Capital Gains Tax: Complete Guide
How CGT works in Australia under Parts 3-1 and 3-3 of ITAA 1997: the cost base calculation, the 50% discount for individuals, CGT events, the main residence exemption and 6-year absence rule, CGT on death, record-keeping requirements, and an overview of the small business CGT concessions.
Capital gains tax in Australia is not a separate tax. Net capital gains are included in assessable income and taxed at your marginal rate under Parts 3-1 and 3-3 of ITAA 1997. Australian resident individuals who hold a CGT asset for more than 12 months receive a 50% discount under Division 115, meaning only half the gain is assessable. Companies receive no discount. The main residence exemption under Division 118 can eliminate CGT entirely on the sale of your home, with the 6-year absence rule extending protection when the property is rented.
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CGT basics for 2025-26
Capital gains tax in Australia is not a separate tax. Net capital gains are included in assessable income and taxed at your marginal income tax rate for the year. CGT only applies to CGT events that happen on or after 20 September 1985; assets acquired before that date are generally pre-CGT and any gains on them are usually ignored. Australian tax residents are taxed on worldwide capital gains; non-residents are generally only taxed on gains from taxable Australian property (such as Australian real estate). The key legislation is ITAA 1997 Parts 3-1 and 3-3.
Calculating capital gains and losses
The basic formula is: capital gain (or loss) equals capital proceeds minus cost base. Capital proceeds are generally what you receive (or are entitled to receive) when a CGT event happens, such as the sale price of a property or shares.
The CGT discount and loss ordering
The CGT discount under Division 115 of ITAA 1997 applies to assets held for more than 12 months.
Order of applying losses and discount (critical)
The ordering rule is: first, work out capital gains for each CGT event. Second, apply current-year capital losses against capital gains. Third, apply any unapplied net capital losses carried forward from prior years. Fourth (and only then), apply the relevant CGT discount percentage to the remaining eligible discount capital gains. Applying the discount before deducting losses is a common error that inflates the assessable amount.
Main residence exemption
A dwelling that is your main residence is generally fully exempt from CGT under Division 118 of ITAA 1997 if it was your main residence for the entire ownership period, was not used to produce assessable income, and is on land within the relevant size limits. If the home was used to produce income or was not your main residence for part of the time, you may get a partial exemption based on time and area used privately versus for income.
The 6-year absence rule
After you move out, you can choose to keep treating the home as your main residence for up to 6 years while it is used to produce income (such as being rented), provided you do not nominate another property as your main residence during that time. If you do not use the former home to produce income after moving out, you can generally treat it as your main residence indefinitely. If you later return and live in the property again, the 6-year clock resets.
Home first used to produce income
If a property you own is first used to produce income after acquisition, the cost base for CGT can be reset to its market value at the time of first income-producing use, subject to conditions (particularly for assets acquired before 20 August 1996).
Foreign residents
For many foreign residents, the main residence exemption is effectively denied for disposals after 9 May 2017, with limited concessions for certain life events such as terminal illness or death of a spouse or child.
Key CGT events
Each CGT event has its own timing rules determining which income year the resulting gain or loss is attributed to.
Worked examples
Three scenarios illustrating CGT calculation in practice.
Investment property with 50% discount
Haruki in Newcastle purchased an investment property in August 2015 for $500,000 with $25,000 in incidental and acquisition costs. He sold in March 2026 for $800,000 with $20,000 selling costs. The property was always income-producing with no capital improvements. Cost base: $545,000. Capital proceeds: $800,000. Capital gain before discount: $255,000. After the 50% CGT discount: $127,500 net capital gain included in assessable income at his marginal rate.
Shares sold within 6 months (no discount)
Olivia in Fremantle bought listed shares on 1 January 2026 for $20,000 including brokerage. She sold on 1 June 2026 for $27,000 with $500 brokerage. Cost base: $20,000. Capital proceeds: $26,500 ($27,000 less $500 selling costs). Capital gain: $6,500. Held less than 12 months, so no CGT discount. Full $6,500 added to assessable income at marginal rates.
Main residence rented for 4 years (6-year rule)
Sam in Launceston bought a house on 1 July 2014 for $600,000 plus $30,000 acquisition costs. Lived in it as main residence from 1 July 2014 to 30 June 2018. Moved out 1 July 2018, started renting immediately, and chose to apply the 6-year rule. No other property treated as main residence. Sold with settlement 30 June 2026 for $1,000,000 with $25,000 selling costs. Total ownership: 12 years. The property is treated as main residence for the entire period under the 6-year rule (rented for only 4 years, within the 6-year limit). Gain is fully exempt.
CGT and death
When a person dies, CGT is generally not triggered merely because assets pass to their legal personal representative (LPR) or beneficiaries. The tax is deferred until a later CGT event (such as sale by the beneficiary). The beneficiary or LPR is taken to have acquired most CGT assets at the deceased's cost base (or market value in particular cases), with special rules for pre-CGT assets.
Main residence on death
A dwelling that was the deceased's main residence and not used to produce income just before death can often be sold CGT-free if disposed of within 2 years of death (measured to settlement). It can also be exempt if it continues to be the main residence of certain individuals (spouse or beneficiary) and is not used to produce income. If the 2-year period is not met and no extension is granted, a partial exemption may still be available.
Record-keeping for CGT
Keep sufficient records from the time an asset is acquired until at least 5 years after the relevant CGT event. Records should substantiate acquisition cost, incidental and ownership costs, improvement costs, disposal proceeds, and market valuations where required. Useful records include purchase and sale contracts, settlement statements, invoices, loan documentation, council and water rates notices, land tax assessments, and valuation reports.
Statute references
- ITAA 1997 Parts 3-1 and 3-3 (Core CGT provisions)
- ITAA 1997 Division 115 (CGT discount rules)
- ITAA 1997 Division 118 (Main residence and other exemptions)
- ITAA 1997 Division 152 (Small business CGT concessions)
- Greig v Federal Commissioner of Taxation [2020] FCAFC 25 — share parcels acquired with the dominant intention of short-term profit-making (here, targeting takeover bids) can be on revenue account; losses deductible under s 8-1 ITAA 1997. Applies the Myer Emporium principle. Decisive for the investor-vs-trader characterisation.
- Eichmann v Federal Commissioner of Taxation [2020] FCAFC 155 — active asset test under s 152-40(1)(a) ITAA 1997 is broader than 'direct functional relevance'; relevant for the small business CGT concessions stack.
Frequently asked questions
How do I calculate the cost base of a CGT asset?+
Can I offset a capital loss against my salary or business income?+
How does the main residence exemption work if I rent out my home?+
Do foreign residents get the CGT discount or main residence exemption?+
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