Capital Gains Tax (CGT) is the tax you pay on the profit when you sell an investment property. In Australia, it's not a separate tax — it's included in your assessable income for the year you sell. That means it can push you into a higher tax bracket if you're not prepared for it.
Here's how it's calculated, when you pay it, and the main strategies for legally reducing it.
How Is CGT Calculated?
Capital gain = sale price − cost base
The cost base includes:
- Purchase price
- Stamp duty and legal costs at purchase
- Capital improvements made to the property
- Selling agent commission and legal costs at sale
This gain is then included in your taxable income for the financial year of the sale.
Example
| Item | Amount |
|---|---|
| Purchase price (2018) | $600,000 |
| Stamp duty + costs | $30,000 |
| Renovation (kitchen 2020) | $45,000 |
| Selling costs (2026) | $20,000 |
| Cost base | $695,000 |
| Sale price (2026) | $1,050,000 |
| Capital gain | $355,000 |
The 50% CGT Discount
If you've owned the property for more than 12 months, you're entitled to a 50% CGT discount. This means only half the capital gain is included in your assessable income.
In the example above: $355,000 × 50% = $177,500 added to your income. At a marginal tax rate of 47%, the CGT bill would be approximately $83,425 — significantly less than if you'd sold before the 12-month mark.
When Do You Pay CGT?
CGT is payable in the financial year you sign the contract of sale — not when settlement occurs. If you sign in June but settle in July, the tax is due in the current financial year.
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Strategies to Reduce CGT
1. Time the Sale
If you're expecting lower income next year (e.g. you're retiring, going part-time, or taking parental leave), selling in that lower-income year reduces your effective tax rate on the gain.
2. Hold for More Than 12 Months
If you're approaching the 12-month mark, waiting ensures you get the 50% discount. This is one of the biggest CGT decisions most investors make.
3. Use Offsetting Capital Losses
If you have other investments that have made a capital loss (shares, other property), these can be offset against your property gain in the same financial year.
4. Contribute to Superannuation
Making a concessional superannuation contribution in the year of the sale can reduce your taxable income and therefore the effective CGT rate. Subject to contribution caps.
5. Own in the Lower-Income Spouse's Name
If one partner earns significantly less, structuring ownership in their name (or part of it) can reduce the overall tax burden. This must be set up at purchase — you can't easily change ownership after the fact without triggering another CGT event.
Main Residence Exemption
Your primary residence is generally exempt from CGT. But if you've ever rented out your home, a portion of any gain may be subject to CGT based on the period it was rented.
Work With an Accountant
CGT strategy is complex and highly individual. These are general principles — your accountant should model the exact tax on any sale before you commit.
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