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What is Capital Gains Tax?

Capital Gains Tax, CGT

Peter Bayliss avatar
Written by Peter Bayliss
Updated over 4 years ago

To put it simply, a capital gain is any profit on the sale of an investment or investment property. On the contrary, a capital loss is any loss on the sale.

Capital Gains Tax is the amount of tax that will be charged on the capital gain event that occurs.

Some examples of capital gains events are as follows:

  • The profit/loss made on the sale of an investments (such as property or shares)

  • The sale of your share in a business

The good news is that the sale of your home (principle place of residence) is exempt from Capital Gains tax and the is due main residence exemption. Personal assets are usually exempt from capital gains tax, For more information on exemptions from capital gains tax, please click here.

The net capital gain is not always the amount you make as a profit. There are different methods for net capital gain calculation that will be discussed below:

The discount method

  • Firstly you will deduct the cost base of from the sale amount. The cost base is the net amount paid for the asset.

  • Secondly you will take away any capital losses brought forward

  • Thirdly you will apply the 50% discount if the asset is held for at least 12 months.

  • Lastly, this will result in the net capital gain which will be taxed at your marginal tax rate in your tax return.

The indexation method

If the asset was purchased before September 1999, the cost base may be increased by the 'indexation' factor. Basically what this is happening here is the cost base is adjusted so that you do not pay tax on the inflation portion of the gain.

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