Capital Gains Tax: Events, Assets, Cost Base, Losses and Discounts
CGT is a sequence. Do not jump to the 50% discount. First identify the CGT event, timing, asset, proceeds and cost base. Then apply losses, discounts and concessions in the statutory order.
What you should be able to do
- Identify common CGT events and their timing.
- Determine whether an asset is pre-CGT or post-CGT and whether a gain or loss is disregarded.
- Build cost base and reduced cost base element by element.
- Apply market-value substitution and anti-overlap rules.
- Distinguish personal-use assets, collectables and ordinary CGT assets.
- Calculate a net capital gain under the five-step method in s 102-5.
CGT is mechanical once the correct event is identified. Event first; calculation second. Most avoidable exam mistakes come from applying the discount too early or forgetting losses and special asset categories.
Key language
Issue → Rule → Authority → Application
6.1 Capital Gains Tax is a method, not a single rate
Australian capital gains tax is not a separate tax imposed by a standalone CGT Act. It is an income-tax regime contained principally in Parts 3-1 and 3-3 ITAA97. A taxpayer's net capital gain is included in assessable income as statutory income under s 102-5. A net capital loss is not deducted from salary, rent or business income. Instead, capital losses are quarantined and applied within the CGT calculation under ss 102-10 and 102-15.
The most important habit in CGT is to follow the statutory sequence. Do not begin with “sale price minus purchase price”. First identify a CGT event. Then identify the CGT asset or right involved. Determine the time of the event. Work out capital proceeds and cost base/reduced cost base. Apply any disregard or exemption. Only then move to the five-step net-capital-gain method in s 102-5.
6.2 Step zero: no CGT event, no capital gain or loss
Section 102-20 states the foundational rule: a capital gain or loss is made only if a CGT event happens. Section 104-5 contains the event table. The course focuses on several recurring events:
| CGT event | Provision | Typical trigger |
|---|---|---|
| A1 | s 104-10 | Disposal of a CGT asset, usually by changing ownership under a contract. |
| C1 | s 104-20 | Loss or destruction of a CGT asset. |
| C2 | s 104-25 | Cancellation, surrender, discharge, redemption or similar ending of an intangible CGT asset/right. |
| D1 | s 104-35 | Creating a contractual or other legal/equitable right in another entity. |
| F1 | s 104-110 | Granting a lease. |
Section 102-25 deals with priority where more than one CGT event could apply. A good exam answer identifies the specific event and its time rule rather than writing merely “CGT applies”.
6.3 Pre-CGT assets: an event can happen even though the gain is disregarded
The CGT regime commenced in September 1985. The supplied course materials distinguish pre-CGT and post-CGT assets and direct attention to disregard rules such as s 104-10(5)(a). An important conceptual point is that a CGT event can still happen in relation to a pre-CGT asset; the resulting capital gain or loss may then be disregarded. Section 102-23 helps students keep “event” and “taxable result” separate.
The Forum also contains 2026 Budget material concerning proposed future CGT reform. In the book, proposals must be clearly labelled as proposals unless and until enacted. For assessment answers, use the law applicable to the stated income year and verify legislative status at the date of the assessment.
6.4 What is a CGT asset?
Many CGT events require a “CGT asset”. Section 108-5 defines the concept broadly and includes property and legal or equitable rights that are not property in the ordinary sense. Shares, land, contractual rights, debts and many intangible rights can therefore fall within the regime.
This breadth explains why CGT appears in fact patterns that do not involve selling physical property. Forgiving a debt can involve the ending of a right; agreeing to a restrictive covenant can involve creation of a contractual right; termination of a contract can involve the ending of an intangible asset.
6.5 Personal-use assets and collectables
The CGT regime treats some private assets specially. Section 108-20 addresses personal-use assets, and s 108-10 addresses collectables. Losses on personal-use assets are generally disregarded, while capital losses from collectables are quarantined for application against capital gains from collectables.
This becomes important for jewellery, artworks, debts between friends and similar facts. The legal classification is not based simply on whether the asset is “personal” in everyday language. Apply the statutory definition and exceptions. A debt can cease to be a personal-use asset where it arose in the course of gaining or producing assessable income—for example, an interest-bearing loan.
6.6 Capital proceeds
Section 116-20 provides the general capital-proceeds rule. Broadly, proceeds include money and the market value of property received or entitled to be received in respect of the CGT event. Section 116-30 contains market-value substitution rules in relevant non-arm's-length or no-consideration situations.
Always ask whether the stated price is the legal capital proceeds. Gifts and transfers for nominal consideration are classic traps. If Jeff gifts land worth $800,000 to his daughter or transfers it for $1, the market-value substitution rule may deem market value for the transferor's capital proceeds. The recipient's cost base may also be affected by the market-value rules in s 112-20.
6.7 Cost base and reduced cost base
Section 110-25 structures the cost base into elements. Students should identify the relevant element rather than placing every historical expense into a single “purchase cost” figure. The first element generally captures money/property given to acquire the asset. Other elements can include incidental costs, non-capital ownership costs in defined circumstances, capital expenditure to increase or preserve value, and capital expenditure to establish, preserve or defend title/right.
Section 110-35 specifies incidental costs. Other provisions prevent amounts already deducted from being counted again in the cost base. This coordination principle is vital: tax law generally does not permit the same economic outgoing to produce a deduction and also inflate the cost base unless legislation allows it.
6.8 Calculating the capital gain or loss for an event
Each CGT event has its own calculation mechanism. For A1, compare capital proceeds with cost base to determine a gain, or with reduced cost base to determine a loss. The event's time rule can be crucial. For a contract-based disposal, the CGT event commonly occurs when the contract is entered into, not at settlement. This means a contract signed before 30 June can affect that income year even where settlement happens in July.
For C1, insurance proceeds can form capital proceeds where an asset is lost or destroyed. For C2, a payment received when a contractual right is cancelled can be proceeds. For D1, the party who creates a right may make a capital gain by comparing proceeds with the incidental costs permitted by the event; the recipient's position requires separate analysis.
6.9 The 50% discount: apply it at the correct stage
Division 115 contains the discount-capital-gain regime. For an eligible individual or trust, an eligible gain on an asset held for at least 12 months can commonly receive the 50% discount, subject to the detailed rules. Companies do not receive the general 50% discount.
The most common calculation mistake is applying the discount too early. Current-year capital losses and prior-year net capital losses are applied before the discount. Section 102-5's method statement gives taxpayers choices about which capital gains are reduced by losses. Tax-effective allocation often means using losses against non-discount gains first so that the discount is preserved for eligible gains.
6.10 The five-step net capital gain method in s 102-5
- Step 1: reduce current-year capital gains by current-year capital losses. The statutory notes allow choice in the order of application.
- Step 2: reduce remaining gains by unapplied net capital losses from earlier years, again observing the statutory rules and available choices.
- Step 3: apply the CGT discount to eligible discount capital gains.
- Step 4: apply available small-business CGT concessions where relevant. The course materials may direct students to ignore these in particular problems.
- Step 5: add the remaining capital gains. The result is the net capital gain included in assessable income under s 102-5.
Capital losses do not reduce ordinary income. They operate within the CGT method. Collectable losses are subject to their own quarantine under s 108-10.
6.11 Main-residence and other exemptions
The Forum's statutory map includes provisions such as ss 118-110, 118-135, 118-145 and 118-185 dealing with the main-residence framework and partial use. A student should identify the precise exemption provision and test its conditions rather than stating “home is CGT-free”. Periods of income-producing use, absence, land size, timing and ownership can all alter the result.
Section 118-10 contains other disregard rules for specified personal assets. Every exemption is statutory. Check its elements and any threshold.
6.12 Anti-overlap and interaction with ordinary income
Where a gain is also ordinary income—for example, a profit-making transaction—the CGT provisions contain anti-overlap rules such as s 118-20. The student should first calculate the ordinary-income consequence and the CGT consequence, then apply the coordinating provision. Do not simply say “CGT does not apply because it is income”: a CGT event may still happen, but the capital gain can be reduced to avoid double taxation.
6.13 Worked calculation — Priya
The Week 7 calculation notes provide an excellent statutory demonstration. Priya has discount capital gains of $960,000, non-discount capital gains of $8,300, current-year capital losses of $86,000 and a prior-year net capital loss of $20,000. She also has a $600 collectables loss that is quarantined.
| Step | Calculation | Result |
|---|---|---|
| 1A | Apply current loss against non-discount gains: $8,300 − $8,300 | $0 non-discount gain; $77,700 current loss remains |
| 1B | $960,000 discount gains − $77,700 remaining current loss | $882,300 |
| 2 | $882,300 − $20,000 prior-year net capital loss | $862,300 |
| 3 | $862,300 × 50% discount | $431,150 |
| 4 | No small-business concessions assumed | $431,150 |
| 5 | Add remaining gains | Net capital gain = $431,150 |
The $431,150 enters assessable income under s 102-5. The $600 collectables loss is carried forward for use against future collectables gains under s 108-10(4), rather than reducing the $431,150.
6.14 Tutorial issue map: common CGT events
The Forum examples are designed to make students classify events:
- Shares sold: CGT event A1; determine contract date, proceeds and cost base.
- Stolen necklace: consider C1 and the personal-use/collectable rules; insurance changes capital proceeds.
- Loan forgiven: creditor's debt/right ends under C2; decide whether any loss is disregarded as personal use.
- Restrictive covenant: creation of a contractual right can trigger D1 for the covenantor.
- Lease premium: granting a lease can trigger F1; do not confuse the premium with ordinary rent.
- Gift of land: A1 with market-value substitution for proceeds; recipient cost-base substitution may apply.
6.15 How to write a CGT IRAC answer
I — Issue
Identify each asset/right and each event separately. State whether the problem asks for an individual capital gain/loss or the overall net capital gain.
R — Rule
Cite s 102-20, the specific event in Div 104, the asset/proceeds/cost-base provisions, any exemption/disregard, Div 115 if relevant, and finally the s 102-5 method.
A — Application
Show event time, proceeds and cost base with numbers. Apply exemptions. Keep discount/non-discount gains and quarantined losses in separate columns. Explain the loss-ordering choice.
C — Conclusion
State each gain/loss and the final net capital gain included under s 102-5. State any carried-forward net capital loss or collectables loss separately.
6.16 Current-law discipline: enacted law versus proposals
The Forum contains references to proposed 2026 Budget reforms, including possible changes commencing in later years. The teaching rule is simple: identify the status of the measure. A Bill, announcement or explanatory memorandum is not automatically enacted law. In assessment work, state the law applying to the specified income year and, if useful, separately note a proposed future change.
6.17 Plain-English summary
CGT is a sequence. Event → asset/right → time → proceeds → cost base → gain/loss → exemptions → losses → discount → concessions → net capital gain. If you follow that order, even a complicated CGT problem becomes manageable. If you skip straight to arithmetic, you are likely to miss the event time, a market-value substitution rule, a disregarded loss, an exemption or the correct ordering of the discount.
Deep Teaching Commentary — Learn the Doctrine, Then Learn How to Use It
Capital gains tax is not a separate tax with a single calculation. It is a statutory method for identifying capital gains and losses from CGT events, modifying them under exemptions and special rules, netting them in the order required by s 102-5, and then including only the resulting net capital gain in assessable income. The student who memorises this order avoids most CGT errors.
The source materials are unusually detailed because CGT problems are sequential. First identify the event and timing. Then identify the asset, ownership and acquisition date. Next calculate capital proceeds and cost base or reduced cost base. Then determine the gain/loss and apply disregards, exemptions, current-year losses, prior-year losses, the discount and any concessions in the statutory order. Each step can contain its own sub-issue.
CGT also contains numerous interaction rules. Personal-use assets, collectables, pre-CGT assets, depreciating assets, main residence rules and anti-overlap provisions can radically change the result. A high-quality answer does not jump from “sold asset” to “50% discount”.
Provision-by-provision teaching guide
| Provision / regime | What it does | How to use it in a university answer |
|---|---|---|
| ITAA97 ss 102-5, 102-10 and 102-15 | Provide the net capital gain method, calculation of net capital losses and application of losses. | Write the five-step s 102-5 method in order before inserting numbers. |
| ITAA97 ss 102-20 and 104-5 | A capital gain or loss arises only if a CGT event happens; s 104-5 is the event table. | Always identify the event code before calculating. |
| ITAA97 s 104-10 (CGT event A1) | The most common event: disposal of a CGT asset. Timing generally turns on the contract, not settlement, for a contractual disposal. | Use for sales/transfers of assets. |
| ITAA97 ss 104-20, 104-25, 104-35 and 104-110 | Cover destruction/loss, ending of rights, creation of contractual/other rights and other events identified in the course. | Use the correct event for compensation, rights and non-sale facts rather than defaulting to A1. |
| ITAA97 ss 108-5, 108-10 and 108-20 | Define CGT assets and special treatment of collectables and personal-use assets. | Classify the asset before applying loss rules because some losses are quarantined or disregarded. |
| ITAA97 ss 116-20 and 116-30 | Deal with capital proceeds and market-value substitution in relevant non-arm’s-length/no-proceeds situations. | Use when consideration is non-cash, absent or not market value. |
| ITAA97 ss 110-25, 110-35, 110-45 | Set out cost-base elements, incidental costs and exclusions. | Work element by element and remove amounts already deducted where the legislation requires. |
| ITAA97 s 112-20 | Market-value substitution can modify cost base in specified acquisition circumstances. | Use for gifts/non-arm’s-length acquisitions where statutory conditions are met. |
| ITAA97 Div 115 | Contains the CGT discount rules. | Apply only after losses at the correct stage of the s 102-5 method and only if the taxpayer/asset/holding period qualifies. |
| ITAA97 main-residence provisions in Div 118 | Can disregard all or part of gains on qualifying dwellings, subject to conditions and partial-use rules. | Identify occupancy, ownership period, income-producing use and any absence/special rules before calculating the taxable gain. |
| ITAA97 anti-overlap provisions | Prevent the same economic gain/loss being counted twice under ordinary income and CGT. | Analyse both regimes first, then apply the statutory priority/adjustment rule. |
Cases, rulings and authorities — proposition + exam function
| Authority | Proposition taught by the source material | When to use it |
|---|---|---|
| TR 92/3 / Myer line of authority | Important because some asset profits are ordinary income as well as generating a CGT event. | Use to determine whether the CGT result is displaced/reduced by ordinary-income treatment. |
| CGT examples in Forum 6 | The course uses numerous worked examples to teach event selection, asset classification, cost base, discount/indexation and the net-gain method. | Use the examples as calculation patterns, not as substitutes for the statutory method. |
| Treasury Laws Amendment (Tax Reform No. 1) Bill 2026 material | The Forum separately discusses proposed 2027 reforms. | Clearly label proposals as proposals unless enacted; answer the current-law question using enacted law. |
Matching tutorial — fact-by-fact reasoning map
List every asset/event with proceeds, cost base, gain/loss, discount status and special category before attempting the s 102-5 net calculation.
Apply losses to gains in the order chosen by the taxpayer; the source notes emphasise that applying losses against non-discount gains first can be tax-effective.
Apply at Step 2 before the CGT discount. State the remaining gain.
Separate discount and non-discount gains and apply the correct percentage only to qualifying discount gains at the correct step.
Keep collectable losses quarantined under s 108-10(4); do not use them against ordinary CGT gains.
The supplied calculation reaches $431,150 after the loss and discount ordering. Show every step and then include that net amount under s 102-5.
Where the acquisition date permits a choice, calculate both methods accurately and identify the legally available and tax-effective outcome.
For each acquisition, holding, improvement and disposal cost, identify the statutory cost-base element; do not simply total every expense associated with the asset.
How to write this chapter in IRAC / tax-problem form
Issue. Identify the taxpayer, income year and transaction. Break the problem into separate receipts, outgoings, CGT events or administrative decisions. Do not write one broad issue such as “what tax is payable?”.
Rule / Law. Start with the exact Act and provision. If the section contains multiple limbs, subsections, paragraphs, exceptions or a method statement, set them out in the order in which they operate. Then add the case, ruling or ATO authority for the particular proposition it explains.
Application. Apply one fact to one legal element at a time. Compare the facts with the authority and deal with the strongest alternative characterisation. Where the law requires a calculation, show the legal order and the arithmetic together.
Conclusion. State the legal tax consequence and amount where possible. Then add any associated loss, penalty, objection/review, timing or administrative consequence relevant to the chapter.
Chapter mastery — 15 questions with model answers
Source-Coverage Audit — Every Statutory Reference in the Supplied Materials
This completeness layer preserves every detected Act, Part, Division, Subdivision, section, subsection, paragraph and method-statement reference from the supplied Forum/Tutorial materials. Use the teaching chapter above for explanation; use this audit to ensure no source reference is silently omitted.
Source-Coverage Audit — Every Case, Ruling and Authority in the Supplied Materials
Every detected case or ruling from the aligned materials is retained here. The blue link opens an AustLII search so the authority can be checked and later replaced with the most direct official/public judgment link where appropriate.
Detailed Forum / Lecture Source Notes — Completeness Layer
The following is the detailed teaching layer derived from the supplied Forum material. It is kept deliberately full at draft stage so that the final editing pass can improve prose without losing doctrine, examples, calculations or statutory detail.
Introduction
CGT introduced on 19 September 1985
Distinction between pre and post CGT assets
Assessable income includes net capital gains: section 102-5
Calculating net capital gains: section 102-5
Working out net capital losses and their application: sections 102-10 and 102-15
The 2026 Federal Budget changes to CGT are summarised at the end of these notes.
Cgt Events
You can only make a capital gain or loss if a CGT Event happens: section 102-20.
Summary of CGT Events: section 104-5
Consider common events:
A1 - most common CGT Event - disposal of a CGT asset: s 104-10
C1 - loss or destruction of a CGT asset: s 104-20
C2 - cancellation, surrender and similar endings: s 104-25
D1 - creating contractual or other rights: s 104-35
F1 - granting a lease: s 104-110
What is the time of each of these events, and what is the calculation mechanism for each event?
Order of application of CGT Events: section 102-25
In most cases, capital gains or losses on pre-CGT assets are disregarded. See for example section 104-10(5)(a). Does this mean that a CGT Event does not happen in relation to a pre-CGT asset? See section 102-23.
How would your answer change if Sarah’s necklace was insured, and the insurance company paid her $5,600 on 20 August 2026?
Sally has created a contractual right in favour of the purchaser. If Sally breaches the contract and sets up a hairdressing salon 200 metres away in 6 months’ time, the purchaser can enforce the right.
How is the $50,000 recognised for both Sally and the purchaser?
In your revision: Consider the scenario from the Week 4 tutorial involving the restrictive covenant. Advise Jackson and KAL of the CGT consequences of this transaction and when any amounts are recognised.
On 1 November 2025, Marie granted the tenant a 2-year lease at market rent (which was fixed at $10,000 rent per month over 24 months), and she received an additional one-off, $8,000 lease premium from the tenant for granting them the lease.
Cgt Assets
We now know that we need a CGT Event in order to make a capital gain or loss. Many of the CGT Events, (but not all - for example CGT Event D1) require the existence of a ‘CGT asset.’ Therefore, the definition of a ‘CGT asset’ becomes important. The definition is also important for other reasons (eg calculating cost base for ‘CGT assets’ - discussed later in the Forum).
Definition of a CGT Asset
Definition of a ‘CGT asset’ - section 108-5.
What does ‘property’ mean in section 108-5(1)(a)?
Legal or equitable rights that are not property: section 108-5(1)(b).
Note that a CGT asset includes part of, or an interest in, a CGT asset: section 108-5(2)(a).
Collectables and Personal Use Assets
Collectables: sections 108-10, 108-15, 108-17 and 118-10(1)
Personal use assets: sections 108-20, 108-25, 108-30 and 118-10(3)
How would your answer change if Andrea purchased the bracelet for $600 and still sold it for $700?
What is Andrea purchased the bracelet for $600 and sold it for $400?
Separate CGT Assets
If a taxpayer acquires a residential property, does real property law normally regard the house as a separate asset from the land? Does the tax law normally make this distinction?
What is the treatment if a post CGT structure is built on pre-CGT land? See section 108-55(2).
A building or structure on land, or a capital improvement to land, is deemed to be a separate CGT asset from the land if the depreciation provisions (in Div 40 ITAA97 - studied in a later Forum) apply to the asset: s 108-55(1) and s 108-70(1). The legislation provides the following example (in s 108-70(1)):
You own land that you use for pastoral operations. You build some fences that are destroyed by fire. The fences are depreciating assets and are subject to a balancing adjustment on their destruction under Division 40 [meaning the depreciation provisions in the ITAA97]. The fences are taken to be a separate CGT asset from the land.
Another example is the building in Wangaratta Woollen Mills v FCT 69 ATC 4095, which is regarded as ‘plant’ (discussed in a later Forum).
A depreciating asset that is part of a building or structure is deemed to be a separate CGT asset from the building or structure: s 108-60. The legislation provides the following example (in s 108-60):
You own a factory from which you carry on a business. You install rest rooms for your employees. The plumbing fixtures and fittings are depreciating assets. These are taken to be a separate CGT asset from the factory.
What is the effect of s 118-24(1) in this context (assuming the asset is used 100% to produce assessable income)? Which regime has “priority” regarding such depreciating assets? What does this mean, for example, if the taxpayer has a prior year net capital loss?
Acquisition Of Cgt Assets
Acquisition rules - see sections 109-5 and 109-10
Some of the reasons why the time of acquisition is important are to determine: (1) whether the asset is a pre or post CGT asset; (2) whether indexation is applicable; and (3) whether a CGT asset has been held for a sufficient time so that a CGT discount might apply.
Calculating Capital Gains And Capital Losses
Most CGT Events provide for the calculation of a capital gain or capital loss by comparing 2 different amounts. The amount of the gain or loss is the difference between these 2 amounts. See section 102-22.
In many cases, we need to calculate the difference between the capital proceeds, and the cost base or reduced cost base. See, for example, the calculation for CGT Event A1 at section 104-10(4).
Note, however, that this is not the universal calculation under the CGT rules. See, for example, the calculation for CGT Event D1 at section 104-35(3). Why does the calculation for CGT Event D1 differ? The point is that you must always check the legislation for the calculation formula for each CGT Event.
We now turn to the issue of what constitutes the capital proceeds, and the cost base or reduced cost base, as these apply in many cases under the CGT rules.
What are Capital Proceeds?
General Rules: section 116-20(1) - eg the money (or market value of property) you received, or are entitled to receive, in respect of the CGT Event happening.
Market value substitution rule - section 116-30 - read this section in detail.
Apportionment rule - section 116-40
Other modifications to the general rule for capital proceeds in s 116-20 apply. Read the examples in s 116-45 (non-receipt rule), s 116-50 (repaid rule), and s 116-55 (assumption of liability). There is also a misappropriation rule in s 116-60.
What is the Cost Base?
According to section 110-25, the 5 elements of cost base are:
1st - includes money paid, or required to be paid, to acquire a CGT asset. Includes market value of any property given to acquire the asset.
2nd - incidental costs (eg accountancy, agent & legal fees, costs of transfer, stamp duty, certain advertising costs, valuation costs, search fees, conveyancing kits, borrowing expenses) - see section 110-35. Note the overriding requirements in ss 110-35(1).
3rd - costs of owning the CGT asset (eg interest on money borrowed to acquire the asset, costs of maintaining, repairing or insuring the asset, land tax, etc) - note post 20 August 1991 acquisition date. The 3rd element does not apply to personal use assets or collectables.
4th - capital expenditure incurred: (a) the purpose or the expected effect of which is to increase or preserve the asset’s value; or (b) that relates to installing or moving the asset. Note that the 4th element does not apply to capital expenditure incurred in relation to goodwill.
5th - capital expenditure incurred to establish, preserve or defend your title to the asset (or right over the asset).
Where indexation applies, the cost base of a CGT asset includes indexation of the elements (except the 3rd element): s 110-36(1).
What is the Reduced Cost Base?
Difference between cost base and reduced cost base: read, in particular, subsections 110-55(1), (2) and (3).
When calculating a capital loss, the cost base is called the ‘reduced cost base’. The main difference is that indexation (if relevant - see below) is ignored in calculating the reduced cost base, and the 3rd element is different.
If the reduced cost base exceeds the capital proceeds the difference is a capital loss. If the capital proceeds are less than the cost base, but more than the reduced cost base, then there is neither a capital gain nor a capital loss.
General Rules about the Cost Base and Reduced Cost Base
Market value substitution rule - section 112-30 - read this section in detail
Apportionment rule - section 112-30
Generally, expenditure does not usually form part of the cost base or reduced cost base to the extent that a taxpayer has deducted or can deduct it. There are some timing rules regarding this principle: see s 110-40 and s 110-45.
In relation to the reduced cost base, see section 110-55(4). Note, also, section 110-55(9).
If indexation is applicable to the cost base, the third element of the cost base is not indexed: see section 960-275(4).
Split, changed or merged assets: section 112-25
Indexation of CGT cost base
For CGT assets purchased after 11:45am (ACT time) on 21 September 1999 (the “1999 Announcement time”), indexation of the cost base had been abolished. But see the 2026 Federal Budget reforms (below) as indexation is coming back to life.
For CGT assets purchased on or before the 1999 Announcement time, indexation of the asset’s cost base is only relevant for individuals trusts and complying super funds if they choose to index the cost base for the purposes of section 110-25.
For pre-1999 Announcement time CGT assets, in calculating the indexed cost base, indexation is only available up until 30 September 1999.
That is, indexation is frozen as at 30 September 1999. At that time, inflation data was published on a quarterly basis, and the quarter ending 30 September 1999 is the relevant reference point because indexation was abolished for assets acquired after the 1999 Announcement time: s 114-1. This is why the numerator for the indexation factor (see below) always refers to the index number for the quarter ending 30 September 1999. The legislation still requires the quarterly indexation figure to be used.
If indexation is relevant, in order to index the cost base of a CGT asset, the asset must be held for at least 12 months before the time of a CGT Event that happens: section 114-10.
Indexing amounts: see sections 960-270, 960-275 and 960-280.
Indexation factor (must be rounded to 3 decimal places only) commonly:
Index number for the quarter ending on 30 September 1999
Index number for the quarter in which the expenditure was incurred
See the ATO website for the indexation factors at: Consumer price index (CPI) rates
In calculating a net capital gain, individuals, trusts and complying superannuation funds that purchased CGT assets on or before the 1999 Announcement time can choose between:
indexation of the asset’s cost base but no discount capital gain; or
discounting the capital gain (see below) but no indexation of the asset’s cost base.
Option (b) in most cases will result in the relevant taxpayer paying less tax. You should always check this though.
In calculating a net capital gain, individuals, trusts and complying superannuation funds that purchased CGT assets after the 1999 Announcement time, apply the discount capital gain method (provided that the conditions for receiving the discount are satisfied).
Discount capital gains
Generally speaking, to be a discount capital gain, the capital gain must be made by an individual; trust or complying superannuation fund. Note, discount capital gains do NOT apply to companies.
To be a discount capital gain:
CGT Event must happen after the 1999 Announcement time - the capital gain must result from a CGT event happening after the 1999 Announcement time (see section 115-15).
No indexation in calculating the capital gain - the capital gain must have been worked out by reference to a cost base whose elements have not been indexed (see section 115-20).
Must hold the CGT asset for 12 months - the capital gain must result from a CGT event happening to a CGT asset that was acquired by the entity making the capital gain at least 12 months before the CGT event (see section 115-25).
Capital gains from some CGT events do not give rise to discount capital gains. For example, CGT Events D1, F1, F2, F5 and H2 (see section 115-25(3)).
The discount percentage for an amount of a discount capital gain is 50% if the gain is made by an individual or trust; and 33.33% (recurring) if the gain is made by a complying superannuation fund (see section 115-100).
Indexation vs Discount Capital Gains: Summary
Note that the table assumes that the relevant CGT asset is a post CGT asset. It also assumes the 2026 Federal Budget reforms have not yet been implemented.
Type of Entity
Asset purchased before the 21 September 1999 time
Asset purchased after the 21 September 1999 time
Individual,
Trust or
Complying Super Fund
Choice between:
Indexation method available (with indexation frozen at the September 1999 quarter)
OR
Discount method available, only if the asset has been held for at least 12 months before the CGT event happens.
No Indexation method available.
Discount method available only if the asset has been held for at least 12 months before the CGT event happens.
Other Entities
(eg Companies)
Indexation method available (with indexation frozen at the September 1999 quarter).
No discount method available.
No Indexation method available.
No discount method available.
See Example 16 below.
Calculating A Net Capital Gain: Putting It All Together
See the Method Statement in section 102-5. You need to appreciate the methodology adopted in section 102-5 in detail. See Example 17 below.
Working out your net capital loss - see section 102-10.
How to apply net capital losses - see section 102-15.
Kate purchased a vacant block of land on 18 October 1986 for $300,000. Stamp duty on the purchase incurred in October 1986 was $18,000. Legal expenses incurred in October 1986 related to the purchase were $2,800. Kate incurred constructions costs to build a new house on the land in November 1996 for $200,000. Once construction was completed, the house was always tenanted.
Kate sold the land with the building on it for $1,600,000 on 16 April 2026. The real estate agent’s commission on the sale was $30,000. Assume Kate sold no other CGT assets during the CIY and that she has no prior year net capital loss. (Ignore any possible Capital Allowance Deductions under s 43-10 of ITAA 1997).
CGT Calculation - Indexation Approach
Capital Proceeds $1,600,000
Less Cost Base (Indexation Approach)
Acquisition Cost: $300,000 x 1.547 (68.7/44.4) = $464,100
Stamp Duty on Purchase: $18,000 x 1.547 (68.7/44.4) = $27,846
Legal Expenses on Purchase: $2,800 x 1.547 (68.7/44.4) = $4,332 (rounded)
Capital Improvement: $200,000 x 1.025 (68.7/67.0) = $205,000
Estate Agent’s Commission: $30,000 x 1.000 = $30,000
Indexed cost base $731,278
Capital Gain $868,722
Note
The index number for the December 1986 Quarter is 44.0. For the September 1999 Quarter, the index number is 68.7 and for the December 1996 quarter it is 67.0.
CGT Calculation - Discount Capital Gain Approach
Capital Proceeds $1,600,000
Less Cost Base (Not Indexation Approach)
Acquisition Cost = $300,000
Stamp Duty on Purchase = $18,000
Legal Expenses on Purchase = $2,800
Capital Improvement = $200,000
Estate Agent’s Commission = $30,000
Cost base without indexation $550,800
Capital Gain - before discount $1,049,200
After the CGT Discount, the capital gain becomes $524,600 (50% of $1,049,200)
Modify Facts - CGT Calculation of Capital Loss
Assume the facts as in the above example, except that the sale proceeds of Kate’s asset were only $500,000 (instead of $1,600,000). The capital loss formula is Reduced Cost Base less Capital Proceeds. The capital loss for Kate is $50,800 (that is, $550,800 - $500,000).
An individual makes the following gross capital gains and capital losses for the CIY regarding CGT assets held as investments:
Asset 1 - capital gain of $10,000 (CGT asset sold within 12 months and so the asset is ineligible for the 50% discount)
Asset 2 - capital gain of $15,000 (CGT asset sold after 12 months therefore the asset is eligible for the 50% discount)
Asset 3 - capital loss of $12,000
The taxpayer also has an unapplied net capital loss of $7,000 carried-forward from the PIY.
All assets had been acquired after 21 September 1999.
Step 1: Reduce the capital gains made during the CIY by the capital losses for the CIY.
In this example, it is much more tax effective to utilise the current year capital loss against Asset 1 first as this will ultimately produce the lowest overall amount in the taxpayer’s assessable income. See Note 1 in Step 1 in s 102-5, which permits a choice to be made about the order in which capital gains can be reduced by capital losses for the CIY.
In doing so, the capital gain on Asset 1 is reduced to nil at Step 1. The capital gain on Asset 2 is reduced to $13,000 at Step 1.
Step 2: Subtract any prior-year, unapplied net capital loss against any capital gains remaining at Step 1.
Notice that the taxpayer has a choice about the order in which this is done (see Note 2 in Step 2 in s 102-5).
The $13,000 gain remaining after Step 1 is reduced by $7,000 at Step 2, to result in a capital gain of $6,000.
Step 3: Separate the result from Step 2 into non-discounted capital gains and discounted capital gains, and apply the correct discount percentage to the discount gains.
Non-discount capital gains = $0
Discount capital gains = $6,000
The discounted capital gain will be reduced to $3,000 (ie $6,000 × 50%) after Step 3.
Step 4: Apply the CGT small business concessions, if applicable.
Assume there are no CGT small business concessions available in this question. We do not study the CGT small business concessions in this course.
Step 5: Add up all of the amounts remaining to get the taxpayer’s net capital gain.
The non-discount gain was reduced to nil. This means that the remaining capital gain is $3,000, which is the taxpayer’s net capital gain for the year.
The $3,000 will enter the taxpayer’s assessable income as statutory income under s 102-5.
Anti-Overlap Provisions
Note the application of section 118-20 - reduce the capital gain by amounts otherwise assessable. Read, in this order, subsections 118-20(1), 118-20(3), and then 118-20(2).
How do these provisions rest with section 6-25? What conclusions can you make?
Take the example of Mr Goldfinger from Taxation Ruling 1992/3:
“Mr Goldfinger purchased a number of gold bars for $100,000 and, following a sharp rise in the price of gold, sold the gold bars one week later for $110,000. Goldfinger did not carry on a business and had no previous dealings in gold.”
Discuss the income tax treatment of this transaction.
Does section 118-20 apply in this situation? Why?
How do the reduced cost base rules work to prevent double counting? Consider sections 110-55(9) and 110-55(4).
Exemptions
The CGT regime contains various exemptions. These are also aimed at preventing double counting (or no counting at all in some situations).
pre-CGT assets (disregarded)
cars and motor cycles (section 118-5)
collectables and personal use assets (see section 118-10 - discussed previously)
depreciating assets (see section 118-24)
trading stock (see section 118-25)
capital gains and losses from gambling, a game or a competition with prizes (section 118-37(1)(c))
certain compensation receipts and damages payments (see section 118-37)
An important exemption in practice is the CGT main residence exemption (see Subdivision 118-B ITAA97). Please ensure you review the rules as summarised in the textbook and understand the effect of sections 118-110, 118-15, 118-120, 118-140, 118-145, 118-185, 118-190, and 118-192. Also refer to the examples provided on the ATO website at: Treating former home as main residence.
2026 Federal Budget: Overview Of Cgt Reforms
The government outlined a number of proposed CGT changes in the 2026 Federal Budget.
Legislation to give effect to these changes has been introduced into Parliament.
A summary of the key measures, based on the law as proposed at the time the original Bill was introduced, is set out below.
You will not be assessed on these proposed reforms. They are included for your awareness only, as they may be highly relevant to your future practice as a solicitor. In particular, the reforms could have significant implications for tax planning, asset structuring, and the future treatment of capital gains, making it important to have at least an awareness at this time of their potential impact.
CGT indexation and discount changes
For CGT events involving individuals and trusts occurring from 1 July 2027:
Taxpayers will be able to apply cost base indexation to capital gains accruing from that date, provided the relevant asset has been held for at least 12 months.
For expenditure incurred from 1 July 2027, the indexation factor is likely to be determined according to the following formula:
Index number for the quarter in which the CGT event happens
Index number for the quarter in which the expenditure is incurred
The existing CGT discount will continue to apply to gains that accrued prior to 1 July 2027.
To effect these changes, there will be a deemed sale just before, and a reacquisition on, 1 July 2027, for any pre-1 July 2027 CGT assets the taxpayer continues to own after that time. The capital proceeds from the deemed sale are the market value just before 1 July 2027 or are calculated using an apportionment method (determined by the Minister?).
For CGT assets acquired before 21 September 1999, taxpayers will no longer be permitted to choose between applying indexation and the CGT discount.
For CGT events occurring before 1 July 2027, the current rules relating to indexation and the CGT discount remain unchanged.
There are no proposed changes to the availability of cost base indexation for entities other than individuals and trusts (eg companies).
Pre-CGT assets
Capital gains and losses that arise before 1 July 2027 will continue to be disregarded for CGT purposes.
However, from 1 July 2027, the pre-CGT status of assets will effectively cease. The Explanatory Memorandum indicates that any capital gains accruing on or after that date will be subject to CGT.
New residential premises
A 50% CGT discount will be available to individuals or trusts in respect of gains on new residential dwellings.
Where an individual or trust derives a capital gain from a CGT event involving a new residential dwelling, they may choose between:
applying the CGT discount, or
applying the new regime (cost base indexation together with the 30% minimum tax rate on capital gains-see below).
Minimum 30% tax on capital gains
From 1 July 2027, a minimum tax rate of 30% will apply to the net capital gains of Australian resident individuals. Certain recipients of income support payments will be excluded from this rule.
An exception to the minimum tax will apply to gains on new residential dwellings where the taxpayer elects to use the CGT discount instead of indexation approach.
Amendments to the method statement
Section 102-5 ITAA 1997 is proposed to be revised by expanding the net capital gain calculation from 5 into 7 steps. This change accommodates 4 new categories of capital gains, distinguishing between:
residential and non-residential CGT assets; and
gains attributable to periods before and after 1 July 2027.
Relevant legislation
See: Treasury Laws Amendment (Tax Reform No. 1) Bill 2026, Sch 1, and the related Explanatory Memorandum to the Bill; and Income Tax Rates Amendment (Tax Reform No. 1) Bill 2026.
Matching Tutorial — Full Problem Source and Teaching Integration
The tutorial is part of the chapter, not an afterthought. Read the facts by turning each receipt, outgoing, event or procedural step into a separate issue. Write the relevant provision beside each issue before applying the cases.
Tutorial 6 - Week 7: Final calculation notes
5-step, net capital gain calculation (in s 102-5 ITAA97)
Priya receives interest on the $20,000 loan to her friend, so the loan debt arises in the course of her gaining or producing her assessable income. This means the debt is not a personal use asset, so the $6,000 capital loss on the forgiven loan is not disregarded.
The calculation below shows how s 102-5 ITAA97 applies to the facts. Please ensure you review this section carefully. For a further example, see Example 17 in the Week 6 Forum notes.
Summary (before applying s 102-5 ITAA97)
For the CIY, Priya’s total discount capital gains are: $960,000 (being the $660,000 capital gain on the sale of the Bondi property, plus the $300,000 capital gain in the sale of the Gold Coast property).
For the CIY, Priya’s total non-discount capital gains are: $8,300 (being the $5,800 capital gain on the sale of the GL shares, plus the $2,500 capital gain from the lease premium).
Priya has total capital losses for the CIY of $86,000 (being the $80,000 capital loss on the sale of the vacant land, plus the $6,000 capital loss on the forgiven loan to her friend).
Priya has an unapplied net capital loss from the PIY of $20,000.
Priya also has a net capital loss from collectables for the CIY of $600 which will be carried forward to reduce her capital gains from collectables in the next income she has such gains: s 108-10(4) ITAA 97.
Applying s 102-5 ITAA97
Step 1: Reduce the capital gains made during the CIY by the capital losses for the CIY.
In this example, it is much more tax effective to utilise the current year capital loss against the non-discount capital gains first as this will ultimately produce the lowest overall amount in the Priya’s assessable income. See Note 1 in Step 1 in s 102-5, which permits a choice to be made about the order in which capital gains can be reduced by capital losses for the CIY.
In doing so, the non-discount capital gain is reduced to nil, which leave $77,700 of current year capital loss remaining ($86,000 - $8,300). The remaining current year capital loss ($77,700) is then applied to the discount capital gains, which reduces them to $882,300 ($960,000 - $77,700) at Step 1.
Step 2: Subtract any prior-year, unapplied net capital loss against any capital gains remaining at Step 1.
Notice that Priya has a choice about the order in which this is done (see Note 2 in Step 2 in s 102-5).
The $882,300 discount gain remaining after Step 1 is reduced by $20,000 at Step 2, to result in a capital gain at Step 2 of $862,300.
Step 3: Separate the result from Step 2 into non-discounted capital gains and discounted capital gains, and apply the correct discount percentage to the discount gains only.
Non-discount capital gains = $0
Discount capital gains = $862,300
The discount capital gain will be reduced to $431,150 ($862,300 × 50%) at Step 3.
Step 4: Apply the CGT small business concessions, if applicable.
Assume there are no CGT small business concessions available in this question. We do not study the CGT small business concessions in this course.
Step 5: Add up all of the amounts remaining to get Priya’s net capital gain.
The non-discount gain was reduced to nil. This means that the remaining capital gain is $431,150, which is Priya’s net capital gain for the year.
Conclusion
The $431,150 will enter Priya’s assessable income as statutory income under s 102-5 ITAA97.
Priya also has a net capital loss from collectables for the CIY of $600 which will be carried forward to reduce her capital gains from collectables in the next income she has such gains: s 108-10(4) ITAA 97.