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Capital gains tax is the tax you pay on capital gains made when selling assets. As an individual you will be taxed on the capital gain at the same rate as your personal income tax rate. You can read more about it in our article here.
However, if you hold an asset for more than 12 months, you may be eligible for a 50% capital gains tax discount. The CGT discount was introduced in 1999 and was designed to replace what some considered a complex indexing system for working out real (i.e. adjusted for inflation) capital gains.
Here’s everything you need to know about the capital gains tax discount.
The Capital Gains Tax Discount Explained
If you have held an asset for more than 12 months and then sell it, and are also an Australian citizen, you can reduce your capital gain by 50% for tax purposes.
You may be able to count previous ownership towards the 12 months if you acquired the asset via a deceased estate or through a relationship breakdown.
Why does Australia have a Capital Gains Discount?
The capital gains tax discount was introduced in 1999 by the Howard Costello Liberal Government to replace the indexing method used to calculate real realised capital gains.
A discount of 50% was considered simpler than having to index the cost base of holding an asset for inflation. Inflation was relatively high when it was first introduced (8%) and while inflation has crept up over the past 12 months, it had been close to 2% for nearly two decades.
There have been a number of arguments for a reduction in the capital gains discount to make the tax system more equitable but successive governments have made little attempt to change it.
Benefits of the Capital Gains Discount
The biggest benefits of the capital gains tax discount usually accrue to those who have held assets for just over the 12 months required and for those who are able to sell assets at a much higher price than what they acquired them at.
For example, if you bought a property and were able to add significant value to it over a 12 month period by renovating it, and sold it at a much higher price than you bought it at, you would be a big beneficiary of the 50% CGT discount.
How to Use the Capital Gains Discount
First you need to work out what you received for the asset or your capital proceeds and then from that amount you deduct your cost base. The cost base will include the price you paid for the asset originally—and remember it needs to have been more than one year ago for you to be able to get the discount—plus other costs incurred in acquiring and/or holding the asset.
Incidental costs of acquiring the assets can include things such as surveyor costs, stamp duty or costs of transfer. The ATO has a detailed list here.
Costs of owning the asset can include rates and land taxes but these costs can only be included in the cost base if they are not deductible. The ATO cites vacant land as an example of where this would happen.
If your capital proceeds are more than your cost base then you have a capital gain. If they are not, you have a capital loss. The CGT discount can only be applied to a net capital gain, i.e. if you have a capital gain and a capital loss from different events you need to deduct the loss from the gain before you can apply the discount.
Additional CGT Discounts
The sale of a property used for affordable housing may be eligible for an extra 10% CGT discount, in addition to the 50% CGT discount, for any period it was used to provide affordable housing as long as that was for three years or more (continuously or in aggregate).
There are also four CGT discounts available to eligible small businesses.
What’s Excluded From The CGT Discount?
The CGT discount is only available to individuals or trusts. Complying superannuation funds have a lower CGT discount rate of 33.33%.
Foreign or Temporary Residents
Foreign or temporary residents can not use the CGT discount for capital gains made after May 8, 2012.
Creation of a New Asset
A CGT event that creates a new asset and a capital gain is not eligible for the CGT discount. The ATO says such a situation could arise, for example, with a restrictive covenant “where you receive payment for agreeing not to do something or granting a lease”.
Home Used for Business or Rental in First 12 Months
If the asset disposed of is your home and you started using it for business or as a rental in the first 12 months of ownership it is not eligible for the CGT discount.
Non-widely Held Entity
The ATO says the CGT discount may be denied when the CGT event occurs from disposal of an interest in an entity with less than 300 members.
Income Asset Conversion
The CGT discount may also be denied if an income asset is converted to a capital asset for the purposes of gaining the CGT discount.
Frequently Asked Questions (FAQs)
How much is the capital gains discount?
For individuals and Australian trusts it is 50% and for complying super funds it is 33.33%.
Can I claim the CGT discount on crypto?
If you are holding your crypto asset as an investment it may be eligible for the discount.
What is an example of the capital gains tax discount?
The following is a summary of an example used by the ATO.
Rhi buys an investment property for $500,000 and sells it 5 years later for $600,000. Her capital proceeds from the CGT event are $600,000 and her cost base is $530,000, which includes the price paid plus stamp duty, conveyancing fees, sale costs and the agent’s commission. Her capital gain on the investment property is: $600,000 − $530,000 = $70,000. She has no other capital gains or losses, is an Australian resident and can therefore reduce the capital gain to be reported in her income tax return by 50% i.e. a net capital gain of $35,000. She will pay tax on this gain at her marginal income tax rate.