Selling an investment property, shares or a business asset can create a tax bill well after the sale funds have reached your account. Capital gains tax is not a separate tax in Australia. Instead, a net capital gain is generally included in your assessable income and taxed at your applicable income tax rate.
That makes timing, paperwork and the details of how you have used an asset especially important. For Gippsland property owners, investors, sole traders and business operators, getting those details right before a contract is signed can prevent an avoidable surprise at tax time.
When capital gains tax applies
A capital gains tax (CGT) event most commonly happens when you sell or otherwise dispose of a CGT asset. Assets can include real estate, shares, units in a managed fund, cryptocurrency, business goodwill and certain interests in a business.
The relevant date is generally the contract date, not the settlement date. If you sign a contract to sell a rental property in June but settlement occurs in July, the gain will usually be reported in the income year ending 30 June when the contract was signed. This can affect your tax rate, access to losses and whether you have held the asset for at least 12 months.
Most assets acquired on or after 20 September 1985 are subject to CGT rules. Assets bought before that date are generally pre-CGT assets, although major changes to an asset or ownership structure can create more complex outcomes.
Not every sale creates a capital gain. A loss can arise when an asset is disposed of for less than its cost base. Some assets are also exempt or treated differently. Your main residence may be fully or partly exempt, while a car used for private purposes is generally disregarded for CGT purposes.
How a capital gain is worked out
At its simplest, the calculation compares what you receive from the sale with the asset’s cost base. The sale amount is called the capital proceeds. The cost base is more than just the original purchase price.
For a property, the cost base may include stamp duty, conveyancing and legal fees, buyer’s agent fees, survey costs, certain ownership costs, capital improvements and selling costs such as advertising and agent commission. Records matter because a missing invoice can mean a legitimate cost is not included in the calculation.
Some expenses cannot be added twice. For example, costs claimed as a deduction in a rental property tax return cannot usually also form part of the CGT cost base. Building works may be relevant, but capital works deductions claimed over time can affect the final calculation. This is one reason property CGT should be reviewed as a whole, rather than estimated from the purchase and sale prices alone.
The broad calculation is:
- Calculate the capital gain or capital loss for each CGT event.
- Apply current-year capital losses against capital gains.
- Apply eligible prior-year net capital losses.
- Apply any available CGT discount or small business CGT concessions.
- Include the resulting net capital gain in your tax return.
Capital losses can reduce capital gains, but they cannot reduce salary, business income, rent or interest income. Unused net capital losses are generally carried forward to later years, provided the relevant records are retained.
The 12-month CGT discount
Individuals and trusts may generally reduce an eligible capital gain by 50 per cent if they owned the asset for at least 12 months before the CGT event. Complying superannuation funds may generally receive a one-third discount. Companies do not receive the CGT discount.
The discount is valuable, but it is not automatic in every situation. It is usually applied after capital losses are used. If you have an investment property gain and a carried-forward capital loss, the loss is generally applied first, then the 50 per cent discount may apply to the remaining gain.
A gain on an asset held for less than 12 months may still need to be included in full. That can be particularly relevant when a property is renovated and sold quickly, when shares are traded regularly, or when a business asset is sold shortly after purchase.
Main residence rules are not always straightforward
Your home is often exempt from CGT if it has been your main residence for the entire ownership period, has not produced assessable income, and sits on land of two hectares or less. However, common real-life situations can reduce or remove that exemption.
Renting out a room, using part of the home exclusively as a business area, moving out and renting the property, or purchasing a new home before selling the old one can all require a closer review. The absence rule may allow a former home to continue being treated as your main residence for up to six years while it is used to produce income, provided conditions are met. You generally cannot treat two homes as your main residence at the same time, except for a limited overlap when moving.
A property first used to produce income after it was your home can have special valuation rules. Similarly, a property that was a rental before becoming your home may have a partial CGT liability. Do not assume that living in the property at some point makes the full gain exempt.
Subdivision also needs careful planning. Subdividing land does not automatically create a CGT liability, but selling a subdivided lot usually does. In some cases, the nature and scale of development can move beyond a passive capital sale and create income tax and GST consequences as well.
Capital gains tax on business assets
Business owners may face CGT when selling business premises, shares, goodwill, a customer list or an ownership interest in a business. The tax outcome can differ depending on the legal structure and the specific asset sold.
For example, selling a company shareholding is different from a company selling its business assets. Depreciating assets such as plant, vehicles and equipment can also trigger balancing adjustment rules rather than, or alongside, CGT rules. The sale of a factory, medical practice, transport operation or trade business should be reviewed before the sale agreement allocates values to different assets.
Eligible small businesses may be able to access valuable CGT concessions. These may include the 15-year exemption, the 50 per cent active asset reduction, retirement exemption and small business rollover. Access depends on detailed conditions, including your turnover or asset position, ownership arrangements, whether the asset is active in the business and, in some cases, the age or retirement circumstances of individuals involved.
These concessions are not simply a benefit for every small business. Trust distributions, company ownership, related entities and passive assets can all affect eligibility. Early advice is far more useful than trying to reconstruct the position after contracts are exchanged.
Records to keep from purchase to sale
Good records give you options. Keep the contract of purchase and sale, settlement statements, invoices for legal and agent costs, stamp duty evidence, loan and ownership records, improvement invoices, depreciation schedules and records showing how the asset was used.
For shares and managed investments, retain contract notes, dividend statements, distribution tax statements, records of reinvestment plans and any information about corporate actions such as share splits or mergers. These events can change the cost base even when you have not sold anything.
For a business, retain financial statements, asset registers, lease documents, goodwill valuations, share registers and sale agreements. If an asset has been partly private and partly business-related, records supporting the percentage of business use are also helpful.
Digital copies are practical, provided they are complete, readable and backed up. Keep CGT records for at least five years after the relevant disposal, and longer where a capital loss or rollover is carried forward.
Plan before you sell, not after
Before selling a significant asset, consider the likely contract date, expected taxable income for that year, available capital losses and whether holding the asset beyond 12 months changes the result. It may also be sensible to set aside part of the proceeds rather than treating the full sale amount as available cash.
The best approach depends on your circumstances. A property sale may involve main residence and rental history questions; a business sale may require careful allocation between goodwill, equipment and premises. A clear review before documents are finalised gives you a more accurate position and helps ensure the reporting is compliant from the start.
For a practical, personalised review of a proposed sale or a past CGT event, Tax and Accounting Solutions Gippsland can help organise the records, explain the likely treatment and prepare the required reporting with care.