Australian Capital Gains Tax Guide: Discount, Cost Base, Timing Strategies and Offsetting Losses

A capital gain arises when you dispose of a capital asset (a CGT asset) for more than its cost base. CGT assets include: shares, managed funds, ETFs, and cryptocurrency; investment properties; business goodwill; and most other investments. CGT does not apply to your main residence (primary home) under the main residence exemption, to depreciating assets used in business, or to assets acquired before 20 September 1985 (pre-CGT assets).

CGT events are the triggers that bring a capital gain or loss into existence. The most common CGT event is CGT Event A1 - the disposal of an asset (sale, gift, or transfer of ownership). Other CGT events include: CGT Event B1 (use and enjoyment before title passes); CGT Event C1 (loss or destruction of an asset); CGT Event E1 (creating a trust over an asset); and CGT Event F1 (granting a lease). For most individual investors, Event A1 covers the vast majority of CGT situations.

CGT is not a separate tax - capital gains are included in your assessable income for the income year in which the CGT event occurs and taxed at your marginal rate. The timing of a CGT event (which income year the disposal falls in) is therefore a significant tax planning lever.

Australian individual taxpayers and discretionary trusts that have held a CGT asset for more than 12 months before disposal are entitled to a 50% discount on the capital gain. This means only 50% of the gross capital gain is included in assessable income - effectively halving the tax payable on long-term investments.

Example: you sell shares for $50,000 that you bought for $20,000 - a gross capital gain of $30,000. If held for more than 12 months, you apply the 50% discount: $15,000 is included in your assessable income. If your marginal tax rate is 39% (including Medicare levy), you pay $5,850 in tax on the gain - an effective CGT rate of 19.5% on the gross gain. Without the discount (held less than 12 months), you would pay $11,700.

The 12-month holding period is calculated from the date of acquisition to the date of disposal - specifically from the day after acquisition to the day of disposal inclusive. If you acquired shares on 1 March 2023 and sell on 1 March 2024, you have held them exactly 12 months - the discount applies from 2 March 2023 to 1 March 2024 (12 months from the day after acquisition). If you sell on 28 February 2024, only 11 months and 28 days have elapsed - no discount.

The CGT discount is not available to: companies (which pay corporate tax at 30% or 25% on all capital gains); SMSFs in accumulation phase - SMSFs do receive a one-third discount (equivalent to a 10% effective CGT rate on gains from assets held 12+ months); and non-residents.

The cost base of an asset is the starting point for calculating your capital gain or loss. A higher cost base means a smaller taxable gain. Many investors do not claim all the costs they are entitled to include, resulting in a higher CGT liability than necessary.

The five elements of the cost base are: (1) the purchase price of the asset; (2) incidental costs of acquisition (brokerage, stamp duty, legal fees, conveyancing); (3) ownership costs that are not otherwise deductible (rates, insurance, maintenance costs for a non-income-producing asset - note that for investment properties where expenses are already deducted, they cannot also be included in the cost base); (4) capital enhancement costs (improvements, extensions - not repairs which are deductible); and (5) incidental costs of disposal (brokerage, legal fees, agent commissions on property sale).

For shares and ETFs, the cost base is typically the purchase price plus brokerage on both acquisition and disposal. Keep all trade confirmations - they document the cost base. For investment properties, the cost base includes: purchase price, stamp duty, conveyancing fees, building reports, and capital improvements (bathroom renovations, extensions) - not deductible repairs or maintenance.

When an investment property has been depreciated (a tax deduction claimed on the building's value), the cost base may be reduced by amounts previously deducted. A quantity surveyor's depreciation schedule is essential documentation at the time of sale to correctly calculate any cost base adjustments.

A capital loss arises when you dispose of a CGT asset for less than its cost base. Capital losses can only be offset against capital gains - they cannot be offset against ordinary income (salary, rental income, business income) in the current year. If your capital losses exceed your capital gains in a year, the net capital loss is carried forward to future income years indefinitely.

The order of offset matters for tax efficiency: capital losses are applied against capital gains before the 50% discount is applied. If you have both short-term gains (no discount) and long-term gains (50% discount), apply capital losses to short-term gains first to preserve the benefit of the discount on long-term gains.

Example: $10,000 gross capital gain from an asset held 13 months (long-term) and a $3,000 capital loss. If the $3,000 loss is offset against the long-term gain: discounted gain = ($10,000 - $3,000) × 50% = $3,500 included in income. If the loss had been applied after the discount: ($10,000 × 50%) - $3,000 = $2,000 included in income. The ATO prescribes the offset order - losses come off gross gains before the discount - so tax planning must account for this.

Tax-loss harvesting - deliberately selling loss-making assets before year end to generate capital losses that offset capital gains - is a legitimate strategy. Ensure you do not trigger the wash sale rule (selling an asset at a loss and buying back a substantially identical asset purely for the tax benefit - the ATO may treat such arrangements as not genuine).

Timing the income year in which a CGT event falls can significantly reduce the tax payable. Key timing strategies for Australian investors:

Wait 12 months: if you are approaching 12 months of ownership on a profitable asset, delaying the sale until the 12-month anniversary halves the taxable gain. For a $50,000 gain at the 47% marginal rate, the tax saving from the 50% discount is $11,750. Waiting a few weeks or months for the discount is almost always worthwhile for significant gains.

Choose the income year: a CGT event for a share sale occurs on the contract date (the date the sale is agreed), not the settlement date. For property, the CGT event occurs on the date of the contract. If you sign a share sale in late June, the gain falls in the current income year even if settlement occurs in July. Conversely, signing a contract after 30 June defers the gain to the next income year - useful if you expect lower income (and a lower marginal rate) next year.

Spread gains across income years: where possible, sell portions of a large holding across two income years rather than all at once. This can prevent large one-off gains from pushing other income into higher marginal rate brackets.

Use the SMSF: capital gains inside a complying SMSF in accumulation phase are taxed at 15% (10% effective rate with the one-third discount for assets held 12+ months). In pension phase, capital gains on assets supporting pension liabilities are completely tax-free. Holding growth assets in an SMSF significantly reduces the long-term CGT cost.

Investment property and shares are both subject to CGT, but with important practical differences. Investment property typically involves larger individual gains, more complex cost base calculations (stamp duty, improvements, depreciation adjustments), and less flexibility on timing - a property contract date is harder to manage to a specific day than a share trade.

The main residence exemption completely exempts your primary home from CGT - a significant benefit for owner-occupiers. Partial main residence exemption applies if you have used the property as both your main residence and an income-producing property at different times.

The six-year rule: if you move out of your main residence and rent it out, you can continue to treat it as your main residence for CGT purposes for up to six years, provided you do not nominate another property as your main residence during that period. This preserves the CGT exemption for up to six years of rental income - a powerful strategy for properties with significant embedded capital gains.

Shares provide much more flexibility for tax-efficient CGT management: you can precisely time sales, sell partial parcels, use different tax lots (FIFO, LIFO, or specific identification), and harvest losses more easily. Property's illiquidity and transaction costs (agent commissions of 1.5–2.5%) make CGT timing harder to optimise.

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Apply these strategies to reduce your CGT liability:

• Hold all CGT assets for more than 12 months before disposal - the 50% discount halves your taxable gain
• Check the exact 12-month anniversary date before selling - missing it by a day eliminates the discount
• For shares, note the contract date (not settlement date) as the CGT event - plan sales accordingly around 30 June
• Keep all purchase records, brokerage confirmations, and capital improvement receipts - these form your cost base
• For investment properties, obtain a quantity surveyor's depreciation schedule before sale - it documents depreciation deductions affecting the cost base
• Apply capital losses against short-term gains before long-term gains to preserve the 50% discount on long-term gains
• Consider tax-loss harvesting before 30 June - realise capital losses on underperforming assets to offset gains made during the year
• Use the six-year main residence rule if converting your home to a rental - it can preserve CGT exemption for up to 6 years
• Contribute appreciated shares or property to an SMSF in pension phase where possible - CGT on assets supporting pensions is tax-free
• Consider deferring large gains to the next income year if you expect significantly lower income - sign contracts after 30 June

CGT planning is most effective when done before a sale, not after - the decisions that determine your CGT liability are made at acquisition and disposal, not in the tax return.