A capital gain or capital loss on an asset is the difference between what it cost us and what you receive when we dispose of it.
We pay tax on your capital gains. It forms part of our income tax and is not considered a separate tax – though it’s referred to as capital gains tax (CGT).
If we make a capital loss, we can’t claim it against income but we can use it to reduce a capital gain in the same income year. And if our capital losses exceed our capital gains in an income year, we can generally carry the loss forward and deduct it against capital gains in future years.
All assets we’ve acquired since tax on capital gains started (on 20 September 1985) are subject to CGT unless specifically excluded.
Most personal assets are exempt from CGT, including our home, car, and most personal use assets, such as furniture. CGT also doesn’t apply to depreciating assets used solely for taxable purposes, such as business equipment or fittings in a rental property.
If we’re an Australian resident, CGT applies to our assets anywhere in the world. Foreign residents make a capital gain or capital loss if a CGT event happens to an asset that is ‘taxable Australian property’.
When you sell or else dispose of an asset it’s called a CGT event. This is the point at which you create a capital gain or capital loss. There are additional CGT events, such as when a managed fund or other trust distributes a capital gain to you.
It’s important to set up the timing of a CGT event because it tells you in which income year to report your capital gain or capital loss, and may affect how you calculate your tax liability.
If you dispose of a CGT asset, the CGT event frequently happens when you enter into the contract for disposal. (In the case of real estate, for example, the CGT event generally occurs when you enter into the contract – that is, the date on the contract, not when you settle.) If there is no contract, the CGT event usually happens when you stop being the asset’s owner.
If your CGT asset is lost or destroyed, the CGT event happens when you first receive reward for the loss or destruction. If you don’t receive any reward, the CGT event happens when the loss is discovered or the damage occurred.
When some CGT events occur, such as exchanging an asset for a replacement asset, the law allows you to defer or roll over any capital gain you make until another CGT event (such as selling the replacement asset).
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