Personal investors guide to capital gains tax 2023

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Part A: How capital gains tax applies to you

Part A: How capital gains tax applies to you

On this page

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New terms

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A1: What is capital gains tax and what rate of tax do you pay?

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A2: Worldwide obligations

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A3: How to meet your CGT obligations

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A4: Exemptions and rollovers

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A5: Records you need to keep

New terms

Some terms in this section may be new to you. These words are in bold the first time they are used and are explained in Definitions .

While we have used the word 'bought' rather than 'acquired' in some of our examples, you may have acquired your shares or units without paying for them (for example, as a gift or through an inheritance or through the demutualisation of an insurance company such as AMP, IOOF or NRMA, or a demerger such as the demerger of BHP Steel Ltd (now known as BlueScope) from BHP Billiton Limited), or the demerger of Endeavour Group Limited from Woolworths Group Limited. If you acquired shares or units in any of these ways, you may be subject to capital gains tax (CGT) when you sell them or another CGT event happens.

Similarly, we sometimes refer to 'selling' shares or units although you may have disposed of them in some other way (for example, giving them away or transferring them to someone else). All of these methods of disposal are CGT events.

A1: What is capital gains tax and what rate of tax do you pay?

CGT is the tax you pay on any capital gain that you include on your annual income tax return. It is not a separate tax, merely a component of your income tax. You are taxed on your net capital gain at your marginal tax rate.

Your net capital gain is:

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your total capital gains for the year

minus

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your total capital losses for the year and any unapplied net capital losses from earlier years

minus

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any CGT discount and small business CGT concessions to which you are entitled.

If your total capital losses for the year are more than your total capital gains, the difference is your net capital loss for the year. It can be carried forward to later income years to be deducted from future capital gains. (You cannot deduct capital losses or a net capital loss from your income.) There is no time limit on how long you can carry forward a net capital loss. You apply your net capital losses in the order that you made them. More information on how to apply your capital losses is in step 8 of Part B Sale of shares or units, and step 4 of Part C Distributions from managed funds.

You make a capital gain or a capital loss if a CGT event happens. The disposal of an asset is an example of a CGT event. You can also make a capital gain if a managed fund or other trust distributes a capital gain to you.

You write the total of your current year capital gains at question 18 - label H in your supplementary tax return. You write your net capital gain at question 18 - label A in your supplementary tax return.

This guide only covers capital gains or capital losses from CGT assets that are shares, units or other interests in managed funds.

A2: Worldwide obligations

Australian residents can make a capital gain or capital loss if a CGT event happens to any of their assets anywhere in the world.

A3: How to meet your CGT obligations

To meet your CGT obligations, follow these 3 main steps:

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Step 1 Decide whether a CGT event has happened.

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Step 2 Work out the time of the CGT event.

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Step 3 Calculate your capital gain or capital loss.

Keep your records

You need to keep good records of any assets you have bought or sold so you can correctly work out the amount of capital gain or capital loss you have made when a CGT event happens. You must keep these records for 5 years after the CGT event has happened.

You should also keep records relevant to a net capital loss that you carry forward as part of unapplied net capital losses. You may be able to apply this net capital loss against a capital gain in a later income year.

Step 1 Decide whether a CGT event has happened

CGT events are the different types of transactions or events that may result in a capital gain or capital loss. A CGT event has happened if you have sold (or otherwise disposed of) your shares or units or other assets during 2022-23.

Examples of other CGT events that can happen to shares or units include:

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when a company makes a payment other than a dividend to you as a shareholder

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when a trust or fund makes a non-assessable payment to you as a unit holder

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where you have an annual cost base reduction that exceeds the cost base of your interest in an attribution managed investment trust (AMIT)

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when a liquidator or administrator declares that shares or financial instruments relating to a company are worthless

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when shares in a company are cancelled because the company is wound up.

In some cases, although CGT events may have happened to certain assets, any capital gains or capital losses from them are generally disregarded (for example, assets acquired before 20 September 1985).

For more information about CGT events, see Guide to capital gains tax 2023 .

If a managed fund makes a capital gain and distributes part of that gain to you, you are treated as if you made a capital gain from a CGT event.

If you did not make a capital gain or capital loss from a CGT event during 2022-23, print N in the box at question 18 - label G in your supplementary tax return.

If you did make a capital gain or capital loss from a CGT event during 2022-23, print Y in the box. If the CGT event happened to your shares or units and the event is covered in this guide (see About this guide ), read on. Otherwise, see Guide to capital gains tax 2023 .

Step 2 Work out the time of the CGT event

The timing of a CGT event is important because it determines which income year you show your capital gain or capital loss in. If you sell or otherwise dispose of an asset to someone else, the CGT event happens when you enter into the contract of sale. If there is no contract, the CGT event happens when you stop being the asset's owner.

If you received a distribution of a capital gain from a managed fund, you are taken to have made the capital gain in the income year shown on your statement from the managed fund.

Step 3 Calculate your capital gain or capital loss

There are 3 ways of calculating your capital gain or capital loss from the sale of your shares or units:

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the indexation method

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the discount method

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the 'other' method.

The indexation method allows you to increase the amount that your asset cost (the cost base) by applying an indexation factor that is based on increases in the consumer price index (CPI) up to September 1999.

The indexation method can only be applied to assets that you acquired before 11:45 am AEST on 21 September 1999.

If you use the discount method you do not apply the indexation factor to the cost base, but you can reduce your capital gain by the CGT discount of 50% (after deducting any capital losses for the year and any unapplied net capital losses from earlier years) provided you have owned the shares or units for at least 12 months.

For assets that qualify for both the indexation and discount methods, you can choose the method that gives you the better result. You do not have to choose the same method for all your shares or units even if they are in the same company or fund. Because you must offset capital losses against capital gains before you apply the CGT discount, your choice may also depend on the amount of capital losses that you have available, see example 18 .

You must use the 'other' method for any shares or units you have bought and sold within 12 months (that is, when the indexation and discount methods do not apply). To calculate your capital gain using the 'other' method, you simply subtract your cost base from what you have received (your capital proceeds).

You make a capital loss from the sale of your shares or units if their reduced cost base is greater than your capital proceeds. You cannot index amounts included in your reduced cost base.

If you received a distribution of a capital gain from a managed fund, part C of this guide explains how you calculate the amount of that capital gain. You must use the same method as that chosen by the fund.

Table 1 explains and compares the 3 methods of calculating your capital gain.

Table 1: Capital gain calculation methods

A4: Exemptions and rollovers

There may be an exemption that allows you to disregard your capital gain or capital loss. For example, generally you disregard any capital gain or capital loss associated with any pre-CGT assets (assets you acquired before 20 September 1985).

There may be a rollover that allows you to defer your capital gain or capital loss. For example, if a company in which you hold shares is taken over or merges with another company, you may have a CGT obligation if you are required to dispose of your existing shares. If you exchanged your existing shares for shares in the takeover company this income year, you may be able to defer or roll over some or all of your capital gain (but not a capital loss) until a later CGT event happens to your replacement shares. This is known as scrip-for-scrip rollover.

Another example of a rollover is when you transfer a CGT asset to your former spouse (married or de facto) as a result of a court order after a marriage or relationship breakdown. In this case, you do not make a capital gain or capital loss on the transfer. Your former spouse may make a capital gain or capital loss when a later CGT event happens to the asset. For more information, go to Relationship breakdown and capital gains tax .

A rollover is also available for some demergers of corporate or trust groups.

Assets you did not buy and assets other than shares and units

If you sold assets other than shares and units, had assets from a deceased estate or had several CGT events this income year, this publication does not provide you with enough detail. See Guide to capital gains tax 2023 to find out how to calculate and report your CGT obligations.

A5: Records you need to keep

Most of the records you need to keep to work out your capital gain or capital loss when you dispose of shares in companies or units in unit trusts (including managed funds) will be given to you by the company, the unit trust manager or your stockbroker. It is important that you keep everything they give you about your shares and units.

These records will generally provide the following important information:

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the date you bought the shares or units

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the amount paid to buy the shares or units

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details of any non-assessable payments made to you during the time you owned the shares or units

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the date and amount of any calls if shares were partly paid

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the sale price if you sold them

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any commissions paid to brokers when you bought or sold them.

References

ATO references:
NO QC 72665