What is capital gains tax?

It's always nice to make a profit on an investment but in most cases, the government likes to take their chop out of it too. Enter capital gains tax - or CGT.

So what is it, how do you calculate it, and when do you have to pay it?

What is capital gains tax?

A capital gain occurs when you sell an asset or investment and the money from the sale is greater than what you paid for it (accounting for expenses as well). Essentially, it's the profit you make from any investment you sell.

This capital gain has to be reported to the Australian Taxation Office (ATO) and is taxed, just as any other income would be.

Although it has its own name and rules, your capital gains are reported with the rest of your taxable income, and CGT forms part of your regular income tax.

What do you pay capital gains tax on?

CGT most notably applies to property and shares but can also apply to a range of things like trusts, contractual rights, and goodwill in a business.

And before you think about shipping your assets offshore, CGT can also apply to the sale of assets you've made overseas.

Notably, your family home is typically exempt from CGT, provided you've never rented it out - or rented it out according to ATO exemption guidelines, also known as the six-year rule.

You also shouldn't have used your home to run a business and, generally, your property should be under two hectares. Your car is also exempt from CGT.

When do you have to pay capital gains tax?

When you bought and sold your asset is key when it comes to CGT, particularly with changes to CGT calculations announced in the 2026-27 federal budget.

Changes to capital gains tax calculations

For assets sold before 1 July 2027, if you've held the asset for longer than 12 months, you're entitled to a 50% discount on your capital gains as an individual, or 33.33% as a super fund.

But if you'd held the asset for less than 12 months, you're required to pay CGT on the entire capital gain.

For assets sold after 1 July 2027, for the period after that date, capital gains tax will be calculated under a inflation-indexed system. All capital gains accrued after 1 July 2027 will also be subject to a minimum 30% tax rate.  

It's worth noting CGT is calculated from when you entered into a contract, not from when you settled.

So, for example, if you sign off on selling an investment property in June 2027 and settle in August 2027, you will calculate your capital gains tax under the 50% discount method and will need to report your capital gain in your 2026/27 tax return. 

How do you calculate capital gains tax?

As mentioned, to calculate your CGT you need to pay depends on when the asset was purchased and sold.

Assets sold before 1 July 2027

If you buy and sell an asset within 12 months, you simply add any capital gain to your taxable income, which is then taxed at your regular marginal rate of tax.

If you've owned the asset or investment for longer than 12 months, here's the advice from the ATO for the period up to 30 June 2027:

1. Work out what you received for the asset

This is what you get when you sell the asset. If you give an asset away or sell it to a friend or family member for less than it's worth, your capital gains will be calculated at market value regardless.

2. Work out your costs for the asset

This is your 'cost base'. It's what it cost you to buy the asset, plus certain other costs you incurred to acquire, hold, and dispose of it. If you made a gain on the asset and you acquired it before 21 September 1999, you can index costs for inflation up to that date instead of applying the CGT discount to reduce your capital gain. (See an example and some rules that apply to this method below.) This may give you a lower gain in some cases.

3. Subtract the costs from what you received

(The costs calculated from Step 2 from the amount of Step 1.) If the result is more than zero, you have a capital gain. If you come up with amount less than zero, you have a capital loss.

4. Repeat Steps 1-3 for all CGT events in a financial year

5. Subtract any capital losses from capital gains

You can choose which capital gains to subtract your losses from. If you have any capital gains not eligible for the CGT discount, you can subtract your losses from these gains first. This is entirely legal and will see you pay the lowest capital gains tax.

6. If the remaining amount is: more than zero (go to Step 7), or less than zero - a net capital loss (go to Step 8)

7. Apply the CGT discount (50% for individuals and trusts) to any remaining capital gains

A capital gain is eligible for the discount if you are an Australian resident and the asset has been owned for at least 12 months. Complying super funds can apply a discount of 33.33%. Note: if you acquired the asset before 21 September 1999 and have already indexed its cost base (as per Step 2), you cannot also apply the discount.

8. Report your capital net gain or loss in your tax return

If you have a net capital gain, you will pay tax at your marginal income tax rate. If you have a net capital loss, you cannot deduct it from your other income but you can carry it forward to reduce capital gains you may make in future years.

You can check the ATO's advice on How to calculate your CGT

Assets sold after 1 July 2027

For assets sold after 1 July 2027, the 50% discount method will no longer apply.

Capital gain will be calculated using a hybrid method, splitting the gain into two periods:

• pre-1 July 2027 (eligible for the 50% discount)
• post-1 July 2027 (using cost-base indexation, not the discount system)

As at May 2026, the ATO has not yet published official instructions on post-1 July 2027 calculations.

However, here is a basic rundown:

1. Establish the asset's value at 1 July 2027

This can be done by either:

• obtaining a professional market valuation
• using the ATO's approved time-apportioned formula based on how long the asset was held before and after the new calculation method was instituted

2. Calculate the pre-1 July 2027 gain

This will be the difference between the 1 July 2027 value and your original purchase price (cost base). This portion of your gain is eligible for the standard 50% CGT discount (if you had held the asset for longer than 12 months).

3. Calculate the post-1 July 2027 gain

This is done using cost-base indexation. It is calculated using the sale price minus the indexed value as at 1 July 2027 to give the 'real' gain.

4. Add the gains from the two periods and apply the minimum 30% tax

Add the pre-1 July gain and the indexed post-1 July gain to get the total net capital gain. A minimum tax rate of 30% will apply to the net capital gain, even if your standard marginal tax rate is below 30%.

CGT examples

The CGT discount method

Carl G. Tacks buys an investment property in 2005 for $200,000 and pays $10,000 in stamp duty. Over the course of owning the property, Mr Tacks racks up $5,000 in ownership costs. He sells the property in January of 2015 for $300,000 and pays another $2,000 in sale costs.

Adding the purchase price and the various expenses means Mr Tacks' cost base comes to $217,000. Subtracting this figure from the sale price of his property ($300,000) means his gross capital gain is $83,000.

As Mr Tacks has held his asset for longer than 12 months, he can apply a 50% discount to this figure. This means his net capital gain is $41,500. He then adds this to his taxable income, which is then taxed at the tax bracket rate he falls into.

The CGT indexation method

• costs must have been incurred by 21 September 1999
• can index for inflation only up to 30 September 1999
• cannot index costs of owning the asset

Let's say Mr Tacks bought his investment property for $150,000 in October 1985, including stamp duty and various other fees. He sold said property for $600,000 in October 2005, all fees included.

Assuming Mr Tacks sold and settled in the same month, we divide by the CPI of when he sold by the CPI of when he bought. The ATO provides an index reference base list for this purpose. In this case, this is 83.8 divided by 40.5 which equals 2.069 (rounded to three decimal places).

Mr Tacks then multiplies what he paid for the property by this figure, to give him his inflation-adjusted price. So $150,000 x 2.069 comes to $310,350, which is his new cost base.

Subtracting this from what he sold the property for ($600,000) comes to $289,650 and gives Mr Tacks his capital gain. He then adds this to his taxable income in the 2005/06 financial year.

It's worth noting that in most cases, the discount method will give you the best result but the indexation method may be better in some situations, such as if you also have capital losses on other assets. If in doubt, always consult a tax professional.

What if I make a capital loss?

A capital loss is when you sell an asset or investment for less than what you bought it for, taking into account other costs as well.

Obviously, you don't pay tax on a loss because you didn't make any money. But, if you made any capital gains in the year, you can deduct this loss to reduce your taxable income.

If you didn't make any capital gains in that year, all is not lost. You can carry this capital loss forward to other income years and offset it against future capital gains.

How to minimise capital gains tax?

CGT is difficult to avoid and it can be considerable if you're a successful investor and/or have a high marginal rate of tax.

The best way to potentially minimise your CGT is by being organised and keeping records in an effort to be able to claim more in your cost base.

This can include holding onto any documents relating to the initial purchase of the asset or investment, and keeping receipts and records of any expenses incurred along the way.

Ensure you apply the calculation method that is going to see you pay the lowest capital gains tax (if the asset is eligible for the indexation time frame).

Under new CGT rules, investors selling qualifying new build residential properties maintain the choice between the legacy 50% CGT discount and new indexation systems.

Prior to 1 July 2027, another way to minimise capital gains tax was to sell the asset in a financial year where other income (and therefore your marginal tax rate) was lower. This meant that any capital gains you make would also be taxed at a lower rate.

However, for assets sold after 1 July 2027, a minimum 30% tax rate will apply. 

1. Savings.com.au's two cents

CGT can be complex but it's something you should ideally understand prior to buying any asset or investment.

Remember any capital gain you make by selling the investment down the track may be subject to tax. This should always figure in your calculations when you are ready to offload the asset for any reason.

If you want to maximise your cost base and thereby minimise your capital gains tax, it's wise to consult a qualified tax advisor to ensure everything you're claiming for is above board.

Further, consider consulting a professional in every step of the process of buying and selling an asset or investment. They may be able to offer some strategies that could see you increasing your capital gain or saving on tax, depending on your individual circumstances.