1 Getting started

Overview of capital gains tax

What is capital gains tax?

Capital gains tax (CGT) is the tax you pay on any capital gain you make that you include in your annual income tax return.

For CGT events that occurred in the 2005–06 income year or earlier years, please refer to the previous edition of the Guide to capital gains tax concessions for small business 2005–06 (NAT 8384).

There is no separate tax on capital gains – rather, it is a component of your income tax. You are taxed on your net capital gain at your marginal tax rate.

Your net capital gain is the difference between your total capital gains for the year and your total capital losses (from your business and other assets), less any relevant CGT discount or concessions. Any net capital gain you make for an income year must be included in your assessable income.

CGT events

A capital gain or capital loss is made when certain events or transactions (called CGT events) happen. Most CGT events involve a CGT asset.

Some CGT events, such as the disposal of a CGT asset, happen often and affect many different taxpayers. Other CGT events are rare and affect only a few taxpayers, for example, events concerned directly with capital receipts and not involving a CGT asset.

CGT assets

The most common CGT assets are land and buildings, shares in a company or units in a unit trust.

Less well-known CGT assets include contractual rights, options, foreign currency, leases, licences and goodwill.

Capital gains and losses

In general, you make a capital gain if you receive an amount from a CGT event (such as the disposal of a CGT asset) that is more than your total costs associated with that event.

You make a capital loss if you receive an amount from a CGT event that is less than the total costs associated with that event.

In some cases, you are taken to have received the market value of the CGT asset even if you received a different amount or nothing at all. This may be the case, for example, when you give an asset away.

You can use a capital loss only to reduce a capital gain – not to reduce other income. You can generally carry forward any unused capital losses to a later income year and apply them against capital gains in that year.

Generally, you can disregard any capital gain or loss made on an asset you acquired before 20 September 1985.

Depreciating assets

There are special rules that apply to depreciating assets. A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used. Plant and equipment used in your business are examples of depreciating assets.

You make a capital gain or capital loss from a depreciating asset only to the extent you have used the depreciating asset for a non-taxable purpose (for example, for private purposes).

More information

For more general information about how capital gains tax works, see:

• Guide to capital gains tax 2005–06 (NAT 4151)
• Guide to depreciating assets 2005–06 (NAT 1996)

CGT records you need to keep

You must keep records of everything that may be relevant to working out whether you have made a capital gain or capital loss from an asset.

This means you need records to substantiate the purchase and disposal of any asset, as well as other costs relating to the asset. Records can include contracts, valuations, and details of commissions and legal fees paid.

The records must:

• show the nature of the act, transaction, event or circumstance, and the date it happened
• be in English, or in a form that can be readily translated into English
• be kept for five years after you sell or otherwise dispose of an asset, unless you keep a CGT asset register (see below).

It pays to keep good records

If you don't keep proper CGT records you may:

• incur extra expense in establishing the cost of an asset when you come to dispose of it
• have to pay more tax.

CGT asset register

You may find that a simpler way to keep records of assets is to keep a CGT asset register. This is a register of information about your CGT assets that you've transferred from your CGT records (for example, invoices, receipts and contracts).

For most assets this information includes:

• the date the asset was acquired
• the cost of the asset
• a description, amount and date for each cost associated with purchasing the asset (for example, stamp duty and legal fees)
• the date the asset was disposed of
• the amount received on disposal of the asset
• any other information relevant to calculating your CGT obligation.

You can discard your CGT records five years after having an asset register entry certified if:

• you enter all the necessary information about an asset in your CGT asset register
• the entry is in English and is certified in writing by an approved person (for example, a registered tax agent)
• the asset register entry is certified after 31 December 1997 (although the asset itself may have been acquired before this date).

If you don't keep an asset register, you generally have to keep CGT records for at least five years after you dispose of an asset. For example, if you hold an asset for 10 years and then sell it, you'd have to keep the records for 15 years.

More information

• Taxation Ruling TR 2002/10 Income tax: capital gains tax: asset register

What's new in 2006–07

The government announced in the 2008–09 Budget that it will increase access to the small business CGT concessions for businesses with turnover less than $2 million via the small business entity turnover test.

The main changes apply with effect from the 2007–08 income year. However, there are some minor changes that apply from 2006–07.

The amendments are contained in Tax Laws Amendment (2009 Measures No. 2) Act 2009 which received royal assent on 23 June.

The following changes apply retrospectively from 2006–07 to:

• increase access to the concessions for joint tenants and trustees of testamentary trusts where a gain arises from an asset within two years of the individual's death, where the deceased would have been entitled
• remove the requirement in the retirement exemption to meet the basic conditions where the replacement asset conditions have not been met for the small business rollover (CGT events J5 and J6).

As these changes are retrospective taxpayers have additional time to make their choice to use the concessions where they become eligible as a result of these June 2009 amendments.

The taxpayer has until the later of:

• the day the entity lodges its income tax return for the income year in which the relevant CGT event happened
• 12 months after the day on which these amendments receive Royal Assent
• a later day allowed by the Commissioner.

The extension of time to make a choice applies to CGT events happening before the 23 June 2009.

For more information, see Changes to the capital gains tax (CGT) concessions for small business 2007–08

As part of the government's broader superannuation changes, certain consequential amendments have also been made to the retirement exemption by the Superannuation Legislation Amendment (Simplification) Act 2007 which will apply to CGT events happening in the 2007–08 or later income years.

The government made changes to the law that make it easier for small business to claim tax concessions from July 2007.

Small businesses with a turnover of less than $2 million a year will be eligible to claim a range of tax concessions, and be able to pick and choose which ones best suit their business. This includes the capital gains tax concessions for small business.

The changes also mean that businesses with a turnover of $2 million or more can access the capital gains tax concessions for small business as long as they satisfy the net asset test that has increased to $6 million. These businesses must however, satisfy certain conditions.

These changes apply to CGT in the 2007–08 financial year and beyond.

See Small business CGT concessions for more information.