Selling a capital asset, such as an investment property, you will usually make a capital gain or a capital loss. A capital gain or loss is the difference between what it costs you to acquire and improve the asset, and the amount you receive when you dispose of it. Capital gains tax (CGT) is the tax you pay if you make a capital gain selling your asset.

Your capital gains and losses must be reported in your income tax return each year and you will need to pay tax on your capital gains. Although referred to as capital gains tax, this is actually part of your income tax, not a separate tax.

When a capital gain is made, the profit is added to your assessable income and may significantly increase the tax you need to pay. As tax is not withheld for capital gains, you may want to work out how much tax you will owe and set aside sufficient funds to cover the relevant amount.

If you make a capital loss, you can’t claim it against your other income but you can use it to reduce a capital gain, therefore reducing the tax you pay.

All assets you have acquired, since tax on capital gains started on 20 September 1985, are subject to CGT unless specifically excluded. These exclusions include:

• Most personal assets, including your home, car, and personal use assets, such as furniture; and
• Depreciating assets used solely for taxable purposes, such as business equipment or fittings in a rental property.

The point at which you make a capital gain or loss is usually when you enter into the contract for disposal, not when you settle. So, if you sign a contract to sell an investment property in June 2021, and settle in August 2021, you need to report the capital gain or loss in your 2020–21 tax return.

If you are an Australian resident, CGT applies to your assets anywhere in the world. 

When you acquire a CGT asset, you need to:

• establish your acquisition date – usually this is when you become the owner of the asset (the contract date), but not always; and
• start keeping records of every transaction, event or circumstance that may be relevant to working out whether you have made a capital gain or loss.

Generally, CGT doesn’t apply when you are inheriting property. However, it may apply when you later sell or otherwise dispose of that property.

Need more advice on how capital gains tax affects you? Contact us here at IP Tax and we’ll put you in touch with an investment property tax expert to answer all your questions and ensure you receive the maximum return possible, with no surprises to the tax you owe.