Capital gains tax (CGT), in the context of the Australian taxation system, is a tax applied to the capital gain made on the disposal of any asset, with a number of specific exemptions, the most significant one being the family home. Rollover provisions apply to some disposals, one of the most significant of which are transfers to beneficiaries on death, so that the CGT is not a quasi estate tax.
CGT operates by treating net capital gains as taxable income in the tax year in which an asset is sold or otherwise disposed of. If an asset is held for at least 1 year then any gain is first discounted by 50% for individual taxpayers, or by 33.3% for superannuation funds. Capital losses can be offset against capital gains. Net capital losses in a tax year cannot be offset against normal income, but may be carried forward indefinitely.
Personal use assets and collectables are treated as separate categories and losses, which are quarantined so they can only be applied against gains in the same category, not other gains. This works to stop taxpayers subsidising hobbies from their investment earnings.
History A capital gains tax (CGT) was introduced in Australia on 20 September 1985, one of a number of tax reforms by the Hawke-Keating government. The CGT applied only to assets acquired on or after that date, with gains (or losses) on assets owned on that date, called pre-CGT assets, not being subject to the CGT. In calculating the capital gain, the cost of assets held for 1 year or more was indexed by the consumer price index (CPI), which meant that the part of the gain which was due to inflation was not taxed. Indexation was not used if an asset was held for less than 12 months or a sale results in a capital loss. Also, an averaging process was used to calculate the CGT. 20% of a taxpayer's net capital gain was included in income to calculate the taxpayer's average tax rate, and the average rate was then applied to all the taxpayer's gross income (i.e., including the capital gain in full). So if a large capital gain were to push a taxpayer into a higher tax bracket in the tax year of sale, the brackets was stretched out, allowing the taxpayer to be taxed at their average tax rate.
From 20 September 1999, the Howard government discontinued indexation of the cost base and (subject to a transitional arrangement) introduced a 50% discount on the capital gain for individual taxpayers. Assets acquired before 21 September 1985 continued to be CGT-free. For assets acquired between 20 September 1985 and 20 September 1999, the taxpayer had an option of using indexation (up to the CPI as at 30 September 1999) or using the 50% discount method. Also from 21 September 1999, small business CGT concessions were introduced (below), reducing tax on small business owners retiring, and on active assets being sold, and allowing a rollover when selling one active asset to buy another. The 50% CGT discount is not available to companies. Superannuation funds are entitled only to a 33% CGT discount.
In February 2026 The Australian Financial Review reported that the government was considering changes to the capital gains tax discount in the lead-up to the May budget. The wealthiest fifth of Australians receive almost 90% of the benefit of the capital gains tax discount. The top 10% of earners receive over 80% of the benefit.
In the 2026 Australian federal budget, the government announced that the capital gains tax system would be replaced with one called "cost-base indexation", applying to assets that have been held for more than 12 months, this change will take effect from 1 July 2027. The government will also add a new 30% tax on capital gains from 1 July 2027.
Exemptions The law is framed so as to apply to all assets, except those specifically exempted. It applies both to assets owned outright and to a partial interest in an asset, and to both tangible and intangible assets. Current exemptions, in approximate order of significance are:
Any asset acquired before 20 September 1985, known as a pre-CGT asset. But an asset loses its pre-CGT status if substantial changes are made to it (e.g. major additions to a building), or on the death of the original owner. The house, unit, etc., which is the taxpayer's main residence, and up to the first 2 hectares of adjacent land used for domestic purposes. Personal use assets, acquired for up to $10,000, including boats, furniture, electrical equipment, etc., which are for personal use. Items normally sold as a set must be treated together for the $10,000 limit. Capital loss made from a personal use asset. (s108-20(1)ITAA1997 … any capital loss made from a personal use asset is disregarded) Collectables acquired for up to $500, including art, jewellery, stamps, etc., held for personal enjoyment. Items normally sold as a set must be treated as a set for the $500 limit. If collectables sometimes rise in value then this exemption can be an advantage to a taxpayer collecting small items. Cars and other small motor vehicles such as motorcycles ("small" being a carrying capacity less than 1 tonne and less than 9 passengers). Since cars normally decline in value this exemption is actually a disadvantage. But the exemption applies even to antique or collectable vehicles, so if they rise in value then the exemption is an advantage. Compensation for an occupational injury, or for personal injury or illness of oneself or a relative. (However, compensation for breach of contract is subject to CGT.) Life insurance policies surrendered or sold by the original holder. Such gains are instead taxed as ordinary income (when held for less than 10 years). A third party who buys such a policy will be subject to CGT as on an ordinary investment. Winnings or losses from gambling (which are also free of income tax). Bonds and notes sold at a discount (including zero-coupon bonds) and "traditional securities" (certain interest bearing notes convertible to shares). Gains and losses from these are ordinary taxable income. Medals and decorations for bravery and valour, provided they are acquired for no (financial) cost. Shares in a pooled development fund, which is a special structure with rules facilitating venture financing. Certain other eligible venture capital investments are also exempt from CGT. Payments under particular designated government schemes, for example various industry restructuring schemes.
Trading stock is not regarded as an asset and instead comes under ordinary income tax. Items of plant being depreciated are subject to CGT, but only in the unusual case that they are sold for more than original cost (see Depreciating assets below)
Operation The capital gains tax law is expressed in terms of a set of 52 CGT events (see ITAA 1997 section 104-5), each of which specifies results such as gain, loss, or what cost base adjustment are to be made, and how to determine the date to use for the transaction.
The most common event is A1, the disposal of an asset. On disposal a capital gain arises if the proceeds are greater than the cost base, a capital loss arises if less than the reduced cost base. The date to be used is the date of the contract of sale (even if payment is not until later), or if no such contract exists then the date the taxpayer stopped being the owner (e.g. if an asset is lost).
The cost base of an asset is the amount paid for it, including associated costs such as agent's commissions. However, there are three forms, from lowest to highest amount:
reduced cost base — this is the cost base with certain costs excluded, or certain extra reductions applied. cost base — being money paid, and associated expenses of the transaction, plus later capital costs of additions, or defending one's ownership. indexed cost base — the elements of the cost base each indexed by changes in the consumer price index. Each element is indexed according to the date the cost was incurred. This is relevant only for assets acquired before 21 September 1999.
On disposal then:
if the proceeds are below the reduced cost base — the difference is a capital loss. if the proceeds are above the plain cost base — the difference is a capital gain. if the proceeds are in between the reduced cost base and plain cost base there is neither a gain nor loss. (Quite often the reduced cost base is the same as the plain cost base and this does not arise.)
Capital gains and losses in a given tax year are totalled, but in three separate categories according to the class of the asset:
collectables (those above the $500 exemption described above). personal use items (those above the $10,000 exemption described above). all other assets.
The existence of separate categories for collectables and personal items works to prevent losses from them being offset against other gains such as from investments. In effect it prevents hobbies being subsidised.
Net losses in each category can be carried forward to future years, in their respective categories, but cannot be offset against ordinary income, or each other.
Capital losses are applied before the capital gains discount: An individual makes a capital gain of $100 eligible for 50% discount = $50 net capital gain. If the person also had capital losses of $50, the losses would apply first and there would be $50 capital gains left over eligible for 50% discount = $25 net capital gain.
Reduced cost base When a CGT event takes place on a CGT asset and the cost base is greater than the capital proceeds, then the taxpayer needs to calculate the asset's reduced cost base to work out whether there was a capital loss. The reduced cost base of a CGT asset has the same five elements as the cost base, except for the third element.Subsection 110-55(2)
Common example of reduced cost base:
Greg acquired a rental property on 1 July 1998 for $300,000 and makes improvements of $50,000. Before disposing of the property on 30 June 2011, he had claimed $20,000 in capital works deductions. At the time of disposal, the cost base of the property was $350,000. The reduced cost base of the property is reduced by $20,000 to $330,000.
Prior to 1 July 2001, distributions from property trusts commonly included a so-called "tax free" portion which was subtracted from the reduced cost base but not the cost base, in a similar way. (See Property trust distributions below.)
Indexed cost base method For assets acquired between 20 September 1985 and 20 September 1999 the taxpayer may choose between two methods of calculating a capital gain – the discount method described above, or the indexation method – whichever method results in the least tax. The indexation method is as follows:
for each qualifying asset, calculate the capital gain: the difference between proceeds of sale of the asset and its indexed cost base, but with indexation stopped at the CPI as of the quarter ending 30 September 1999. capital losses are applied in the usual manner: capital losses (of the same or previous years) reduce the capital gain. If there is a net capital gain, it is included in taxable income and if negative the capital loss is carried forward to the next year.
For example: Individual purchased shares in 1987. The Indexed capital gain is $5,000 or Gross Discounted capital gain is $7,500. The capital losses are $4,000:
$5,000 Indexed Gain Outcome: Losses of $4,000 applied = $1,000 net capital gain $7,500 Discounted Gain Outcome: Losses of $4,000 applied gives a balance of $3,500, which multiplied by 50% discount = $1,750 net capital gain
With only capital gains - the discount method is usually better (note indexation is better for small (perhaps only very small) gains). The choice is essentially between reducing the capital gain by the CPI rise of the cost base, or halving it outright. CPI indexation may be small, but if the proceeds are below it then there's no CGT. When the gain is above twice the indexation result, then the discount method is better.