Capital Gains Tax (CGT) was introduced to Australia from 20th of September 1985 to reduce the inconsistency between the taxing of wealth and the taxing of income. The capital gains tax system works by including the assessable gain on the disposal of a CGT asset in the assessable income of the entity disposing of it.

If you purchased a CGT asset after the 20th of September 1985, then you will have to declare a capital gain in your tax return when a CGT event happens in relation to that asset. The most common CGT event is the sale of a CGT asset. To work out the capital gain, the cost base of the asset is subtracted from the capital proceeds of the disposal.

Once the total capital gain has been determined, the CGT discount can be applied if the asset has been held for more than one year. For individuals, the CGT discount means you only have to include 50% of the total gain on the assessible income. For self managed super funds, the discount is 1/3. Companies and other trusts are not entitled to a CGT discount, though if a trust distributes a capital gain to an individual or self managed super fund then the discount may be applied.

If the capital proceeds on disposal of an asset is less than the cost base of that asset, then the entity disposing of the asset makes a capital loss. Capital losses cannot be offset against ordinary income, but they may be offset against capital gains in the current year or in future years as they can be carried forward indefinitely.

There are various capital gains tax exemptions, the most significant being the main residence exemption. Typically, a person’s house will not be subject to capital gains tax when it is their primary residence and has not been used for income producing purposes to the extent that is becomes excluded from the exemption. Other exemptions include cars and motor cycles; decorations for valour (that are awarded not purchased); and collectibles costing less than $500.

Collectibles that are purchased for more than $500 and disposed of for a profit are liable for capital gains tax. However, capital losses that arise from the disposal of collectibles can only be used to offset capital gains on the disposal of other collectibles. Capital gains on collectibles are treated differently because of the complicated nexus between collecting as a hobby and investing for profit.