The Capital Gains Tax (CGT) discount provides significant benefits to Australian residents who hold an asset for more than 12 months before a CGT event occurs. This can lead to substantial tax savings, particularly when the capital proceeds from selling the asset are much higher than the original purchase costs. By qualifying for the 50% Capital Gains Tax discount, you are only taxed on half of your net capital gain, reducing the overall tax burden.

Eligibility for the CGT discount can also extend to assets acquired through inheritance or relationship breakdowns, such as a divorce. Contact us to discuss your unique situation to learn more.

How to calculate your CGT discount

To calculate your Capital Gains Tax (CGT), start by determining your capital proceeds — the amount you received from selling the asset or from a CGT event, such as an insurance payout if the asset was destroyed. If you sold the asset for less than its market value or gave it away, use the market value instead. Next, calculate your cost base, which includes what you paid for the asset plus costs associated with acquiring, holding, and selling it. If the asset was bought before 21 September 1999, you can choose to index the costs for inflation instead of applying the CGT discount.

Next you need to subtract the cost base from your capital proceeds. If the result is positive, you have a capital gain; if negative, you have a capital loss. Repeat this process for every CGT event that occurred during the financial year. If you have capital losses, subtract them from your capital gains. You can also use any capital losses carried forward from previous years, prioritising gains that don’t qualify for the CGT discount to minimise the tax owed.

Finally, if you still have a capital gain after applying losses, you can apply the CGT discount (50% for individuals, 33.33% for complying super funds, or up to 60% for certain investments in affordable housing). To qualify, the asset must have been held for at least 12 months. Report your net capital gain or loss on your income tax return — gains will be taxed at your marginal income tax rate, while losses can be carried forward to offset future capital gains.

You can calculate your Capital Gains Tax using the Australian Taxation Office (ATO) online calculator and record-keeping tool.

Exclusions that could prevent you from accessing the key benefits

There are specific situations where you cannot apply the CGT discount:

Home first used for rental or business in last 12 months

If your property was your home, and you only began using it for rental or business purposes less than 12 months before selling it, you are not eligible for the CGT discount. The 12-month holding rule applies strictly in this case.

You use the indexation method instead

If you acquired the asset before 21 September 1999, you can choose to index the cost base for inflation rather than using the CGT discount. While this option is available, the CGT discount often results in a lower taxable capital gain, making it the better choice in most cases.

Foreign or temporary residents

Foreign or temporary residents cannot claim the full CGT discount on capital gains made after 8 May 2012. If you are in this category, you are excluded from accessing the discount.

Creation of new asset

The Capital Gains Tax (CGT) discount is not applicable for CGT events that result in the creation of a new asset and a capital gain. This could occur, for example, when you receive payment for agreeing to certain conditions, such as in the case of a restrictive covenant or granting a lease.

In these scenarios, the new asset has not been held for at least 12 months before the CGT event, meaning the CGT discount cannot be applied to the capital gain.

Disposal of interest in a non-widely held entity

The Capital Gains Tax (CGT) discount may not be available when disposing of shares or trust interests in non-widely held companies and trusts. These are companies and trusts with fewer than 300 members. If you hold interests in such entities, you may be denied the CGT discount on any capital gains made from their disposal.

Conversion of income asset

If an income asset is deliberately converted into a capital asset with the intention of claiming the Capital Gains Tax (CGT) discount, the discount may be denied under Part IVA of the Income Tax Assessment Act 1936. This provision is aimed at preventing tax avoidance strategies that seek to exploit the CGT discount by reclassifying assets.