply the discount, if applicable

 If the property or the asset was held for longer than 12 months, apply the 50% discount to the total capital gain. 

• The capital gain including the 50% discount, if applicable, is added to your total taxable income for the year.
• Your total income will be taxed at your marginal tax rate for the year. 

Working Example:

Scenario:

• Purchase: John buys 1,000 shares in ABC Ltd. for $10 per share, spending a total of $10,000. He also pays $200 in brokerage fees.
• Holding Period: John holds the shares for 3 years.
• Sale: John sells all 1,000 shares for $15 per share, receiving $15,000. He pays $150 in brokerage fees to sell the shares.

Calculations:

• Capital Gain: $14,850 (Sale Proceeds) - $10,200 (Cost Base) = $4,650
• CGT Discount: Since John held the shares for more than 12 months, he is eligible for the 50% CGT discount.
• Net Capital Gain: $4,650 (Capital Gain) x 50% (Discount) = $2,325

Tax Implications:

• John will include this $2,325 net capital gain in his taxable income for the year.
• He will pay tax on this amount at his marginal income tax rate.

Key Points:

• This example demonstrates the basic calculation of CGT for a simple asset like shares.
• It includes the key factors: purchase price, purchase costs, sale proceeds, sale costs, and the 50% CGT discount for long-term investments.

In essence, CGT is calculated on the profit made from selling an asset, with a significant discount available for long-term investments.

For examples on working out CGT for a single asset or multiple assets from the ATO, please visit here.

Important Note: 

The above is a simplified overview. The specific rules and regulations surrounding business CGT can be complex and vary depending on the type of asset, the structure of the business, and other factors. It is crucial to consult with a qualified tax professional or seek advice from the Australian Taxation Office (ATO) for accurate and up-to-date information.

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