CAPITAL GAINS TAX

The essentials

Capital Gains Tax is tax on net capital gain. Net capital gain is total capital gains minus total capital losses minus the CGT discount.

The CGT discount is 50% - capital losses are taken away from capital gains before the CGT discount is applied. Shares or units need to be held for 12 months to get the discount. The discount is available for individuals, but not for a company, making a capital gain.

CGT is not a separate tax – the net capital gain is taxed at the marginal tax rate.

Capital gains or losses as a general rule can be disregarded for CGT purposes when assets were acquired before 20 September 1985 (pre CGT).

CGT events

A capital gain or capital loss only happens if there is a CGT event. Some common CGT events include:

• Sale of shares or units.
• Distribution of a capital gain by a managed fund or other trust.
• Receipt of a payment from a company other than a dividend.
• When a liquidator or administrator declares shares in a failed company are worthless.
• When shares are cancelled because a company is wound up.
• Creating a trust over a CGT asset or transferring a CGT asset to a trust.

There are about 50 CGT events. Details of each can be found in the Guide to CGT. The timing of the event is important. If an asset is sold the CGT event happens when you enter into a contract. The distribution of a capital gain from a managed fund is taken to have been made in the income year shown on the statement.

Calculating CGT

There are three ways of calculating the capital gain or capital loss:

1. Indexation (see Consumer Price Index 1985-1999 below) which applies only to assets acquired before 11:45am on 21 September 1999 and allows you to apply the CPI (up to September 1999 only) to the cost base of the asset. Subtract the result from the capital proceeds to arrive at the capital gain. Use the method if shares or units were held for 12 months or more and it produces a better result than the discount method.
2. Discount capital gains by half after first deducting any capital losses. Use if shares or units were held for 12 months or more and it produces a better result than the indexation method
3. Other method applies if shares or units were not held for 12 months and the indexation and discount methods do not apply. Simply subtract the cost base from the capital proceeds.

We recommend you review the following sections of our website for specific Capital Gains Tax situations:

Liquidators declarations – for failed companies

Deregistered companies – generally for failed companies