What is capital gains tax?

Understanding how capital gains tax (CGT) works is important when it comes to managing your finances and making informed decisions about your investments and assets. 

If you’ve heard about changes to Australia’s CGT (which started in 1985 and has gone through several evolutions since), it’s normal to have questions or feel uncertain, but changes aren’t happening overnight. 

New CGT rules are scheduled to take effect on 1 July 2027, so there’s time to get up to speed on how capital gains have been taxed historically - and what taxes will look like in the future - so you can decide your next steps.

What is capital gains tax?

Capital gains tax (often referred to as CGT) is the tax you may pay when an investment grows in value and you sell it for a profit. This can include assets like investment properties, shares, crypto and other income-producing assets. CGT applies when you sell an asset for more than you paid for it. The difference between your purchase price and sale price is known as the capital gain.

Example: you buy an investment property. After a few years, the market grows and you decide to sell it.

• Your total costs (purchase + selling costs): $700,000

• Your final sale price: $850,000 

• Your capital gain: $150,000

The Government views this profit as a form of income, so it’s added to your taxable income in the financial year that the asset was sold, which can potentially change how much tax you owe when you lodge your return. 

When is capital gains tax payable?

Despite the name, CGT isn't a standalone tax - it’s part of your regular assessment when you file your taxes at the end of the financial year. CGT only applies when a specific trigger occurs, known as a CGT event. Selling an investment property or shares is generally the most common trigger, but transferring ownership or gifting an asset counts too. The amount of tax you pay will vary depending on what income bracket you fall into.

What if I make a capital loss?

We all hope our investments grow over time, but that's not always how things play out. A capital loss occurs when you sell an asset for less than its original purchase price. Losing money is never ideal, but the Australian tax system has some built-in features when a capital loss occurs.

By including capital losses in your tax return, you can either:

• Offset any capital gains made in the same financial year to potentially pay less tax.

• Carry forward loss to offset future capital gains (you're legally allowed to "bank" capital losses indefinitely)

What assets are subject to capital gains tax?

Aussies love to talk about housing, so you’ll typically hear capital gains talked about in the context of the Australian real estate market, but CGT also applies to a range of asset classes, including: 

• Investment properties and land: residential rental properties, commercial premises, holiday homes and vacant land are generally subject to CGT.

• Shares and investment units: this includes individual shares in a company, exchange-traded funds (ETFs) and units in a managed fund or trust.

• Cryptocurrency: crypto assets are viewed as investments, meaning selling, trading or converting digital currencies generally triggers a tax calculation.

• Business assets: selling parts of a business, including commercial premises or certain intangible assets.

You generally don’t have to worry about CGT on the home you live in (as long as you haven't used it to run a business or rent out a room), personal use assets under $10,000 (your car is generally exempt regardless of price) or certain collectibles (bought for $500 or less).

Check the Australian Tax Office (ATO) website to find out more about which assets are subject to CGT and which assets are exempt.

What is the CGT discount?

The CGT discount is a tax concession that allows you to reduce the taxable amount of profit you make through your capital gains. 

Under the current rules: if you own a CGT asset for more than 12 months before selling it, you qualify for a 50% discount. This means you only add half of your actual gain to your taxable income for that financial year.

Under the new rules starting 1 July 2027: Capital gains tax reforms were announced in the 2026-27 Federal Budget, and scheduled to commence on 1 July 2027. Under these new reforms the traditional 50% discount will be replaced by an inflation-adjusted indexation model. Instead of reducing the gain by 50%, the system will adjust your initial purchase cost upwards using the Consumer Price Index (CPI).

This ensures you are only taxed on your "real" profit above inflation. Additionally, a minimum tax rate of 30% will apply to these investment gains. If you're planning to buy or sell investments in the coming years, it's worth keeping an eye on the latest ATO guidance and speaking with a financial or tax professional about your options.

Note: If you own an asset before 1 July 2027 and sell it after, your gain will be split. The 50% discount applies to the gain built up until 30 June 2027, and the new indexation rules apply to the growth in the gain from 1 July 2027 until the date of disposal.

Can I reduce capital gains tax?

With some forward planning, there may be opportunities to manage the tax impact of a capital gain and keep more of your investment returns working towards your goals. For example, timing your asset sales to occur in a financial year where your taxable income is lower, which could place you in a lower marginal tax rate bracket.

You may also be eligible to make a tax-deductible super contribution to reduce your taxable income, which could reduce the overall tax impact of a capital gain. The outcome will depend on your circumstances, eligibility and contribution caps. There are also catch-up rules that could allow you to tip more tax-deductible contributions into super from up to five previous years, depending on how much profit you got from your asset sale. 

For more help, it’s a good idea to get across the rules and limits around super contributions.

What if I transfer property instead of selling it?

Making a cash gift to family or friends doesn’t trigger CGT. But gifting assets (such as property and shares) generally will trigger CGT, even if no cash changes hands. If you sell, transfer or gift a property for less than it’s worth, you still need to use market value to calculate the capital gain.

There are special cases when it comes to marriage breakdowns and special disability trusts, but understanding how it works can be complex. So, it’s a good idea to make sure you’re across the rules and get some expert advice before making any decisions.

What to do next

Owing capital gains tax isn’t necessarily a sign something has gone wrong. In many cases, it’s a sign that an investment has performed well. The key is understanding how CGT works and planning for it as part of your broader strategy. 

Because these rules affect how property and investment portfolios are structured, it’s a good idea to speak with your accountant or tax adviser to see how upcoming changes might impact your financial strategy.