Capital gains tax, or CGT, can materially affect the after-tax result of selling an investment property, shares, a business asset or an ownership interest in a business. The good news is that Australian tax law provides several exemptions, reductions and roll-overs. The challenge is that each concession has detailed conditions, and a result that appears straightforward can change because of how the asset was owned, used or transferred.
Understanding the difference between a full exemption, a discount and a deferral is the starting point for making better investment decisions.
CGT exemptions, discounts and roll-overs are not the same thing
A CGT event commonly occurs when you dispose of an asset, such as when you sell an investment property, shares or business premises. A capital gain may then form part of your assessable income, after applying capital losses and any available CGT concessions.
A CGT exemption generally means the relevant capital gain is disregarded. The main residence exemption is the best-known example.
A CGT discount reduces an eligible capital gain rather than eliminating it. For individuals and trusts, the general CGT discount is generally 50% where the relevant conditions are met, including the ownership period requirement. Companies cannot access this general discount.
A roll-over usually defers the gain rather than removing it permanently. It can be valuable where an asset is replaced, a business is restructured or assets are transferred following a relationship breakdown, but the deferred gain may become relevant later.
This distinction matters when comparing investment options. Selling an asset may create an immediate tax outcome, while retaining it, transferring it, replacing it or using it differently may produce a very different CGT result.
The main residence exemption and its important limits
For many Australians, the most significant CGT exemption is the one available for a main residence. Broadly, a capital gain or capital loss on a dwelling can be disregarded where an individual owns it and it was their main residence throughout their ownership period, subject to the detailed rules and exceptions.
Calling a property your “home” is not always enough. The facts of how it was used are important. Relevant considerations can include:
- whether you genuinely lived in the property as your home
- how long you lived there
- whether you rented all or part of it out
- whether you ran a business from it
- whether you owned another property that you treated as your main residence
- whether the property was held personally, through a trust or through a company
- whether you were an Australian resident when the CGT event happened.
Using part of a home to earn income can lead to a partial exemption rather than a full exemption. This can arise where a room is rented out, the property is used in a way that supports income-producing activities, or the home is used for business purposes beyond ordinary work-from-home arrangements. The tax outcome will depend on the circumstances, including the nature and extent of the income-producing use.
Ownership structure is equally important. The ordinary main residence exemption is designed for an individual’s ownership interest. Holding a home through a company or trust can have very different CGT consequences. A beneficiary living in a trust-owned property does not automatically obtain the same outcome as an individual who owns their home directly.
Foreign residency also requires care. The main residence rules contain limitations for foreign residents, with narrow exceptions in some circumstances. Anyone moving overseas, returning to Australia, or selling a former Australian home while non-resident should obtain advice before signing a contract.
Moving out, renting your former home and changing residences
A common CGT question is whether a former home can remain exempt after the owner moves out and rents it to tenants.
The absence rules may allow you to choose to keep treating a former home as your main residence after you leave. Where the home is used to produce income, such as rent, this choice can generally be available for up to six years. Where it is not used to produce income, the period can generally be unlimited. However, you cannot generally treat another property as your main residence during that same period, other than under the limited rules that can apply when changing homes.
This is not an automatic exemption. It is a choice that needs to fit the facts and your wider property position. It is particularly important where you have moved interstate, bought a new home before selling the old one, or converted a former residence into a long-term rental property.
There are also limited rules that can allow overlap between an old and new main residence when moving house. The overlap is not open-ended and depends on conditions relating to the use of the old home in the period before sale.
Building, renovating or replacing a home can create further complications. Land is not automatically exempt merely because you intend to build a future home on it. In some circumstances, a choice may allow land to be treated as a main residence for a limited period while a dwelling is built, repaired or renovated, provided the conditions are met.
Other CGT exemptions that investors should recognise
The main residence exemption receives most attention, but it is not the only CGT exemption that may be relevant.
Assets acquired before 20 September 1985 are generally treated as pre-CGT assets, meaning gains and losses on their disposal are generally disregarded. This area can still be complex, especially where major improvements have been made after that date, ownership has changed, or the asset is held through a company or trust.
Inheritance is another area where special rules apply. When a dwelling passes through a deceased estate, the beneficiary or trustee may be able to disregard a capital gain if the legislative conditions are satisfied. One important pathway involves a dwelling that was the deceased’s main residence just before death and was not then being used to produce assessable income, with the ownership interest ending within two years of death or within a longer period allowed by the Commissioner.
Relationship breakdowns can also involve a CGT roll-over. Where the requirements are met, the transfer itself may not trigger an immediate capital gain or loss for the transferring spouse. That does not necessarily mean CGT disappears altogether. The person receiving the asset may inherit the tax history relevant to a later sale.
It is also worth remembering that gifting an asset is not a simple way to avoid CGT. If property is transferred to a family member or friend for less than market value in a non-arm’s-length arrangement, market value may be used to calculate the CGT outcome.
The CGT discount can be valuable, but it is not a full exemption
Many investors refer to the “12-month rule” as if it were an exemption. It is not. It is a key condition for accessing the general CGT discount.
For an individual or trust, a capital gain may qualify for the 50% general discount where the asset was acquired at least 12 months before the CGT event and the other legislative conditions are met. The gain must also be worked out using a cost base that does not use indexation.
The usual order of calculation matters. Capital losses are generally applied before the CGT discount, and the order in which concessions are considered can affect the outcome.
The discount is not available to companies. This is one reason the choice between individual, trust and company ownership should be considered before an investment is acquired, not only when it is sold. Trust distributions, company tax treatment, asset protection, financing and succession planning may also be relevant, so the right structure will depend on more than CGT alone.
Foreign residency can affect access to the full discount for certain capital gains. Investors who have lived or worked overseas during their ownership period should not assume that the full discount will apply.
Small business CGT concessions can provide substantial relief
Small business owners may be able to access a separate group of CGT concessions when selling an active business asset, business premises, goodwill, shares or trust interests. These are among the most valuable CGT concessions available, but they are also among the most technical.
The basic conditions generally require a CGT event that would otherwise result in a gain, access through the CGT small business entity rules or the maximum net asset value test, and satisfaction of the active asset test. The maximum net asset value test is $6 million immediately before the CGT event, taking into account the relevant assets of the taxpayer and certain connected entities and affiliates.
An asset is not necessarily “active” simply because it is valuable to a business owner. Broadly, the asset must be used, or held ready for use, in the course of carrying on a business by the owner, an affiliate or a connected entity, or otherwise meet the relevant rules for intangible assets, shares or trust interests. Passive investment assets require careful analysis.
The four principal small business CGT concessions are:
- the 15-year exemption
- the small business 50% reduction
- the retirement exemption
- the small business roll-over.
The 15-year exemption can allow an individual to disregard a capital gain where the basic conditions are met, the asset has been continuously owned for 15 years, and the sale is connected with retirement for someone aged 55 or over, or the person is permanently incapacitated.
The retirement exemption does not necessarily require a person to retire. It has its own conditions and an individual lifetime CGT retirement exemption limit of $500,000. Special payment and superannuation contribution requirements can apply where a relevant individual is under 55.
The small business roll-over can defer all or part of an eligible capital gain. It may be available even before a replacement asset has been acquired, but later CGT consequences can arise if replacement asset or expenditure requirements are not met within the applicable period.
A practical example: a former home that becomes an investment
Consider an investor who buys a home, lives in it for several years, then relocates for work and rents the property out. Later, they buy another home and eventually sell the original property.
The original property may potentially remain covered by the main residence exemption for part of the ownership period under the absence rules. However, the investor may need to decide which property is treated as their main residence after purchasing the new home. The period of rental use, the timing of the move, the purchase and sale contracts, and any income-producing use of either property can all affect whether the final result is a full exemption, a partial exemption or a taxable capital gain.
This is why property records should be kept from purchase through to sale. Useful records include contracts, settlement statements, legal costs, stamp duty records, renovation invoices, loan documents, rental statements, depreciation schedules and evidence of periods of private use.
CGT records should generally be retained for at least five years from the later of when the relevant records were prepared or obtained, when the relevant transactions were completed, or the income year in which the CGT event happened.
Plan before the sale, not after it
CGT exemptions and concessions can significantly improve the after-tax outcome of an investment sale, but they should never be assumed. The ownership structure, purpose of the asset, income-producing use, timing of transactions and relationship between entities can all change the result.
The most useful time to review CGT is before signing a sale contract, transferring an asset, changing a property’s use or restructuring a business. Early advice can help identify available exemptions, assess record-keeping gaps and avoid decisions that unintentionally reduce access to a concession.
This article is general information only and is not personal financial or tax advice. CGT outcomes depend on your particular circumstances, so speak with a registered tax agent or accountant, such as, before acting on a sale, transfer or investment restructure.