3.

1 CGT CORE CONCEPTS

WHAT IS CAPITAL GAINS TAX?
Capital gains tax (CGT) is levied on capital gains arising from CGT events happening (generally) to
CGT assets.
A capital gain or loss arises when a CGT event occurs, generally in relation to a CGT asset
(e.g. the disposal of a CGT asset). Sometimes a capital gain or loss can be triggered in other circumstances,
including when a managed fund or trust makes a distribution to a taxpayer (see table 3.2 in the section
‘CGT events’).
A capital gain or loss may also occur when certain gifts are received by taxpayers. CGT events are
covered in the section ‘CGT events’. The section ‘Determining gain/loss from CGT event’ later in this
module examines how to calculate the capital gain or loss for each CGT event.
It is important to understand that CGT is not a separate tax, but rather that it is part of a taxpayer’s
income tax. Taxation is levied on the net capital gain at the taxpayer’s marginal tax rate.
CGT was introduced into Australia on 20 September 1985, and normally only applies to CGT assets
acquired by the taxpayer from that date. If an asset was acquired before 20 September 1985, it is generally
exempt from CGT. Note that income from the disposal of a pre-20 September 1985 asset may still be liable
for taxation under other non-CGT provisions of the legislation. In some instances, such income might be
assessable under the ordinary income provision in s. 6-5 of ITAA97 (see the section ‘Mere realisation of
capital assets and profits from isolated transactions’ in module 2) or under s. 15-15 of ITAA97, which
applies to a profit-making undertaking or plan involving the disposal of a pre-CGT asset. Capital gains are
included as part of assessable income and are subject to the income tax provisions.

What is a CGT Event?

CGT events are the different types of transactions or events that might result in a capital gain or capital loss.
Many CGT events involve a CGT asset (see the section ‘CGT assets’) and some relate to capital receipts.
There are a wide range of CGT events, and these are discussed in the section ‘CGT events’ in this module.

What is a CGT Asset?

The definition of a CGT asset is discussed in more detail in the section ‘CGT assets’. Included in the
definition of a CGT asset is any kind of property, including items such as shares in a publicly listed
company, or an investment property used to generate rental income. Also included are legal/equitable
rights other than property (ITAA97, s. 108-5).
No CGT is paid on the disposal of an individual’s main residence (assuming key conditions are met) —
the main residence exemption is discussed later in the section ‘Determining gain/loss from CGT event’. In
fact, most personal assets are exempt from CGT, which includes the main residence, car and some personal
use assets. Personal use assets and collectables are discussed in more detail in the section ‘CGT assets’.
Note that depreciating assets used solely for taxable purposes — for example, fittings in a rental property
or business equipment — are also exempt from CGT.

What is a Capital Gain/Loss?

A capital gain or loss is generally calculated as the difference between the cost to acquire the asset and the
proceeds received as a result of the CGT event.
For many of the CGT events, if the proceeds received from the CGT event are higher than the cost base
(discussed in the section ‘Cost base’ later in this module), then a capital gain is made.
Likewise, for many CGT events, if the proceeds received from the CGT event are less than the reduced
cost base of the asset (discussed in the section ‘Reduced cost base’), a capital loss is incurred. A capital
loss can be applied against capital gains for the same income year and carried forward into future income
years to offset against future capital gains. However, a capital loss cannot be deducted from the taxpayer’s
other income.
There is no limit on how long the loss can be carried forward (subject to certain rules applying to
companies), and the losses are applied in the order they were incurred.
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When Does a Capital Gain/Loss Occur?
Each CGT event sets out its own rules for when each event occurs and a capital gain or loss arises (ITAA97,
s. 104-5). For example, in CGT event A1, a capital gain or loss occurs on the date when the contract for
disposal of the asset is entered into — not the settlement date.
When applying CGT event A1, if a contract is signed to sell an investment property in June 2025 and
settles in September 2025, then any gain or loss is reported in the 2024–25 tax year, not the 2025–26
tax year.

What About Residency?

For Australian residents, CGT applies to any assets held anywhere in the world. This is irrespective of
whether the Australian residents are individuals, partnerships, trusts, superannuation funds or companies.
For foreign residents (non-Australian residents for taxation purposes), a capital gain or loss is incurred if
a CGT event happens to an asset that is a taxable Australian property. Note the Commissioner of Taxation
considers that a non-resident beneficiary of a resident trust will be subject to CGT on any gain from the trust
regardless of its source (TD 2022/12) (see the section ‘Non-residents and capital gains tax’ in module 2).

CGT INTERACTION WITH OTHER TAXES

Other (non-CGT) tax provisions take precedence over CGT. For example, if a disposal of a CGT asset is
subject to another form of taxation under Australian tax legislation, then any capital gain on that asset is
reduced accordingly.
Where the disposal of the asset occurs in the ordinary course of a business, then the gross proceeds from
that transaction will be assessed as ordinary income under s. 6-5, and no capital gain will arise.
Figure 3.3 shows how this operates.

FIGURE 3.3 CGT interaction with other taxation legislation

No CGT. Consider
Has a CGT event
whether any other tax
occurred? No legislation applies.

Yes

Does any tax legislation Income is subject to tax

apart from CGT and under that legislation
s. 15-15 apply? Yes (e.g. s. 6-5).

No

Is a pre-CGT asset
(acquired before Is there a profit-making Profit may be taxed
20 September 1985) Yes undertaking or plan? Yes under s. 15-15.
involved?

No

CGT may apply to

any gain, subject to
exemptions, exclusions
and rollover relief.

Source: CPA Australia 2025.

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182 Australia Taxation

SIX-STEP PROCESS FOR DETERMINING CGT
To determine a taxpayer’s net capital gain, a six-step process can be followed, as shown in table 3.1.

TABLE 3.1 Six-step process for determining CGT

Step Description Module section/subsection

Step 1: Determine A CGT event must occur for a capital gain or loss to arise. ‘CGT events’
CGT event

Step 2: Identify a The CGT event often (but not always) involves a CGT ‘CGT assets’
CGT asset asset. The underlying asset or assets must be determined
to calculate any capital gain or loss.

Step 3: Calculate This must be considered separately for each CGT event. ‘Determining gain/loss from
the capital gain CGT event’
or loss

Step 4: Determine Applying an exception or an exemption may prevent a ‘Determining exception

exceptions or capital gain occurring. or exemption’
exemptions

Step 5: Apply Applying a rollover will defer a capital gain until a ‘Rollover provisions and
applicable rollover subsequent CGT event occurs. Sometimes the taxpayer other reliefs’
provisions must choose the rollover. In other instances, the rollover
applies automatically.

Step 6: Calculate Step 6 brings together all the capital gains for the year and ‘Calculating net capital
net capital the capital losses for the current and previous tax years. gain/loss’
gain/loss CGT discounts and the small business concessions are
applied, if applicable, to further reduce net capital gain.

Source: CPA Australia 2025.

Figure 3.4 represents the six-step process as a decision tool.

CGT EQUATION
FORMULA TO LEARN

Calculating the final net capital gain or loss can be a complex process. The equation is as follows
(ITAA97, s. 100-50).

Net capital gain = Capital gains − Capital losses − CGT discount − CGT small business concessions
The calculation of net capital gain or loss is Step 6 in the CGT six-step process and is covered later in
the section ‘Calculating net capital gain/loss’.

RECORD KEEPING
We know now that net capital gains are included in assessable income (ITAA97, s. 102-5) and tax is paid
at marginal tax rates. Therefore, taxpayers are required to keep proper records of all CGT assets acquired
after 19 September 1985. Taxpayers can choose to maintain records or keep an asset register.

Records
Where a taxpayer elects to maintain records, the taxpayer must keep details, in English, of the:
• date the asset was acquired and its cost, including any incidental costs
• date the CGT event occurred and any costs related to the CGT event
• capital proceeds received or deemed to be received (s. 121-20).
Records must be kept for five years after the last relevant CGT event in relation to the asset. This applies
to all records, unless the Commissioner of Taxation advises otherwise or the company has been dissolved
(s. 121-25). Records do not have to be kept for events where the capital gain or loss is disregarded, except
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MODULE 3 CGT Fundamentals 183

upon a rollover. Note, however, that records must be kept by foreign residents who make capital gains or
losses through fixed trusts (s. 121-30).

FIGURE 3.4 CGT six-step process

Step 1: No
Did a CGT event
happen in the tax year?

Yes

Step 2:
Identify the CGT asset
(if relevant)

Step 3:
Calculate the capital
gain/loss

Step 4: Yes
Do any exceptions
or exemptions apply?

No

Yes Step 5:
CGT liability
Do rollover
is deferred
provisions apply?

No

Step 6:
Determine net capital
gain/loss

Net loss
Net gain

Carried forward for

Included in No capital
offset against future-
assessable income gain or loss
year net capital gains

Source: CPA Australia 2025.

Asset Register
Taxpayers can keep a ‘CGT assets register’ with a separate entry for each asset. The entries in the register
must be in English. All entries in an assets register must be certified by a tax agent. The original records
pertaining to the asset listed in the register must be kept for five years. This five-year period is from when
the entry of the asset in the register was certified, not the date of the CGT event. For the Commissioner’s
view on the use of asset registers, see TR 2002/10.
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184 Australia Taxation

3.2 CGT EVENTS
OVERVIEW OF CGT EVENTS
A capital gain or loss can only potentially arise if a defined CGT event occurs. This is found in s. 100-20(1)
of ITAA97 and the defined CGT events are listed in Division 104 of ITAA97. They are also presented in
the next section.

DEFINED CGT EVENTS

The CGT events are set out in Division 104 of ITAA97, and summarised in table 3.2. Note that events
relating to tax consolidation (L1–L8) are not included in the table and are not examinable.
Table 3.2 outlines the main defined CGT events.

TABLE 3.2 CGT events

Event
number
(section) Description Timing of event Example

A1 Disposal of a CGT asset. When taxpayer enters into Sale of shares by an investor.
(s. 104-10) the disposal contract. If no
contract, when ownership
transfers.

B1 Use and enjoyment before When use of CGT asset passes Hire purchase arrangements.
(s. 104-15) title passes. to another entity.

End of a CGT asset (C1–C3)

C1 Loss or destruction of a When taxpayer receives Factory destroyed by fire.

(s. 104-20) CGT asset. compensation or, if none,
when loss is discovered or
destruction occurred.

C2 Cancellation, surrender and When taxpayer enters into Cancellation of legal rights arising
(s. 104-25) similar endings. contract to end an intangible from a contract.
asset. If no contract, when
asset ends.

C3 End of option to acquire When option ends. Gain/loss made by company

(s. 104-30) shares, etc. when option to acquire its shares
expires without being exercised.

Bringing into existence a CGT asset (D1–D4)

D1 Creating contractual or When taxpayer enters into Non-compete clause in a

(s. 104-35) other rights. contract or right is created. business sale contract.

D2 Granting an option. When option is granted. Option to purchase land within a

(s. 104-40) specified period granted.

D3 Granting a right to income When taxpayer enters into Taxpayer holds a mining
(s. 104-45) from mining. contract or right is granted. entitlement and grants a right to
income from operations permitted
under the entitlement.

D4 Entering into a conservation When covenant is entered into. Landowner enters into covenant
(s. 104-47) covenant. with government to conserve
their property for environmental
purposes.

Events relating to trusts (E1–E10)

E1 Creating a trust over a When trust is created. Assets are transferred to a new
(s. 104-55) CGT asset. family trust.

(continued)

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MODULE 3 CGT Fundamentals 185

 TABLE 3.2 (continued)

Event
number
(section) Description Timing of event Example

E2 Transferring a CGT asset to When asset is transferred. Assets are transferred to an

(s. 104-60) a trust. existing family trust.

E3 Converting a trust to a When trust is converted. Non-unit trust is converted to a

(s. 104-65) unit trust. unit trust.

E4 Capital payment for When trustee makes payment. Amounts distributed from a unit
(s. 104-70) trust interest. trust that are non-assessable
due to the small business 50%
concession.

E5 Beneficiary becoming When beneficiary becomes In specie distribution of trust

(s. 104-75) entitled to a trust asset. absolutely entitled. assets to a beneficiary.

E6 Disposal to beneficiary to Time of disposal. Property transfers on the

(s. 104-80) end income right. winding-up of a trust.

E7 Disposal to beneficiary to Time of disposal. Property disposals on the

(s. 104-85) end capital interest. winding-up of a trust.

E8 Disposal by beneficiary of When disposal contract is Sale of trust interests originally

(s. 104-90) capital interest. entered into or, if none, when acquired for $nil consideration.
beneficiary ceases to own
CGT asset.

E9 Creating a trust over When taxpayer makes Assignment of prospective

(s. 104-105) future property. agreement. interest in partnership to a
discretionary trust.

E10 Annual cost base reduction When the reduction happens. The annual reduction in cost base
(s. 104-107A) of interest in attribution due to tax-deferred distributions
managed investment exceeds the cost base of
trust (AMIT). the asset.

Events relating to leases (F1–F5)

F1 Granting, renewing or When lease agreement is Lessor grants a lease and, if it is a

(s. 104-110) extending a lease. entered into or, if none, at long-term lease, does not choose
start of lease. For lease to apply event F2.
renewal/extension, at start of
renewal/extension.

F2 Granting, renewing or When lessor grants the lease or Lessor grants lease over land and
(s. 104-115) extending a long-term lease. at start of renewal or extension. lease is for at least 50 years.

F3 Lessor pays lessee to get When lease term is varied Payment made by lessor to
(s. 104-120) lease changed. or waived. shorten duration of lease.

F4 Lessee receives payment for When lease term is varied Payment received by lessee for
(s. 104-125) changing lease. or waived. agreeing to shorten duration
of lease.

F5 Lessor receives payment for When lease term is varied Payment received by lessor for
(s. 104-130) changing lease. or waived. agreeing to shorten duration
of lease.

Events relating to shares (G1 and G3)

G1 Capital payment for shares. When company pays non- Liquidator’s interim distribution
(s. 104-135) assessable amount. made more than 18 months
before company ceases to exist.

G3 Liquidator or administrator When declaration is made. Liquidator makes declaration

(s. 104-145) declares shares or financial before final winding-up of a
instruments worthless. company where no further
shareholder distributions
expected.
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186 Australia Taxation

 Special capital receipts (H1 and H2)

H1 Forfeiture of a deposit. When deposit is forfeited. Deposit paid to taxpayer is

(s. 104-150) forfeited when purchaser pulls
out of contract for sale of land.

H2 Receipt for event relating When act, transaction or Payment to the owner of land
(s. 104-155) to a CGT asset (residual event occurs. who plans to build a building on
event — designed to ensure the land as an inducement to
tax is paid where no other commence building early, but
CGT event applies). with no legal obligation to do so.

Australian residency ends (I1 and I2)

I1 Individual or company stops When individual or company Taxpayer owning certain assets
(s. 104-160) being an Australian resident. stops being Australian resident. leaves Australia to become
permanent resident of the UK.

I2 Trust stops being When trust ceases to be Trustee and central management
(s. 104-170) resident trust. resident trust for CGT and control of a trust move
purposes. overseas.

CGT events relating to rollovers (J1, J2, J4–J6)

J1 Company stops being When the company is no longer Rollover of Australian asset
(s. 104-175) member of wholly owned fully owned by the group. from a non-resident group
group after rollover. (Note: company to a resident group
Since the tax consolidation company, followed by break-up
regime was introduced, this of corporate group.
event occurs only rarely.)

J2 Change in relation to When the change happens. Replacement asset acquired by

(s. 104-185) replacement asset or taxpayer under small business
improved asset after small rollover becomes trading stock.
business rollover.

J4 Trust fails to cease to exist When failure occurs. Trust continues to exist six
(s. 104-195) after its assets are rolled months after its assets have been
over into a company. rolled over into a company under
Subdivision 124-N.

J5 Failure to acquire replace- At end of replacement asset Taxpayer claims small business
(s. 104-197) ment asset or undertake period (generally two years after rollover relief on disposal of an
capital expenditure in the rollover). asset but does not purchase a
respect of existing active replacement asset within two
asset after small business years after the disposal.
replacement asset rollover.

J6 Cost of replacement asset At end of replacement asset Taxpayer claims small business
(s. 104-198) or capital expenditure period (generally two years after rollover relief on disposal of
in respect of existing the rollover). an asset but purchases a
active asset not sufficient replacement asset costing
to cover capital gain less than the gain that was
disregarded under small disregarded under the rollover.
business rollover.

Other CGT events (K1–K12)

K1 International transfer When the unit starts to be held Taxpayer starts to hold an
(s. 104-205) of emissions unit (CGT as a registered emissions unit. international emissions unit as
implications of carbon a registered emissions unit.
pricing).

K2 Bankrupt pays amount in When payment is made. Bankrupt taxpayer can claim part
(s. 104-210) relation to debt. of pre-bankruptcy capital loss
if taxpayer repays some of the
related debt.

K3 Asset passes to tax- When individual dies. Asset is transferred to a foreign

(s. 104-215) advantaged entity resident beneficiary on death
after death. of taxpayer.

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(continued)

MODULE 3 CGT Fundamentals 187

 TABLE 3.2 (continued)

Event
number
(section) Description Timing of event Example

K4 CGT asset becomes trading When asset becomes Land previously held as an
(s. 104-220) stock of taxpayer. trading stock. investment is subdivided by
the taxpayer in preparation
for development and sale and
becomes trading stock.

K5 Companies and trusts When CGT events A1, C2 or Taxpayer sells shares in a
(s. 104-225) holding collectable assets E8 happen to shares in the company that owns artwork that
that have fallen in market company or interests in the has decreased in value.
value. trust that owns the collectable.

K6 Sale of pre-CGT shares When another CGT event Taxpayer sells pre-CGT shares
(s. 104-230) or trust interest, where involving the shares or in private company. Eighty per
market value of post- interest occurs. cent of the value of the company
CGT assets held by relates to post-CGT assets.
company/trust represents
at least 75% of net value of
the company/trust.

K7 Balancing adjustment event When balancing adjustment Disposal of a truck partly used for
(s. 104-235) occurs for a depreciating event occurs. private purposes.
asset used wholly or partly
for private purposes.

K8 Direct value shifts affecting When decrease in value of Existing shares in a family
(s. 104-250) equity or loan interests in a equity or loan interest occurs. business held by a husband
company or trust. and wife are devalued when new
shares are issued to the son.

K9 Entitlement to receive certain When the entitlement arises. Capital gains on sale of eligible
(s. 104-255) amounts in respect of venture capital investments.
venture capital investments.

K10 Foreign exchange gains. When the foreign currency Foreign exchange gain on the
(s. 104-260) amount is paid to the taxpayer. sale of a CGT asset for foreign
currency consideration, paid
within 12 months of the sale.

K11 Foreign exchange losses. When the foreign currency Foreign exchange loss on the
(s. 104-265) amount is paid to the taxpayer. sale of a CGT asset for foreign
currency consideration, paid
within 12 months of the sale.

K12 Foreign hybrid loss Just before the end of the Capital loss made by partners in
(s. 104-270) exposure adjustment. tax year. foreign hybrids (e.g. UK limited
partnerships).

Source: Based on Income Tax Assessment Act 1997 (Cwlth), Division 104-5, Federal Register of Legislation, accessed October 2024,
[Link]/Series/C2004A05138.

The table shows that there is a large number of CGT events, but some of these rarely occur. Candidates
are not required to have an in-depth knowledge of all events.
The chief CGT events, which are examined in more detail later in ‘Specific CGT events’, are:
• A1 — Disposal of a CGT asset
• C1 — Loss or destruction of a CGT asset
• C2 — Cancellation, surrender and similar endings
• D1 — Creating contractual or other rights
• F1 — Granting, renewing or extending a lease
• H1 — Forfeiture of a deposit.

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188 Australia Taxation

DETERMINING THE CGT EVENT
The first step is to determine which CGT event is the correct one to apply to the taxpayer’s situation.
It is very important that the most appropriate CGT event is selected. This is because each CGT event
has its own rules for determining the timing of that event (as summarised in table 3.2), and a capital gain
or loss is calculated differently for different CGT events. Exemptions and relevant concessions only apply
to certain CGT events.
Section 102-25 outlines how to determine the appropriate CGT event, which is shown in figure 3.5.

FIGURE 3.5 Order of application of CGT events (s. 102-25)

CGT cannot apply. Consider

Has a CGT event
whether the transaction is subject
occurred? No to tax under other legislation.

Yes

Does any CGT event Apply only the most specific CGT
apart from D1 and H2 event, unless an exception applies
apply? Yes (see below).

No

Does CGT event D1

(creating contractual or Apply CGT event D1.
other rights) apply? Yes

No

Does CGT event H2

(receipt for event
Apply CGT event H2.
relating to a CGT asset) Yes
apply?

Source: CPA Australia 2025.

SPECIFIC CGT EVENTS

This section examines the chief CGT events most likely to occur in a given tax year. To recap, these are:
• A1 — Disposal of a CGT asset
• C1 — Loss or destruction of a CGT asset
• C2 — Cancellation, surrender and similar endings
• D1 — Creating contractual or other rights
• F1 — Granting a lease
• H1 — Forfeiture of a deposit.
For many of the CGT events, the determination of the capital gain or loss generally involves a comparison
of capital proceeds upon the CGT event occurring with the cost base or the reduced cost base of the asset.
These terms are discussed in more detail in the section ‘Determining gain/loss from CGT event’.

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MODULE 3 CGT Fundamentals 189

Event A1: Disposal of a CGT Asset
Disposal of a CGT asset is the most common CGT event. It occurs where there is a disposal or part disposal
of a CGT asset (s. 104-10). This disposal occurs only where there is a change in the beneficial ownership
of the asset. There would not be a change of ownership where an asset is destroyed (CGT event C1 would
apply) or where there is a change in trustee without any change to the beneficial ownership of trust assets
(see module 5).
CGT event A1 can involve the compulsory acquisition of a CGT asset, which will require the application
of the apportionment rules in s. 112-30. It should be noted that when determining the cost base of the part of
the CGT asset that was compulsorily acquired, the compensation to the extent that it reflects the reduction
in value of the remaining part of the CGT asset, will form part of the capital proceeds for the CGT event
happening to the part of the CGT asset compulsorily acquired (see TD 2001/9). This is calculated using
the following formula (s. 112-30(3)).
Capital proceeds for the CGT event happening to the part
Cost base of the asset ×
Those capital proceeds + Market value of the remainder of the asset
Timing
CGT event A1 occurs at the date the disposal contract is entered into or, if there is no contract, when the
change of ownership occurs.
Calculation of Capital Gain or Loss
A capital gain is made if the capital proceeds from the disposal are more than the cost base of the asset.
Conversely, a capital loss arises if those capital proceeds are less than the asset’s reduced cost base.
Exceptions for Pre-CGT Assets
A capital gain or loss is disregarded if the asset was acquired before 20 September 1985 (i.e. for
pre-CGT assets).
Example 3.1 considers a scenario in which a specific CGT event occurs.

EXAMPLE 3.1

Determining the CGT Event — Lucy Yee

On 20 June 2025, Lucy Yee enters into a contract to sell land that she had acquired on 1 April 1998. The
contract is settled on 1 October 2025. Lucy makes a capital gain of $650 000 from the sale. Consider what
CGT event has occurred, the timing of the event and what would happen if the contract falls through and
is not completed.
Assuming the contract is completed, the gain is made in the 2024–25 tax year, as the time of the CGT
event A1 is when the contract is made (20 June 2025), not when settlement takes place.
If the contract falls through, then CGT event A1 does not occur because there is no change in beneficial
ownership of the land. Assuming Lucy had lodged her income tax return for the 2024–25 tax year, and
included the capital gain, if the contract subsequently fell through, she would request an amendment to
the 2024–25 income tax assessment to exclude the capital gain.

Event C1: Loss or Destruction of a CGT Asset

Where a CGT asset that is owned by the taxpayer is lost or destroyed, CGT event C1 occurs (s. 104-20).
Timing
The time of the event is when the taxpayer first receives compensation (such as a payment from an
insurance policy) for the loss or destruction or, if no compensation is received, when the loss is discovered
or the destruction occurred.
Capital Gain or Loss
The taxpayer makes a capital gain if the capital proceeds from the loss or destruction — meaning any
compensation received — are more than the asset’s cost base, and a capital loss if those proceeds are less
than the asset’s reduced cost base.
Exception
A capital gain or loss is disregarded if the asset that was lost or destroyed was acquired before 20 September
1985 (i.e. for pre-CGT assets s. 104-20(4)).
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190 Australia Taxation

 Example 3.2 considers another scenario in which a specific CGT event has occurred, as well as the
timing of the event.

EXAMPLE 3.2

Determining the CGT Event — Tony Paton

On 1 February 2024, Tony Paton’s dairy farming business is destroyed by fire. Tony receives $1.2 million
in compensation from his insurance company on 1 October 2024.
Consider what CGT event has occurred and when it is considered to have occurred.
As Tony received compensation for the loss or destruction of a CGT asset, CGT event C1 occurred on
1 October 2024 (2024–25 tax year) and not on 1 February 2024 (2023–24 tax year) when the fire occurred.

Event C2: Cancellation, Surrender and Similar Endings

CGT event C2 only applies to intangible assets. An intangible asset has no physical form and includes
contractual rights, options, leases or shares in a company.
CGT event C2 occurs if ownership of an intangible asset ends, due to any of the following reasons.
• It is redeemed or cancelled.
• It is released, discharged or satisfied.
• It expires.
• It is abandoned, surrendered or forfeited.
• It is exercised (for options).
• It is converted (for convertible interests) (s. 104-25).
Timing
The event occurs when the taxpayer enters into the contract that results in the ending of the asset or, if
there is no contract, when the asset actually ends, for example, the expiration date.
Calculation of Capital Gain or Loss
A capital gain arises if the capital proceeds on the ending of the asset are more than the asset’s cost base.
A capital loss arises if those proceeds are less than the asset’s reduced cost base.
Exceptions
There are some exceptions to CGT event C2, and these are detailed in s. 104-25(5). The most common one
is that it does not apply to pre-CGT assets.

QUESTION 3.1

Coffee Roasters and Bikes & Beans Cafe entered into a contract on 31 July 2024. The contract
specified that Coffee Roasters was the sole provider of roasted coffee beans and all associated
coffee-making hardware and support services to Bikes & Beans Cafe for the following five years.
Coffee Roasters paid $20 000 for the right to provide the coffee beans, hardware and support.
As a result of a dispute, the contract was dissolved on 15 June 2025 and Coffee Roasters received
$30 000 for giving up its right to be the sole provider of coffee beans, hardware and support.
What CGT event was triggered, and what was the capital gain amount?

Event D1: Creating Contractual or Other Rights

Events A1 and C1 to C2 all relate to CGT assets being disposed of or ceasing to exist.
In comparison, events D1 to D4 all relate to when a new asset is created. So, the question is, why does
the creation of an asset result in CGT? While an asset is indeed created, the transactions may also involve
the disposal of legal rights, often in return for a cash sum.
The four CGT events that apply to situations where a new asset is created are:
1. the creation of contractual or other rights — CGT event D1 (s. 104-35)
2. the granting of an option — CGT event D2 (s. 104-40)
3. the granting of a right to income from mining — CGT event D3 (s. 104-45)
4. entering into a conservation covenant — CGT event D4 (s. 104-47).
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 The most common events in this group are D1 and D2. We will look in detail at CGT event D1.
CGT event D1 has wide application because it occurs whenever a taxpayer creates a contractual right
or other legal or equitable right in another entity. One common example of CGT event D1 is a restrictive
covenant in a business disposal contract. Under the covenant, in return for a cash amount, the vendor of
the business agrees not to establish a similar business within a given time frame and locality. In such an
instance, a right has been created in favour of the purchaser.
Timing
The event occurs when the contract is entered into or, if no contract exists, when the right is created.
Calculation of Capital Gain or Loss
A capital gain occurs if the capital proceeds from the creation of the rights are greater than any
incidental costs incurred in creating them. A capital loss occurs if the capital proceeds are less than the
incidental costs.
Exceptions
It is important to remember that CGT event D1 does not apply where another CGT event, other than H2,
occurs. If a taxpayer entered into a contract to sell an asset such as land or shares, CGT event A1 would
occur when the contract to dispose of the asset is entered into, and CGT event D1 is disregarded, even
though there are contractual rights associated with the contract of sale.
Alternatively, if a contract involves different sums received for different purposes, it is possible for CGT
event D1 to be triggered together with other CGT events.
Example 3.3 illustrates a specific CGT event being triggered when a restrictive covenant is entered into.

EXAMPLE 3.3

Determining the CGT Event — David Wong

David Wong is a dentist and sells his business for $800 000. He also promises not to compete with the
new buyer for three years for $200 000.
The sale of the business will trigger CGT event A1 and the restraint of trade (not to compete) provision
will trigger CGT event D1.
There are other specific exclusions for CGT event D1. These are as follows (s. 104-35(5)).
• The right is created ‘by borrowing money or obtaining credit from another entity’.
• The right requires the taxpayer to do something that gives rise to another CGT event for the taxpayer.
• A ‘company issues or allots equity interests or non-equity shares in the company’.
• The ‘trustee of a unit trust issues units in the trust’.
• A ‘company grants an option to acquire equity interests, non-equity interests or debentures in the
company’.
• The ‘trustee of a unit trust grants an option to acquire units or debentures in the trust’.
• The taxpayer created the right ‘by creating in another entity a right to receive an exploration benefit
under a farm-in farm-out arrangement’.

QUESTION 3.2

Mandy Johnston sells her clothing retail business to Naomi Harris. As part of the transaction, Mandy
enters into a restrictive covenant to not open a competing business for the next four years within
10 km of the clothing store. Mandy is paid $150 000 by Naomi for entering into this agreement, and
neither party incurs any associated costs with this payment.
What CGT events occur due to the above events, and what are the resulting capital gains
or losses?

Event F1: Granting a Lease

A lease is a CGT asset as it involves legal rights over property. CGT events F1 to F5 specifically
address transactions in relation to leases. We will look specifically at CGT event F1, the most common
of these events.

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 Two different taxpayers can be caught by these events:
1. the lessor — the taxpayer who grants the lease, usually the owner of the property
2. the lessee — the taxpayer who is given the right to use the property, in return for rental payments and
(sometimes) a lease premium. The premium is the amount paid for obtaining the lease.
Where a lessor grants, renews or extends a lease, CGT event F1 occurs (s. 104-110) and can result in a
capital gain or loss for the lessor.
Timing
Where a lease is granted, CGT event F1 occurs when the lease contract is entered into or, if there is no
contract, at the start of the lease.
Where an existing lease is renewed or extended, CGT event F1 occurs at the start of the renewal
or extension.
Calculation of Capital Gain or Loss
The lessor will make a capital gain if the capital proceeds (any lease premium paid by the lessee) are
greater than the cost to the lessor of granting, renewing or extending the lease (e.g. legal costs).
A capital loss arises where the capital proceeds are less than such costs. A lease premium is typically
paid at the beginning of the lease (the capital component) and does not include rent payable under the
lease, which is assessable income for the lessor.
Exceptions
The lessor can choose to apply CGT event F2 (instead of event F1) to certain long-term leases (50 years
or more). Note that the capital gain or loss is calculated differently under CGT event F2, so consideration
should be given as to which provides the taxpayer with the best result.

QUESTION 3.3

On 15 May 2025, Solving Solutions Ltd (Solving Solutions) granted a lease of office premises to
BooksareUs Pty Ltd in return for a lease premium payment of $15 000. The legal expenses incurred
by Solving Solutions to prepare the lease agreement were $1500.
What is the capital gain derived and under which CGT event?

Event H1: Forfeiture of a Deposit

CGT event H1 occurs where a deposit is forfeited because a prospective sale or other transaction does not
proceed (s. 104-150).
Timing
The time of the event is when the deposit is forfeited.
Calculation of Capital Gain or Loss
A capital gain arises where the deposit is more than the expenditure incurred in connection with the
prospective sale or other transaction. A capital loss occurs if the deposit is less than that expenditure.
Example 3.4 is another example illustrating the application of a specific CGT event.

EXAMPLE 3.4

Determining the CGT Event — Beau Morris

On 22 October 2024, Beau Morris received a deposit of $60 000 for the prospective sale of his investment
property, a beach house, for $620 000. The sale was to take place on 1 December 2024. The purchaser
did not proceed with the sale and the deposit was forfeited on 5 November 2024. Beau decided not to
offer his beach house for sale to anyone else.
Consider what CGT event occurred and when it occurred. Also consider if a different CGT event would
be triggered if Beau did continue to offer his beach house for sale.
CGT event H1 would occur at this time and Beau would make a capital gain on 5 November 2024 of
$60 000 (reduced by any incidental costs incurred by Beau in entering into the contract).
Note that if Beau did continue to offer his beach house for sale, the forfeited deposit could be included
in CGT event A1 and form part of the capital proceeds (and H1 would not apply) when the house was
subsequently sold (see Taxation Ruling TR 1999/19).
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 QUESTION 3.4

For the following scenarios, determine what CGT event has been triggered and identify the date of
the CGT event.
(a) Aarav Agarwal’s expensive watch is stolen on 4 March 2025, but he does not discover this until
10 March 2025. Insurance pays him for the loss of the watch on 9 April 2025.
(b) Janelle Jones informs her daughter that she will give her one of her investment properties as
a wedding gift on 1 February 2025. There is no contract for the sale/transfer of the property.
Transfer of the property takes place on 1 March 2025.
(c) A company, Breakfast Ltd (Breakfast), has a five-year agreement to be the sole supplier of
a certain breakfast cereal to a major supermarket chain. Three years into this agreement,
on 4 December 2024, the supermarket chain and Breakfast Ltd agree to cancel the original
agreement, with Breakfast Ltd being compensated financially for the early termination.
(d) Chen Zhen is a landlord who, on 3 May 2022, enters into a three-year lease with Donna Wilson.
In addition to the monthly rent, there is an upfront payment of $15 000 payable by Wilson to Chen
at the commencement of the lease. The lease expires on 2 May 2025.

3.3 CGT ASSETS

WHAT IS A CGT ASSET?
As introduced in the first section, ‘CGT core concepts’, a CGT event generally occurs to a defined ‘CGT
asset’ (see figure 3.1). That CGT asset must have been acquired on or after 20 September 1985.
A CGT asset is defined in s. 108-5(1). It includes any kind of property and extends to include legal or
equitable rights that are not property. Examples of a CGT asset include:
• land and buildings (treated together, or as separate assets — this may vary)
• shares in a company
• cryptocurrency
• units in a unit trust
• rights and options
• leases
• goodwill
• licences
• convertible notes
• contractual rights
• foreign currency
• any major capital improvement made to certain land or a pre-CGT asset
• collectables
• personal use assets
• interest in a partnership or in an asset of a partnership.
The knowledge of methods or techniques used to perform technical or practical tasks is commonly
referred to as know-how. This knowledge cannot be bought or sold. Know-how is not regarded as a CGT
asset because it is not property, or a legal/equitable right. However, knowledge and ideas can be protected
through various intellectual property statutes such as those created by copyrights, patents, trademarks and
designs. This change from know-how to intellectual property changes its status to a CGT asset.
Note that special CGT rules apply to CGT assets that are defined as collectables or personal use assets
(see figure 3.1).

QUESTION 3.5

Discuss whether the following are CGT assets.

(a) A patent to make a new highly efficient type of engine.
(b) A secret mining technique that allows minerals to be extracted from the ground more efficiently
as compared to current techniques.

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 (c) A contract to be employed as a senior manager by a leading retail chain, with an annual salary
of $100 000.
(d) The right to a safe workplace under laws that apply to all workers in Australia.

COLLECTABLES
Section 108-10(2) provides a definition of collectable as:
(a) artwork, jewellery, an antique, or a coin or medallion; or
(b) a rare folio, manuscript or book; or
(c) a postage stamp or first day cover;
that is used or kept mainly for your (or your associate’s) personal use or enjoyment.

An interest in, a debt arising from, or an option or right to acquire a collectable will also be a collectable
(ITAA97, s. 108-10(3)).

CGT Treatment
Any capital gain or loss is disregarded if the first element of the collectable’s cost base (or first element of
its cost if it is a depreciating asset) on acquisition was $500 or less (s. 118-10(1)).
The first element of cost base is what the person paid for the asset, or its market value if the person was
given the asset or acquired it through a non-arm’s length transaction. This $500 threshold excludes any
goods and services tax (GST) input tax credits, if these can be claimed. Where a taxpayer is registered
for GST and fulfils the other requirements for claiming an input tax credit on a cost base expenditure, the
input tax credit amount that the taxpayer is entitled to is not included in the CGT asset’s cost base. This is
explained later in this module (see ‘Additional cost base considerations’).
A set of collectables is taken to be a single collectable, so having the seller sell a set of individual separate
assets that were each acquired for no more than $500 would not stop the total acquisition being treated as
a collectable acquired for more than $500 (s. 108-15).
Example 3.5 illustrates the CGT implications involving the sale of a set of collectables.

EXAMPLE 3.5

CGT Treatment of Sets of Collectables

A taxpayer acquired an antique set of 24 pieces of cutlery consisting of knives, forks, dessert spoons and
teaspoons (usually sold as a set) for $2400.
Consider the CGT treatment if the taxpayer sold individual pieces of this set.
This would be considered a full set for CGT purposes. Thus, any gain or loss on the sale of individual
pieces of cutlery would need to be determined, even if the taxpayer claimed that, as there were 24 pieces,
the apportioned cost of individual pieces of that cutlery was $100 each, and so acquired at no more than
$500 each.

Importantly, any capital losses from collectables can only be offset against capital gains on other
collectables in either the current year or in a future year (s. 108-10(4)). A capital gain from a collectable
can qualify as a discount capital gain if all the eligibility conditions to apply the 50 per cent CGT discount
are met. Concessions are calculated in Step 6 of the CGT process and discussed in this module in the
section ‘Calculating net capital gain/loss’.

PERSONAL USE ASSETS

A personal use asset (Subdivision 108-C) is defined as a non-collectable asset, other than land or
buildings, used or kept mainly for personal use or enjoyment of the taxpayer or an associate (s. 108-20(2)
and (3)). A debt arising from, or an option or right to acquire, a personal use asset will also be a personal
use asset.

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Examples
Examples of personal use assets include boats, caravans, televisions and sporting equipment.
An option or right to acquire a personal use asset, a debt arising from a CGT event in which a personal
use asset was the subject of the event, and debt arising other than from gaining assessable income or
carrying on a business will also be a personal use asset (s. 108-20(2)). For example, the debt arising on a
personal, interest-free loan between a parent and their child is a personal use asset as it did not arise from
gaining income or carrying on a business.

CGT Treatment
Any capital gain is disregarded where the first element of the personal use asset’s cost base (or first element
of its cost if it is a depreciating asset) on acquisition was $10 000 or less (s. 118-10(3)). The $10 000
threshold excludes any GST input tax credit, if these can be claimed. Where a taxpayer is registered for
GST and fulfils the requirements for claiming a GST input tax credit on a cost base expenditure, the input
tax credit amount does not form part of the cost base (see ‘Additional cost base considerations’).
Where personal use assets are a set and would ordinarily be disposed of as such, the set of personal use
assets will be taken to be a single asset for the purposes of the $10 000 threshold (s. 108-25).
Any capital loss arising from a personal use asset is disregarded for CGT purposes regardless of
the asset’s cost base (s. 108-20(1)). Such losses are not available to offset capital gains on any type of
CGT asset.
Example 3.6 considers a case involving both personal use assets and other assets. This example will
help you understand how to apply the personal use asset provisions.

EXAMPLE 3.6

Personal Use Assets

On 30 August 2024, Sophie McCullough disposed of the following assets, all of which were acquired after
19 September 1985.

Asset Cost base Capital gain/(loss)

Shares $7800 $3270
Painting $1750 ($1250)
Motor boat $8000 $2500

Consider what capital gains and losses Sophie has, and if any of the losses can be used to offset any
of the gains.
As a result of CGT event A1, Sophie will incur a capital gain of $3270 in respect of the shares. The
capital loss of $1250 from disposal of the painting, which is a collectable, cannot be offset against the
capital gain from the shares. It can only be offset against a gain from a collectable, and shares are not
collectables. The motor boat is a personal use asset. As the first element of its cost on acquisition did not
exceed $10 000, the capital gain on the disposal of the boat is disregarded.

QUESTION 3.6

In the 2024–25 tax year, Dan Davies makes the following sales:
• shares sold for $90 000 that had been purchased for $100 000 two years earlier
• Spider-Man costume worn by an actor in a famous movie, sold for $12 000 — he had bought it on
eBay for $11 000 three years earlier
• an antique table (that Dan’s family uses when having their nightly family dinner) sold for $45 000 —
it had been purchased 18 months earlier for $30 000
• a 100-year-old stamp sold for $15 000 and had been purchased for $25 000 four years previous.
Disregarding the 50 per cent discount, what is Dan’s net capital gain/loss from these sales?
Include in your answer what capital losses (if any) Dan can carry forward.

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SEPARATE CGT ASSETS
A separate CGT asset (Subdivision 108D) differentiates the common law principle that what is attached
to the land is part of the land. That is, in certain circumstances, buildings or structures on land, or capital
improvements to a CGT asset, can be treated as separate assets for CGT purposes. Therefore, if the principal
asset of land was acquired and contracted before 20 September 1985 (pre CGT), any improvements or
additions to the principal asset added after 20 September 1985 (post CGT) will be treated as separate CGT
assets if it meets certain scenarios, as outlined below.
Note that for assets acquired before 20 September 1985 but without a contract, the construction is said
to have started on or after 20 September 1985. Therefore, all land, structures and improvements without a
contract prior to 20 September 1985 will be treated as post-CGT assets for CGT purposes.
The four main scenarios that apply are outlined in the legislation.
1. A building is a separate asset from the land (s. 108-55). In this case, a post-CGT structure or building
is separate to the post-CGT land if a balancing adjustment provision applies to the structure or building
(see Subdivision 40D or s. 355-315, discussed in module 2). Alternatively, a post-CGT building is
separate to the pre-CGT land (regardless of whether the building is subject to a balancing adjustment
provision).
2. A depreciating asset that is part of the building is a separate CGT asset from the building or structure
(s. 108-60).
3. Land that is acquired post CGT is adjacent to land acquired pre CGT and both are amalgamated into
one title (s. 108-65).
4. Capital improvements are made to land or unrelated improvements are made to pre-CGT assets
(s. 108-70). A capital improvement is generally a structural change that is added to an existing CGT
asset or there is a reconstruction or replacement of the entire existing CGT asset. A capital improvement
will generally enhance the value, or improve the efficiency, of the existing asset.
Examples
An example of the first scenario is where the taxpayer constructed a timber mill building on land they
owned since 1990. If the building is subject to a balancing adjustment on its disposal, loss or destruction,
the building will be taken to be a separate CGT asset from the land.
An example of the second scenario is where the taxpayer owns a factory from which they carry on a
business. They install restrooms for the employees and the plumbing fixtures and fittings are depreciating
assets. These assets are taken to be a separate CGT asset from the factory.
An example of the third scenario is where the taxpayer bought a block of land pre-September 1985.
On 1 June 1999, the taxpayer bought another block of land adjacent to the first block. The taxpayer
amalgamated the titles to the two blocks into one title. In this case, the second block is treated as a separate
CGT asset and the taxpayer can make a capital gain or loss from it if they sell the whole area of land.
In the final scenario, a capital improvement to an original pre-CGT asset is taken to be a separate CGT
asset if its cost base when a CGT event occurs in relation to the original asset is:
• more than the CGT improvement threshold of $182 665 for the 2024–25 income year in which the event
happened, and
• more than 5 per cent of the capital proceeds from the event.
Note that both tests must be satisfied for the asset to be considered a separate CGT asset. If only one
test is satisfied and the other is not, the asset is not considered to be a separate CGT asset. Thus, the sale
of the asset is completely exempt for CGT purposes.
On the other hand, if a capital improvement is treated as a separate CGT asset, then the capital proceeds
resulting from the CGT event will be apportioned between the original asset and the capital improvement
in working out the capital gain (s. 116-40).

CGT TREATMENT
Example 3.7 highlights the different outcomes of undertaking a capital improvement.

EXAMPLE 3.7

Separate CGT Assets

In December 1984, Malcolm purchased a Sydney investment property with two rooms for $120 000,
$80 000 for the land and $40 000 for the house. In order to enhance the value of the property and increase
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 the rental income, Malcolm extended the house in 1995 by adding another two rooms of the same size
and quality as the existing rooms. This extension cost $90 000. Malcolm sold the property in September
2024 for $1 million.
At the time of this transaction, a licensed property valuer indicated that the land was valued at $700 000
and the house was valued at $300 000, with the two newer rooms and the two original ones in very similar
condition. The improvement threshold is $182 665 for the 2024–25 income year.
Scenario 1
Assume that the indexed cost base of the extension (capital improvement) at the time of sale in September
2024 (when the CGT event occurs) is $150 000.
The first test is not satisfied because the cost of the extension ($150 000) is less than the 2024–25 CGT
improvement threshold of $182 665.
The second test is satisfied because the cost of the extension ($150 000) is more than $50 000 (5% ×
$1 million) at the time of sale.
Therefore, the extension is not regarded as a separate CGT asset because both tests were not satisfied.
Hence, the sale of the property is exempt from CGT.
Even though Malcolm has made a capital gain of $880 000 (the proceeds of $1 million minus the
original value of $120 000), he does not include this capital gain in his assessable income for the
2024–25 income year because the whole house is a pre-CGT asset (s. 104-10(5)).
Scenario 2
If the cost base of the extension (indexed amount) at the time of sale is $200 000, the extension will be
taken to be a separate CGT asset because it meets the two threshold tests contained in s. 108-70(2). That
is, the value of $200 000 is above the improvement threshold ($182 665) and it is greater than 5 per cent
of the capital proceeds pertaining to this extension ($1 million × 5% = $50 000). Note that both tests must
be satisfied for the asset to constitute a separate CGT asset.
According to s. 116-40, Malcolm needs to apportion the capital proceeds that he received from the sale
between the original house and the extension. As stated, two rooms were added of the same size and
quality as the original rooms, and they were in very similar condition, according to the licensed property
valuer. Therefore, it would be reasonable to apportion the proceeds pertaining to the four-room house on
a 50/50 basis, being $150 000 (half of the value of the house, $300 000) each to the original house and
the extension.
Based on the discussion, the calculation of Malcolm’s taxable capital gain relating to this transaction
will be as follows.

Original value/cost Capital Capital gain

incurred proceeds or loss
CGT assets ($) ($) ($)
Original asset (land and original two rooms) 120 000 850 000* 0**
Capital improvement (the added two rooms) 90 000**** 150 000 60 000***
Total 60 000

*(700 000 + 150 000)

**This original house is a pre-CGT asset. Therefore, any capital gains or losses are disregarded (s. 104-10(5)).
***This extension is treated as a separate CGT asset. Thus, apportionment applies (ss. 116-40 and 104-10(4)).
****Note that the original value of the extension is given at $90 000, not the improved value of $200 000, as this value is
used for the threshold test.
Source: Based on Bevacqua, J, Marsden, S, Morgan, A, Morton, E, Devos, K & Swapna, V 2024, Australian taxation,
3rd edn, pp. 114–115, John Wiley & Sons, Brisbane.

QUESTION 3.7

On 1 February 1982, Reg Peters purchased a block of land for $2.9 million on which to erect a
factory. After receiving several quotes for the construction, Reg eventually signed a contract on
15 March 2021 with Trusted Builders Ltd.
Construction of the factory commenced on 25 January 2022. The factory was completed on the
30 June 2023 at a cost of $3.5 million. However, due to financial difficulties, the land and buildings
were later sold for $8 million on 1 September 2024. An independent valuation revealed that the land
component of this value was $5.2 million at the time of sale.
Advise Reg Peters of the CGT treatment of the transaction for the 2024–25 tax year.

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3.4 DETERMINING GAIN/LOSS FROM CGT EVENT
HOW TO CALCULATE THE GAIN/LOSS
Having established that a CGT event has occurred and identified the relevant asset(s), Step 3 is to calculate
the capital gain or capital loss that arises from each CGT event.
Each CGT event outlines how to calculate the capital gain or capital loss for that CGT event. There are
rules that apply to many events, being that the taxpayer must:
• determine the capital proceeds arising from the CGT event
• determine the cost base of the CGT asset
• subtract the cost base from the capital proceeds.
Where the capital proceeds exceed the cost base, a capital gain arises.
If the capital proceeds are less than the cost base, then the reduced cost base must be ascertained. If the
reduced cost base exceeds the capital proceeds, there is a capital loss.
If the capital proceeds are less than the cost base but more than the reduced cost base, there is neither a
capital gain nor a capital loss.
Figure 3.6 is a flowchart demonstrating how to determine the capital gain and loss.

FIGURE 3.6 Flowchart of determining capital gain/loss for many of the CGT events

Capital gain
Are proceeds greater Consider whether indexation or CGT
than cost base? Yes discount is available to reduce
tax payable (refer to later notes).

No

Capital loss
Are proceeds less than Consider whether loss is available to
reduced cost base? Yes offset other capital gains made in
current or future tax year.

No

No gain, no loss.

Source: CPA Australia 2025.

Now let’s turn to the definitions and operation of capital proceeds, cost base and reduced cost base.

CAPITAL PROCEEDS
The capital proceeds arising from a defined CGT event is the sum of:
• any money the taxpayer has received or is entitled to receive
• the market value of any property the taxpayer received or is entitled to receive in respect of the CGT
event occurring (Division 116).

Determining Capital Proceeds: The General Rule

Capital proceeds will be taken into account at the time of the CGT event, irrespective of whether they were
actually received at that time.
A CGT event involving the taxpayer supplying a CGT asset will sometimes result in the taxpayer
incurring a GST liability. This will typically be the case where the taxpayer is registered for GST and the
other requirements of a taxable supply (see module 6) are fulfilled. In such an instance, the capital proceeds
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will not include the GST liability amount (s. 116-20(5)). For instance, if a business that is registered for
GST sells a commercial property for $2.2 million and, as a result, incurs a GST liability of $200 000, then
the capital proceeds would be $2 million.
Where the capital proceeds are in a foreign currency, it is necessary to determine the Australian
equivalent at the time of the CGT event (s. 960-50) (refer to module 2 for the foreign currency
translation rules).
Example 3.8 provides some facts illustrating how capital proceeds are ascertained when a CGT asset is
sold by instalments.

EXAMPLE 3.8

Capital Proceeds
Megan Marshall sells a CGT asset for $90 000 and receives payments from the purchaser in three equal
annual instalments of $30 000 each. Consider Megan’s capital proceeds attributable to the sale of the
CGT asset.
Megan’s capital proceeds in the year of the CGT event will be $90 000, even though she may only receive
$30 000 at the time of selling the asset.
If Megan was registered for GST, and the supply of this CGT asset fulfilled the other requirements of
constituting a taxable supply, then the capital proceeds would not include the portion of the $90 000 that
constitutes Megan’s GST liability.

Modifications to the Determination of Capital Proceeds

There are six modifications to the general rule in the calculation of capital proceeds. Note that not all
capital proceeds modifications apply to all CGT events (s. 116-25).
These modifications are explained in table 3.3.

TABLE 3.3 Capital proceeds — modifications to the general rule

Modification Description

1. Market value substitution rule (s. 116-30)† Capital proceeds are deemed to be equal to the market value of
the underlying CGT asset where:
• no proceeds are received (e.g. a gift)
• some or all of the proceeds cannot be valued
• actual proceeds differ from the market value of the asset, and
the parties to the transaction did not deal with each other on an
arm’s-length basis (i.e. parties are not acting independently, or
one party exercises influence or control over the other)
• actual proceeds differ from the market value and the CGT event
is event C2 (cancellation, surrender and similar endings).

2. Apportionment rule (s. 116-40) Capital proceeds are apportioned if:

• a payment relates to more than one CGT event
• only part of the proceeds relates to the CGT event.

3. Non-receipt rule (s. 116-45) Capital proceeds are reduced by any amount not received after
reasonable steps have been taken to recover the amount. The
non-receipt must not be attributable to anything that the taxpayer
or taxpayer’s associate has done or omitted to do.

4. Repaid rule (s. 116-50) Capital proceeds are reduced by any non-deductible amount a
taxpayer has to repay.

5. Assumption of liability rule (s. 116-55) Capital proceeds are increased if another entity acquired the CGT
asset from the taxpayer subject to a liability by way of security
over the asset. The increase is equal to the amount of the liability
the other entity assumes.

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 6. Misappropriation rule (s. 116-60) Capital proceeds are reduced if an employee or an agent of the
taxpayer misappropriates (whether by theft, embezzlement,
larceny or otherwise) all or part of those proceeds. However, if
the taxpayer later receives an amount as recoupment for all or part
of the misappropriated proceeds, capital proceeds are increased
accordingly.
† The market value substitution rule does not apply to:
• CGT event D1 (creating contractual rights) where no capital proceeds are received
• the expiry of a CGT asset or the cancellation of a statutory licence (both CGT event C2) where no capital proceeds are received
• CGT event C2 when the event occurs in respect of shares or units in widely held companies or unit trusts (at least
300 shareholders/unitholders) and some capital proceeds are received (s. 116-30(2B)).
Source: Based on Income Tax Assessment Act 1997 (Cwlth), Division 116, Federal Register of Legislation, accessed October 2024,
[Link]/Series/C2004A05138.

Examples 3.9 and 3.10 illustrate the operation of some of the capital proceeds modification rules.

EXAMPLE 3.9

Market Value Substitution Rule (Modification 1)

Soren Pedersen gifts land worth $300 000 to his son. Consider the capital proceeds to Soren and the CGT
difference if Soren sold the land to his son for $100 000.
To determine the capital proceeds in calculating any capital gain or loss under CGT event A1, Soren
is deemed to receive capital proceeds of $300 000 (market value substitution rule). The capital proceeds
would also be $300 000 if Soren sold the land worth $300 000 to his son for $100 000, as this would be
regarded as a non-arm’s length transaction (i.e. between father and son).

EXAMPLE 3.10

Assumption of Liability Rule (Modification 5)

Greg Goodwin sells land in return for $360 000 in cash and the buyer becoming responsible for a $160 000
liability under Greg’s mortgage. Consider how the assumption of liability rule affects the capital proceeds.
The capital proceeds of $360 000 are increased by $160 000 to $520 000 (assumption of liability rule).

QUESTION 3.8

Prisha Patel enters into a contract to sell her investment property in exchange for:
• $600 000 in cash
• the buyer’s car, worth $50 000
• the buyer taking over her mortgage of $200 000.
However, of the $600 000 cash Prisha is supposed to receive, she only receives $550 000
because her personal assistant, who helped manage the settlement, has stolen $50 000 and cannot
be located.
In addition, it turns out that the whole property is termite infested. The buyer subsequently sues
Prisha because the sales contract states that the property has no termites. Prisha settles the legal
action by giving the buyer $20 000.
What are Prisha’s capital proceeds?

COST BASE
The cost base generally includes all non-deductible expenditure incurred in acquiring, maintaining,
improving and disposing of a CGT asset.
Where a CGT event occurs in relation to a CGT asset, the asset’s cost base must generally be calculated
in order to determine the capital gain. The gain is generally the difference between capital proceeds and
the cost base.
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 As with capital proceeds, the cost base is modified in certain circumstances, often by substituting market
value for any amounts actually paid for an asset.
For assets acquired before 21 September 1999, the cost base may also be increased by indexation. This
is discussed in the section ‘Indexed cost base’.
Where a capital loss has arisen from a CGT event, the amount of that loss is calculated by reference to
the reduced cost base, which can be different to the cost base. This is discussed in the section ‘Reduced
cost base’.

Five Elements of Determining Cost Base

Section 110-25 states that an asset’s cost base consists of five elements. These elements are shown in
table 3.4.

TABLE 3.4 Five elements of cost base

Element Examples

1. The money paid, or required to be A taxpayer pays $1000 for a painting at an art auction. The first
paid, in acquiring the asset plus the element of the painting’s cost base is $1000.
market value of any property given or
A taxpayer purchases land for $600 000. The vendor agrees that the
required to be given.
purchase price can be paid in three monthly instalments of $200 000.
The first element of the land’s cost base is $600 000, even if all
instalments have not yet been paid (s. 110-25).

2. Incidental costs incurred where no The incidental costs can only include the following costs, which, with
tax deduction has been or will be the exception of the second last bullet point (concerning the head
allowed for these costs. company of a consolidated group), relate to acquiring the CGT asset,
or to the CGT event (s. 110-35):
• remuneration for the services of a surveyor, valuer, auctioneer,
accountant, broker, agent, consultant or legal adviser
• transfer costs
• stamp duty
• advertising and marketing costs
• valuation and apportionment costs
• search fees
• conveyancing kit costs
• borrowing expenses, such as loan application and mortgage
discharge fees
• costs incurred by a head company of a consolidated group to a
person outside the group that reasonably relates to a CGT asset
transferred between members of the group
• termination or similar fees as a direct result of the ownership of an
asset ending.

3. The costs of owning the CGT asset, These costs include:

but only where the asset was • interest on money borrowed to acquire the asset
acquired after 20.08.91 and where • costs of maintaining, repairing and insuring it
no tax deduction has been or will be • rates or land tax
allowed for these costs. • interest on money borrowed to refinance the money borrowed to
acquire the asset
• interest on money borrowed to finance capital expenditure to
increase the asset’s value.

4. Capital expenditure incurred: Initial (non-deductible) repair expenditure incurred on a CGT asset
• for the purpose or expected effect after its acquisition would be included in the fourth element of the cost
of increasing or preserving the base of the asset (see Taxation Determination TD 98/19; see
asset’s value (does not apply to module 2).
capital expenditure incurred in
relation to goodwill)
• that relates to installing or moving
the asset.

5. Capital expenditure incurred to Compensation payment made to a potential purchaser of a CGT asset
establish, preserve or defend title when the sale contract is terminated would be included in the fifth
to the asset or a right over the asset. element of the cost base of the asset.

Source: Based on Income Tax Assessment Act 1997 (Cwlth), Subdivision 110-A, Federal Register of Legislation, accessed October
2024, [Link]/Series/C2004A05138.
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Additional Cost Base Considerations
Any expenditure relating to illegal activities, entertainment, penalties and bribes to a public official is
excluded from the cost base of a CGT asset (Division 26 ITAA97).
Where the taxpayer is registered for GST and is able to claim GST input tax credits upon making cost
base expenditures (which will reduce their net GST liability, see module 6), the cost base will not include
the net input tax credit amounts (s. 103-30). For instance, a GST-registered business that purchases a
business premises for $660 000 (GST inclusive) and is entitled to claim an input tax credit of $60 000
will only include $600 000 in the first element of the cost base of the premises.
For CGT assets acquired after 13 May 1997, the cost base is reduced to the extent that an amount in
respect of the asset’s cost is deductible (e.g. a capital works deduction for a building) or a non-assessable
recoupment of costs is received in respect of the asset (s. 110-45). Note that expenditures that have been
deducted, or are deductible, are excluded from the cost base (s. 110-45(1B) and (2)) and the reduced cost
base (s. 110-55(4)). That is, if the taxpayer has already had the benefit of the income tax deduction reducing
taxable income, they cannot also gain the benefit of an increased cost base and potential reduction in the
capital gain (see TD 2005/47).

QUESTION 3.9

Adam Zwar purchases a block of land with the intention of erecting two townhouses on it. The
following costs were incurred by Adam in acquiring the land (net of any GST input tax credits).

Item $
Purchase price 250 000
Legal fees 3 500
Stamp duty 10 660
Valuation fees 1 500

Calculate the cost base.

Gifting and the Market Value Substitution Rule

The most common modification to the cost base is the replacement of the actual price paid with the market
value of the asset at the time of acquisition. This is known as the ‘market value substitution rule’ (discussed
in the earlier section ‘Capital proceeds’).
The market value substitution rule applies for the first element of the cost base when, at the time of
acquisition of the asset:
• there is no expenditure incurred by the taxpayer, which is generally when they are in the receipt of a
gift, or
• some or all of the expenditure incurred is unable to be valued, or
• the asset was acquired in a transaction where the parties were not dealing at arm’s length in connection
with the acquisition (s. 112-20(1)).
Example 3.11 illustrates the impact of a gift of a CGT asset from both the donor’s and recipient’s
perspective.

EXAMPLE 3.11

Gifting and the Market Value Substitution Rule

Yasmin Liu received a gift from her parents of 3000 shares in Angels Ltd. At the time, the market value of
each share in Angels Ltd was $10. Consider the first element of cost base for Yasmin due to receiving the
shares, the capital proceeds attributable to Lucy’s parents due to gifting her the shares.
Because Yasmin did not incur any expenditure in acquiring the asset, she would be deemed to have
acquired the shares at their market value of $10 per share on the date of acquisition.
The first element of the cost base of Yasmin’s shares is, therefore, $10 × 3000 = $30 000.
Yasmin’s parents would be deemed to have disposed of the shares at their market value at the time
of the gift (see the earlier section ‘Modifications to the determination of capital proceeds’). Their capital
proceeds would also be $10 × 3000 = $30 000.
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 Section 112-20(2) provides that the market value substitution rule will not apply, despite the parties not
dealing at arm’s length, where the acquisition of the asset resulted from another entity doing something
that did not constitute a CGT event, and what was paid to acquire the asset was not more than its market
value at the time of acquisition. This would typically apply where a company issues shares or a trust issues
units, for less than the market value.
Note that, although in general the issuing of company shares or trust units does not trigger a CGT event,
in some limited situations it can trigger CGT event K8. This will be the case where such shares or units
are issued to other related parties in an attempt to shift value from the existing owners of the interests
in the company or trust to the new owners of the interests in the company or trust. For instance, a sole
shareholder of a company that causes further shares in that company to be issued to their spouse at under
market value is value shifting by essentially devaluing their own shareholding, and so they are potentially
triggering CGT event K8. (The details of CGT event K8 are beyond the scope of this course.)
Example 3.12 presents a situation where the market value substitution rule does not apply to a
share issue.

EXAMPLE 3.12

Non-Applicability of Market Value Substitution Rule

Albert fully owns a company called QLT Pty Ltd (QLT). Albert arranges for QLT to issue 1000 shares worth
$100 000 to himself in exchange for him paying the company $40 000. Although the parties were not
dealing at arm’s length, the market value substitution rule will not apply because (s. 112-20(2)):
• Albert’s acquisition resulted from another entity (QLT) doing something that did not constitute a CGT
event, being the issuing of shares (note that CGT event K8 would not apply here because there is no
attempt to shift value to another shareholder)
• Albert paid $40 000 to QLT, which is less than the market value of the shares of $100 000.
As a result, the first element of the cost base of the shares for Albert would be what he paid for them,
being $40 000.
However, if Albert had overpaid for the shares, for instance, by paying $200 000, the latter requirement
of s. 112-20(2) would not be fulfilled. As a result, the market value substitution rule would deem the first
element of the cost base of the shares to be their market value of $100 000, not $200 000.

INDEXED COST BASE

Indexing of the cost base occurs for CGT assets acquired prior to 11.45 am on 21 September 1999. The
following three conditions must be met for indexing to be applied.
1. The asset was acquired at or before 11.45 am on 21 September 1999.
2. The asset was acquired at least 12 months before a CGT event occurred in relation to the asset.
3. The taxpayer elects to use the indexation method.
Increasing the cost base by indexation (s. 110-36) has the result of decreasing any capital gain from the
CGT event.
Although indexation is available for all taxpayers, its importance has been severely limited as indexation
was frozen from the quarter ended 30 September 1999 and is not available for assets acquired after
21 September 1999. Further, expenditure on CGT assets acquired before this date can only be indexed
to September 1999. Indexation is never available when calculating a capital loss.

Calculation of Indexed Cost Base

FORMULA TO LEARN

To calculate the indexed cost base, these steps should be followed.

1. Elements 1 (money paid plus market value), 2 (incidental costs), 4 (capital expenditure for asset’s value)
and 5 (capital expenditure to establish title or right over asset) of the cost base should be indexed by
the consumer price index by multiplying each of the relevant expenditures by the indexation factor.
2. The unindexed element 3 (costs of ownership) should be added.
Any expenditure incurred on a CGT asset after 11.45 am on 21 September 1999 cannot be indexed.

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 So, in order to index expenditure, it must be multiplied by the indexation factor, calculated as follows.
The index number for the quarter of the year in which the CGT event occurred to the asset
(frozen at the quarter ended 30 September 1999 if CGT event occurred after that date)
The index number for the quarter in which the amount was paid
(or the expenditure incurred)

The resultant indexation factor is rounded to three decimal places, rounding up if the fourth decimal
place is five or more (s. 960-275(5)).
In practical terms, if indexation is available, then unless the CGT event occurred prior to the September
1999 quarter, the numerator for the indexed cost base formula will be 68.7 (the figure for the September
1999 quarter, see table 3.5) as indexation is frozen from the September 1999 quarter onwards.
Consumer price index (CPI) numbers are published for all quarters up to the current date and are used
for other tax and superannuation purposes. Note that table 3.5 stops at September 1999, when indexation
was frozen for CGT cost-base purposes.

TABLE 3.5 CPI numbers

Year 31 March 30 June 30 September 31 December

1999 67.8 68.1 68.7 —

1998 67.0 67.4 67.5 67.8

1997 67.1 66.9 66.6 66.8

1996 66.2 66.7 66.9 67.0

1995 63.8 64.7 65.5 66.0

1994 61.5 61.9 62.3 62.8

1993 60.6 60.8 61.1 61.2

1992 59.9 59.7 59.8 60.1

1991 58.9 59.0 59.3 59.9

1990 56.2 57.1 57.5 59.0

1989 51.7 53.0 54.2 55.2

1988 48.4 49.3 50.2 51.2

1987 45.3 46.0 46.8 47.6

1986 41.4 42.1 43.2 44.4

1985 37.9 38.8 39.7 40.5

Source: Based on ATO 2024, ‘Consumer price index (CPI) rates’, accessed October 2024, [Link]/tax-rates-and-
codes/consumer-price-index.

For CGT events that occur from 21 September 1999, some taxpayers can choose to apply the CGT
discount instead of using an indexed cost base. The CGT discount is discussed in the section ‘Calculating
net capital gain/loss’.

REDUCED COST BASE

We know that a capital gain is determined by reference to an asset’s cost base or indexed cost base.
However, a capital loss is determined with reference to an asset’s reduced cost base.
All elements of the cost base discussed previously (except for the third element — costs of ownership
of the CGT asset incurred after 20 August 1991) form part of the reduced cost base.

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 When determining the reduced cost base, the taxpayer excludes the following elements (s. 110-55):
• any amount allowed or allowable as a deduction
• any decline in value of a CGT asset (i.e. depreciation deduction)
• any recouped costs not included in assessable income
• certain costs that give rise to a tax offset rather than a deduction
• if the CGT asset is shares in a company, certain distributions from amounts derived by the company
before you acquired the shares
• any expenditure on illegal activities, entertainment, contributions to political parties, water infrastructure
improvement payments, penalties and bribes of public officials
• any GST input tax credits after 19 February 2004 (s. 103-30).
Items included in the reduced cost base are never indexed.
Example 3.13 illustrates how a reduced cost base, used in ascertaining a capital loss, is calculated.

EXAMPLE 3.13

Determining Reduced Cost Base

Deirdre Green acquired an investment property in November 2010 for $400 000. The incidental costs of
acquisition and disposal were $60 000. Deirdre had claimed a capital works deduction of $24 000 on
the construction cost of the dwelling (capital works deductions are available under Division 43 — see
module 2). On 10 May 2025, Deirdre sold the property for $420 000.
Consider the capital loss due to the sale of the property.
As there is a capital loss here, it is calculated as the reduced cost base minus the capital proceeds. The
reduced cost base is calculated as follows.

Item $
Cost of property (first element) 400 000
Add: Incidental costs (second element) 60 000
Less: Capital works deduction (as this is a deduction, it is subtracted from the reduced
cost base) (24 000)
Total reduced cost base 436 000
To calculate the capital loss:
Less: Capital proceeds (sales price) (420 000)
Capital loss 16 000

QUESTION 3.10

Sandra Savage purchased shares in March 1993 for $50 000. Sandra sold the shares in February
2025 for $55 000, at which time she incurred brokerage fees of $200. If possible, Sandra wishes to
use indexation to minimise her CGT liability.
What is Sandra’s capital gain or loss on the shares?

DETERMINING EXCEPTION OR EXEMPTION

Pre-CGT Assets
The chief exemption to CGT is of course pre-CGT assets. These are assets acquired before 20 September
1985. There is one exception to this exemption — CGT event K6. CGT event K6 may result in a capital
gain if certain CGT events occur to pre-CGT shares in a company, or pre-CGT interests in a trust.
The date of acquisition of the CGT asset is therefore very important. Refer back to table 3.2, which lists
the timing of each CGT event.

Specific CGT Exemptions

Subdivision 118-A exempts various capital gains and losses from CGT. The most common exemptions
fall into three main categories. These categories are outlined in table 3.6 and include: exempt assets in
their own right; anti-overlap provisions that prevent double taxation; and those described as exempt or
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loss-denying transactions. Subdivision 118-D separately covers CGT events pertaining to insurance and
superannuation transactions.

TABLE 3.6 Three main categories of specific CGT exemptions in Subdivision 118-A

Exempt assets Anti-overlap provisions Exempt or loss-denying transactions

A capital gain or loss made from a car A capital gain or loss made A capital gain or loss made from a
(which is defined as a motor vehicle from a CGT event happening CGT event relating to compensation or
designed to carry a load of less than one to a depreciating asset damages received for any wrong, injury
tonne and fewer than nine passengers), (however, not CGT event K7) or illness suffered by the taxpayer or
motorcycle or similar vehicle (s. 118-5). (s. 118-24) their family (s. 118-37)
Note that a car may be classified as
a collectable under s. 108-10(2) if it
is an antique or a personal use asset
under s. 108-20(2) if it is used or
kept mainly for the taxpayer (or their
associate’s) personal use or enjoyment.
Nevertheless, in either case, it remains
a car for the purposes of s. 118-5 and
any capital gain or loss is disregarded
(TD 2000/35)

A capital gain or loss made from a A capital gain or loss from A capital gain or loss made from a
decoration awarded for valour or brave a CGT asset classified as CGT event relating to winnings or
conduct (unless the taxpayer paid trading stock at the time of a losses from gambling, a game or a
money or gave any other property for CGT event (s. 118-25) competition with prizes (s. 118-37)
it) (s. 118-5)

A capital gain or loss from a collectable A capital gain or loss due to the
where the first element of the cost base taxpayer receiving a reimbursement
(acquisition cost) is $500 or less (refer or payment of their expenses (but not
back to the section ‘Collectables’ under for the loss, destruction or transfer of
‘CGT assets’) (s. 118-10) an asset) under a scheme established
by an Australian government agency,
a local government body or foreign
government agency (s. 118-37)

A capital gain from personal use assets A capital gain or loss arising from a
where the first element of the cost base reimbursement or payment of the
(acquisition cost) is $10 000 or less taxpayer’s expenses (but not for the
(s. 118-10) (refer back to the section loss, destruction or transfer of an
‘Personal use assets’ under ‘CGT asset) under a scheme established
assets’) under an Act or legislative instrument
(e.g. regulations or local government
by-laws) (s. 118-37)

Any capital loss from a personal use A capital gain or loss arising from a
asset (s. 118-10) (refer back to the right or entitlement to a tax offset,
section ‘Personal use assets’ under deduction or a similar benefit under
‘CGT assets’) an Australian law, or under the law of a
foreign country (s. 118-37)

A capital gain or loss from CGT assets A capital gain or loss arising from
used solely to produce exempt income CGT event C2 happening due to the
or some amounts of non-assessable, ending of rights that directly relate
non-exempt (NANE) income (i.e. tax-free to the breakdown of a marriage or
income) (s. 118-12) relationship, including cash received
as part of the marriage or relationship
breakdown settlement (s. 118-75)

Note: In certain circumstances, exemptions from the CGT regime include a capital gain or loss arising from a general insurance
policy, a life insurance policy or an annuity instrument (s. 118-300).
Source: Based on Income Tax Assessment Act 1997 (Cwlth), Subdivisions 118-A and 118-D, Federal Register of Legislation, accessed
October 2024, [Link]/Series/C2004A05138.

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MAIN RESIDENCE EXEMPTION
An important and commonly used exemption is the main residence exemption (Subdivision 118-B). The
main residence exemption means that there is no capital gain or capital loss made from a CGT event that
relates to a dwelling that is the taxpayer’s main residence (s. 118-110).
The main residence rule can change depending on how the taxpayer came to own the dwelling and how
they subsequently treated it — for example, if it was later rented out. There are also different rules relating
to foreign investment and the main residence.
Definition of Dwelling
A dwelling is defined under the legislation as a unit of residential accommodation and includes a building,
caravan, houseboat or other mobile home. It also includes the land under the unit of accommodation
(s. 118-115).
The land that is adjacent to a dwelling will be eligible for the main residence exemption where the land
was used for private and domestic purposes. The maximum area of such land eligible for the exemption is
two hectares (s. 118-120). However, where a taxpayer’s land exceeds two hectares, the taxpayer can select
which two hectares the main residence exemption applies to (TD 1999/67).
Definition of Main Residence
There is no definition of ‘main residence’ in the taxation legislation. Instead, the ordinary meaning applies
and this involves a question of fact. The following are taken into account:
• the length of time the taxpayer has lived in the dwelling
• the place of residence of the taxpayer’s family
• whether the taxpayer’s personal belongings have been moved into the dwelling
• the address to which the taxpayer’s mail is delivered
• the taxpayer’s address on the electoral roll
• the connection of services such as telephone, gas and electricity
• the taxpayer’s intention in occupying the dwelling
• whether the taxpayer freely chooses or is obliged to spend time at a residence (CASE 26/93 AAT).

AMOUNT OF MAIN RESIDENCE EXEMPTION AVAILABLE

Subdivision 118-B (ss. 118-100–118-210) states that the main residence exemption will not apply where
the residence was:
• only a main residence for part of the ownership period, or
• used for the purpose of producing assessable income.
More than One Residence
If a taxpayer owns more than one residence that qualifies as a main residence, they must choose which
one is the main residence for CGT purposes. This choice occurs in the income year when the CGT event
occurs in relation to the dwelling in question.
Where a taxpayer has a main residence and acquires another dwelling that is to become the new main
residence, then both dwellings are treated as the taxpayer’s main residence for the shorter of:
• six months ending when the ownership interest in the existing main residence ends, or
• the period between the acquisition of the new ownership interest and end of the old ownership interest
(s. 118-140(1)).
This change of main residence exemption only applies where the existing main residence was used as a
main residence for a continuous period of at least three months in the preceding 12 months, ending when
the taxpayer’s ownership interest in it ends and it was not used for income-producing purposes during that
12-month period (s. 118-140(2)).
Absence from Main Residence
A taxpayer who initially occupies a dwelling as a main residence and then is absent from the dwelling can
choose to continue to treat the dwelling as the main residence (s. 118-145):
• for a maximum of six years if the dwelling, which is the main residence, is used to produce assessable
income during the absence. A taxpayer is able to claim a maximum period of six years every time the
dwelling becomes, and then ceases to be, the individual’s main residence
• for an indefinite period if the dwelling is not used for income-producing purposes during the period
of absence.
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 This absence rule will only apply if another dwelling is not being claimed as a main residence at the
same time.
Example 3.14 illustrates an instance where the taxpayer is entitled to the absence from main residence
exemption.

EXAMPLE 3.14

Absence from Main Residence

In May 2017, Trent Nickles acquired a house in Melbourne and occupied it immediately as his main
residence. However, in January 2018, Trent was posted overseas for a period of three years as a
requirement of his employment with the Defence Force. During this period, Trent rented out his property
to local student tenants. On returning to Australia in January 2021, Trent moved back into his house, lived
in it and then eventually sold it in December 2024, making a capital gain. The property was Trent’s only
main residence during the period 2017–24.
Will Trent be subject to CGT on the sale of his property?
Trent will be entitled to the full main residence exemption, as his period of absence while the property
was rented was less than six years and Trent had re-established the home as his main residence upon his
return. The capital gain will be disregarded.

Different Main Residences

If a spouse has a different main residence, then a choice has to be made by the couple about which dwelling
will be the main residence. Where the spouses nominate a different dwelling as their main residence and
each spouse has a 50 per cent interest in each dwelling, then each dwelling is deemed to be a main residence
at 50 per cent.
However, this also applies in cases where the spouses nominate a different dwelling as their main
residence and a spouse has an interest in a property of more than 50 per cent; in this case, the dwelling is
taken to be the main residence for only half of the period. If the ownership interest is 50 per cent or less,
the dwelling is deemed to be the spouse’s main residence for that period (s. 118-170).

QUESTION 3.11

When Shaun Simnett and Jane West married, they bought and moved into a townhouse. They each
own 50 per cent of the townhouse. They also own a beach house that is 70 per cent owned by Jane
and 30 per cent owned by Shaun. From 1 July 2024, Shaun mainly lives in the townhouse and Jane
mainly lives in the beach house.
For the period 1 July 2024 to 30 June 2025, Shaun nominates the townhouse as his main residence
and Jane nominates the beach house as her main residence.
On 30 June 2025, Shaun and Jane dispose of both dwellings.
Apply the CGT treatment and any main residence exemption to this event for the period 1 July
2024 to 30 June 2025.
Source: Adapted from Income Tax Assessment Act 1997 s. 118-170, Federal Register of Legislation, accessed October 2024,
[Link]/Series/C2004A05138.

Partial Exemption
Where the dwelling was the main residence for only part of the ownership period, then an individual will
only get a partial exemption (s. 118-185).

FORMULA TO LEARN

The capital gain, or loss, is calculated by using the following formula.

Non-main residence days
Capital gain or capital loss amount ×
Days in your ownership period

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 However, a different rule will apply in partial exemption situations where:
• the property was initially subject to the main residence exemption, and
• on or after 7.30 pm on 20 August 1996, it was subsequently used for income-producing purposes
(s. 118-192).
Where these conditions are fulfilled, s. 118-192 rather than s. 118-185 will apply. The effect of
s. 118-192 is that the first element of the cost base will be reset to the market value of the residence at
the time it was first used for income-producing purposes. Further, any other relevant expenditures from
that point will be taken into account in the asset’s cost base, meaning that the property will be treated as if
it was acquired at the point that it started being used as an income-producing asset.
Where a taxpayer initially uses a house as their main residence, then rents it out (on or after 20 August
1996), and then subsequently moves back into it (without being able to utilise the absence provision in
s. 118-145), both of the above sections will apply. In such a situation, s. 118-192 will apply for when it is
first used for rental purposes, meaning that the first element of its cost base will be the market value at that
time. Then, when calculating the capital gain for the remainder of the ownership period, it will be subject
to the pro-rata rule under s. 118-185 for this remaining period.
Example 3.15 considers capital gains on a partial main residence.

EXAMPLE 3.15

Capital Gain Where Partial Use as a Main Residence

Lucas Veiszadeh initially lived in the house he purchased in 2017 for two years, and then, in 2019, it was
used for rental purposes for three years (assume Lucas was claiming another main residence for these
three years). In 2022, Lucas moved back into the house for another three years before selling the house
in 2025. Consider how the CGT partial exemption provisions affect the calculation of the capital gain on
the house.
The first element of the cost base for this house would be its market value when it was first used
by Lucas for rental purposes in 2019 (s. 118-192). Further, the capital gain would then be subject to a
50 per cent main residence exemption (because, after it was initially used for rental purposes, it was then
used as a main residence for half of that time between 2019 and 2025).

QUESTION 3.12

The following events relate to Tania Watson’s purchase and sale of a house.
• Tania purchased a house on 1 February 2017 for $300 000, and $10 000 was paid in stamp duty.
• Tania initially lived in this house for five years.
• On 1 February 2022, Tania purchased an apartment and she moved into the apartment on the
same day. For tax purposes, this apartment was regarded by Tania as her main residence from
1 February 2022.
• Also on 1 February 2022, Tania rented out her house to a tenant. On this day, her house was
valued at $420 000.
• During July 2022, the bathroom of the house was renovated, which cost $30 000.
• On 1 February 2023, she sold her apartment and moved back into her house. The house was
worth $550 000 at this time.
Tania sold the house on 1 February 2025 for $1 million. Real estate agent fees were $20 000.
What would be the capital gain made on the house (before applying any possible discounting)?

Figure 3.7 contains a flowchart that illustrates when s. 118-185 and when s. 118-192 are to be utilised.

FOREIGN RESIDENTS AND THE MAIN

RESIDENCE EXEMPTION
The Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Act 2019 (Cwlth)
confirmed that taxpayers who are foreign residents at the time of a CGT event cannot benefit from either
the full (s. 118-110(3)–(5)) or partial main residence (s. 118-185(3)) provisions regarding their period
of ownership. For instance, a taxpayer who was initially an Australian resident and lived in their main
residence for many years, and then subsequently became a foreign resident and then later sold their house,
would be unable to utilise the main residence exemption (full or partial) upon the sale of their house.
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 Pdf_Folio:211
FIGURE 3.7 Flowchart for determining the application of ss. 118-185 and 118-192

Is a main
residence exemption Yes Sections 118-185 and 118-192
available for the full are not required to be applied.
ownership period?

No

After Apply both ss. 118-185 and 118-192.

the premises Section 118-192 will, in essence, assume that
commenced being the property was acquired for its market value
Are the
used for income-producing when the taxpayer commenced using it for
conditions Yes Yes
purposes, was it income-producing purposes. Section 118-185
in s. 118-192 for
subject to the main residence will be applied to the ownership period after
s. 118-192 to apply
exemption for any portion the property was first used for income-
fulfilled?
of the remaining producing purposes. It will take into account to
ownership period? what extent for that period the property was
not subject to the main residence exemption.

No
No

Apply the rules in s. 118-192 that, in essence,

Apply the pro-rata assume that the property was acquired at market
formula in s. 118-185. value when the taxpayer commenced using it for
income-producing purposes.

Source: CPA Australia 2025.

MODULE 3 CGT Fundamentals 211

 However, there are exceptions under these provisions so that, in some instances, foreign residents can
utilise the main residence exemption. For instance, an exception applies when certain life events occur,
such as, when the taxpayer has been a foreign resident for less than six years at the time of the CGT event,
and either they or their spouse had a terminal medical condition at the time of their foreign residency
(ss. 118-110(3)–(5), 118-185(3)).
Example 3.16 considers capital gains on a partial main residence.

EXAMPLE 3.16

Main Residence Exemption for a Foreign Resident

David Montgomery, an Australian resident and a senior executive with LTD Bank, purchased a townhouse
in Sydney for $450 000 in June 2017. This became the main residence for him and his family. In August
2018, LTD Bank posted David to London for a period of seven years and provided him with a Bank
residence for him and his family to live in while there. David immediately rented out the Sydney townhouse
for the period of his absence. David’s wife returned to Sydney for a few months in 2023 as she was
homesick, but then returned to London. David considered the Sydney residence to be too small for his
family’s needs and later sold it in 2025, while still overseas, for $1.3 million.
In this case, David’s residency status had changed to a non-resident, and he had been a non-resident
for a continuous period of greater than six years (i.e. 2018 to 2025) and therefore does not qualify as
an excluded resident (s. 118-110(4)). Likewise, the temporary return of David’s wife due to homesickness
does not constitute a life event (s. 118-110(5)). Consequently, as no exceptions apply, CGT would be
payable on the sale of the Sydney townhouse.

Foreign Resident Capital Gains Withholding Regime

There is a 12.5 per cent withholding obligation for foreign residents who dispose of:
• taxable Australian real property with a market value of $750 000 or above
• an indirect Australian real property interest
• an option or right to acquire such property or interest.
Under this rule, when the vendor (owner) of these Australian assets is a foreign resident, then the
purchaser of the property is required to pay 12.5 per cent of the purchase price direct to the ATO. The
vendor can then claim a credit for the foreign resident capital gains withholding payment that the purchaser
has made by lodging a tax return for the relevant year (see module 2) (ATO 2024a).
As part of the 2023–24 Mid-Year Economic and Fiscal Outlook, the federal government announced a
measure to improve the integrity of the foreign resident capital gains withholding regime. This measure
(1) increases the foreign resident capital gains withholding tax rate for relevant CGT assets from
12.5 per cent to 15 per cent and (2) removes the current $750 000 withholding threshold before for
transactions involving either taxable Australian real property or an indirect Australian real property interest
that provides company title interests. These changes will apply to acquisitions of relevant CGT assets made
on or after the later of 1 January 2025 or the commencement of this measure. At the date of writing, this
legislation had not been passed.

CGT — EXEMPTION ON GRANNY FLATS

A CGT exemption to some granny flat arrangements has been effective since 1 July 2021, where the
following conditions are fulfilled (Subdivision 137-A).
• There is a formal written agreement arising from a family arrangement or other personal tie (commercial
rental agreements will not be covered (s. 137-15, s. 137-20)).
• The agreement involves the creation, variation or termination of a granny flat arrangement (s. 137-10).
• The granny flat arrangement involves the provision of accommodation to an older person or a person
with a disability (where the older or disabled person is an Australian resident) (ATO 2024b).
For instance, assume that an elderly person agrees to transfer their main residence to their daughter to
live in and, in exchange, the daughter agrees to build a granny flat at the rear of the property that their
parent can live in and provide domestic support for the parent. In such a case, the daughter creating such
a right for their parent would typically trigger CGT Event D1. This is because the daughter has created
a contractual right in the parent — the parent has the right to have a granny flat built for them, and they
have the right to be able to live in it and receive domestic support from the daughter (refer back to ‘Event
D1: creating contractual or other rights’ under ‘Specific CGT events’). This CGT exemption is aimed at
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making such a transaction CGT free for the daughter. Note that, in such an instance, the elderly person’s
transfer of the house would come under the pre-existing main residence exemption and so would not be
subject to CGT.

ROLLOVER PROVISIONS AND OTHER RELIEFS

How Rollovers and Reliefs Operate
Applying a rollover allows the taxpayer to defer or disregard — or rollover — a capital gain or a capital loss
until a further (or later) CGT event occurs. There are many types of rollovers under the taxation legislation;
the chief ones are:
• rollover for the disposal of assets to, or creation of assets in, a company (Division 122)
• replacement assets rollovers (Division 124)
• small business restructure rollovers (Division 328-G)
• demerger relief (Division 125)
• same asset rollovers (Division 126).

Disposal of Assets to, or Creation of Assets in, a Wholly Owned Company

This rollover event allows taxpayers to incorporate their businesses into a company without incurring
a CGT liability. The rollover will apply where there is a change in the entity legally owning the assets;
however, there is no change in the underlying beneficial ownership of the actual assets (Subdivision 122-A,
s. 122-15).
It applies to individuals, trustees or all partners in a partnership. The CGT assets must be transferred to
a wholly owned company, and the consideration is in the form of non-redeemable shares. The shares must
be of substantially the same market value as the net assets transferred for the rollover to be applied.
The assets transferred to the wholly owned company also retain their previous tax attributes, meaning
that the cost base, the reduced cost base and the pre-CGT status remain the same.
Example 3.17 contains an example illustrating how the transfer of assets to a company can benefit from
a rollover.

EXAMPLE 3.17

Transferring Assets Over to Designing Now

Michael James runs a business as a graphic designer. After speaking with his accountant, he decides that
the business should be incorporated. Michael sets up a new company, Designing Now Pty Ltd, of which
he is the sole shareholder, and transfers his business assets to Designing Now.
Consider how a Subdivision 122-A rollover potentially applies to this situation.
CGT event A1 would occur on transfer of any CGT assets to the company. However, if Michael chooses
a rollover under Subdivision 122-A, any capital gains or losses are disregarded. Michael will be deemed
to have acquired the shares in Designing Now for an amount equal to the total cost base of the business
assets. Further, if the assets were acquired before 20 September 1985, Michael’s shares will also be
deemed to be pre-CGT assets.
Designing Now will be deemed to have acquired the business assets at the same time as Michael,
so to the extent that Michael originally acquired the assets before 20 September 1985, the company will
continue to treat the assets as pre-CGT assets. Designing Now will take on Michael’s cost base or reduced
cost base for the assets he acquired post-CGT.

Replacement Asset Rollover Events

Replacement asset rollovers involve the ownership of one CGT asset ending and the acquisition of a new
(replacement) CGT asset. When a replacement asset rollover event occurs, the following happens.
• Any capital gain or loss made from the original asset is disregarded.
• The new (replacement) asset takes on the cost base of the original asset.
• If the original asset was acquired before 20 September 1985 (pre-CGT), the new (replacement) asset is
also deemed to be a pre-CGT asset (ITAA97, Subdivision 124-A).
The various replacement asset rollovers available in the legislation are detailed in table 3.7.

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 TABLE 3.7 Replacement asset rollovers

Division/Subdivision Type of rollover

Subdivision 124-B Involuntary disposal of a CGT asset owned by the taxpayer due to:
• compulsory acquisition (or threat of impending compulsory acquisition) by an
Australian government agency or certain other entities
• whole or partial loss or destruction of the asset
• land becoming compulsorily acquired subject to a mining lease
• a lease granted by an Australian government agency expiring and not being
renewed
where the taxpayer receives compensation in the form of a replacement asset
or money to purchase a replacement asset (or a combination of both).

Subdivisions 124-E and 124-F Exchange of shares, units, rights or options.

Division 615

Subdivision 124-I Conversion of a body to an incorporated company.

Subdivision 124-M Scrip-for-scrip exchange, where a share in a company or an interest in a trust is

replaced by a share or an interest in another entity and the other entity obtains
at least 80% of the voting rights in the original company or trust (e.g. company
takeover situations). Various conditions apply in obtaining such relief.

Subdivision 124-N Disposal of assets by a fixed trust to a company under a trust restructure.

Source: Based on Income Tax Assessment Act 1997 (Cwlth), Division 124, Federal Register of Legislation, accessed October 2024,
[Link]/Series/C2004A05138.

Example 3.18 considers one of the instances in which a replacement asset rollover applies.

EXAMPLE 3.18

Replacement Asset Rollover Event

Limor Chan purchased land in June 1985. On 1 March 2025, the government compulsorily acquired the
land, and gave Limor some different land in return. Consider how replacement asset rollover applies and
its effect.
There is no capital gain or loss on the disposal of the original land, as it is a pre-CGT asset. However,
if Limor elects to apply rollover under Subdivision 124-B, the new land would also qualify as a pre-CGT
asset, even though it was acquired on 1 March 2025.

Small Business Restructure Rollover

The small business restructure rollover allows small businesses to transfer active assets (discussed later in
this module, and generally applies to assets used in the course of a business, or intangible assets inherently
connected with the business) from one entity (the transferor) to one or more other entities (transferees)
without incurring an income tax liability (including, but not limited to, CGT liability). It applies to transfers
on or after 1 July 2016.
Small businesses who meet the standard small business entity (SBE) rules (including an aggregated
turnover of less than $10 million) can access this concession. The rollover applies to the transfer of active
assets that are CGT assets, trading stock, revenue assets or depreciating assets.
The rollover is available when the following conditions are met.
• The entity is an applicable SBE or related entity.
• The rollover is part of a genuine restructure (not an artificial or tax-driven scheme).
• The rollover must not result in a change to the ultimate economic ownership of the transferred assets
(see s. 328-430).
Specifically, this requires that the individuals who directly or indirectly own the asset remain the same.
Further, where there is more than one individual involved, it requires that the share of each individual’s
economic ownership remains materially the same before and after the restructure (s. 328-430(1)(c)). Note
the following.

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 Non-fixed (discretionary) trusts may be able to meet the requirements for ultimate economic ownership,
for example, where there is no practical change in which individuals economically benefit from the assets
before and after the transfer.
Family trusts may meet an alternative ultimate economic ownership test where:
• the trustee has made a family trust election, and
• every individual who had ultimate economic ownership of the transferred asset before the transfer, and
• every individual who has ultimate economic ownership after the transfer, must be members of the family
group relating to the family trust (ATO 2020).

Examples 3.19 and 3.20 illustrate whether, for the purposes of the small business restructure rollover,
there has been a change in the ultimate economic ownership of transferred CGT assets.

EXAMPLE 3.19

Small Business Restructure

Janey Hall runs a small marketing and public relations agency business as a sole trader. She now wishes
to run the business through a unit trust. Janey sets up the Whistles Media Trust with herself as sole unit
holder and transfers the active assets of the business to the trust. Consider if this would result in a change
in the ultimate economic ownership of the CGT assets.
This would not result in a change in ultimate economic ownership of those assets.
Source: Based on ATO 2023, ‘Small business restructure roll-over’, accessed October 2024, [Link]/
businesses-and-organisations/income-deductions-and-concessions/income-and-deductions-for-business/concessions-offsets
-and-rebates/small-business-restructure-roll-over.

EXAMPLE 3.20

Ultimate Economic Ownership Changes

Joan Baldwin, Michelle Murphy and David Hall operate a small marketing and public relations agency
business as equal partners. They want to transfer their interests in the assets of the partnership to a
company. Michelle and David are a couple.
Joan, Michelle and David establish a company, whereby 300 identical shares are issued as follows:
• 100 shares are issued to Joan
• 150 shares are issued to Michelle
• 50 shares are issued to David.
Consider if Joan, Michelle and David could utilise the small business restructure.
David receives fewer shares because he has other income and Michelle and David, as a couple, want
to lower their overall income tax bill.
While this does not change the individuals who have the ultimate economic ownership of the asset, there
is a change in the proportionate share of that ultimate economic ownership. Accordingly, Joan, Michelle
and David cannot use the small business restructure rollover.
However, if the shares were distributed equally between the partners, the ultimate economic ownership
of the assets would be unchanged; and Joan, Michelle and David could use the rollover, subject to
satisfying the other conditions.
Source: Based on ATO 2023, ‘Small business restructure roll-over’, accessed October 2024, [Link]/
businesses-and-organisations/income-deductions-and-concessions/income-and-deductions-for-business/concessions-offsets
-and-rebates/small-business-restructure-roll-over.

Demerger Relief
Rollover relief is available where the original interests in a company or trust demerge, and the taxpayer
receives new or replacement interests in the demerged entity. A demerger generally involves the splitting
of a corporate group into two or more groups or entities, with ultimate ownership remaining the same.
The aim of this rollover is to ensure businesses can restructure without triggering costly capital gains.
Where demerger relief applies, any capital gain or loss for the ultimate shareholders and for members
of the corporate group can be disregarded (ITAA97, Division 125).
Example 3.21 illustrates a demerger.

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 EXAMPLE 3.21

Demerger Relief
Peter Schmidt owns shares (his original interests) in Company A, a public company. Company B is a
wholly owned subsidiary of Company A. Company A announces a demerger utilising a proportionate
capital reduction and the disposal of all its shares in Company B to its 320 000 shareholders. Following
the demerger, all of the shareholders in Company A, including Peter, will own all of the shares in Company B
(their new interests).
Consider how the demerger relief provisions in Division 125 apply in this situation.
The demerger rollover relief provisions apply in this situation, as Peter owned shares in Company A,
which has demerged from Company B and, due to the demerger, Peter has received shares in Company B.
Source: Based on Income Tax Assessment Act 1997 (Cwlth), s. 125-55, Federal Register of Legislation, accessed
October 2024, [Link]/Series/C2004A05138.

Same Asset Rollover Events

A same asset rollover event means an asset can be transferred from one taxpayer to another — and no
CGT arises (Division 126). The applicable CGT is later paid by the transferee (i.e. the person to whom the
transfer is made, or who received the transferred asset) when a later CGT event occurs to the asset.
When a same asset rollover event occurs, the following happens.
• Any capital gain or loss the transferor makes is disregarded.
• The transferee acquires the transferor’s cost base in the asset at the time of the transfer.
• Where the asset is a pre-CGT asset (transferor acquired the asset before 20 September 1985), the asset
retains its pre-CGT status in the hands of the transferee.
• Where the asset is a collectable or personal use asset of the transferor, it retains this status in the hands
of the transferee.
The type of same asset rollovers found in the legislation is presented in table 3.8, while table 3.9 outlines
the effect of these rollovers.

TABLE 3.8 Type of same asset rollovers

Subdivision Type of rollover

126-A CGT assets transferred to a spouse or former spouse as a result of a binding legal agreement
following a marriage or relationship breakdown.

126-B CGT assets transferred between companies in the same wholly owned group, involving at least
one foreign resident company.

126-C Changes to a trust deed of a complying approved deposit fund, complying superannuation
fund or a fund that accepts workers entitlement contributions.

126-D Transfer of assets from a small superannuation fund with fewer than five members to another
complying superannuation fund on marriage breakdown.

126-G CGT assets transferred between certain fixed trusts under a trust restructure.

Source: Based on Income Tax Assessment Act 1997 (Cwlth), Division 126, Federal Register of Legislation, accessed October 2024,
[Link]/Series/C2004A05138.

TABLE 3.9 Effect of rollovers

No rollover Rollover applied

Capital gain or loss arises on transfer/disposal of Capital gain or loss on transfer/disposal of original assets is
original assets under CGT event A1. disregarded.

Assets (either same assets or replacement assets) Assets (either same assets or replacement assets) maintain
acquire new cost base and acquisition date. the cost base and acquisition date of the original assets.

Assets lose any pre-CGT status. Assets (both existing and replacement assets) maintain any
pre-CGT status.

Source: Based on Income Tax Assessment Act 1997 (Cwlth), Division 126, Federal Register of Legislation, accessed October 2024,
[Link]/Series/C2004A05138.
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 Example 3.22 illustrates the impact of the same asset rollover in a marriage breakdown situation.

EXAMPLE 3.22

Same Asset Rollover Event 126-A

Meg Colombo’s ex-husband Francesco Colombo owns a block of land (purchased in 1998) with a cost
base of $75 000. As a result of a court order under the Family Law Act 1975 (Cwlth), Francesco is required
to transfer the land to Meg. Consider the effect of the same asset rollover in this situation.
Rollover relief under Subdivision 126-A automatically applies to ensure that Francesco does not
crystalise a capital gain or loss on the transfer. Meg’s cost base in the land is $75 000 (the same as
Francesco’s cost base).

QUESTION 3.13

Which rollover would potentially apply in the following situations, and what would be the effect of
each particular rollover?
(a) Simone Small divorces Neil Small and, as part of the divorce settlement, Simone’s investment
property purchased in 2018 is transferred to Neil.
(b) Mel Kumar owns shares in a conglomerate called CGG Ltd that she acquired three years ago.
CGG owns a major supermarket chain, SPM Ltd, which it demerges from. Due to the demerger,
Mel receives shares in SPM Ltd, and part of her shares in CGG Ltd are cancelled.
(c) Kerrie Kelly owns a business (not an SBE) as a sole proprietor that she acquired two years
ago. Kerrie transfers all assets in the business to a company that she is the sole owner of, in
exchange for receiving shares in the company. The value of the shares equals the value of the
assets transferred to the company.
(d) Bryanna Browning owns shares in a mining company, MIN Ltd (acquired in 1984), which is then
fully acquired by a larger mining company, RHP Ltd. Due to the takeover, Bryanna’s shares in
MIN are replaced with shares in RHP.

CGT Consequences of Death

Generally, when a person dies, any capital gain or loss from a CGT event involving a CGT asset that the
deceased owned at the time of death is disregarded (s. 128-10).
This general rule does not apply where the CGT asset passes to:
• a tax-advantaged beneficiary who is a tax-exempt entity
• the trustee of a complying superannuation entity
• a foreign resident, and the asset is not taxable Australian property (see module 2, section ‘Non-residents
and capital gains tax’).
In these three cases, the trustee of the deceased’s estate must include any capital gain in the tax return
of the deceased (s. 104-215).
Where the deceased’s CGT asset(s) devolves to a legal personal representative, or passes to a beneficiary
in the deceased’s estate, then either of these parties is taken to have acquired the asset on the day of the
deceased’s death. In this case, any capital gain or capital loss the legal representative makes if the asset
passes to a beneficiary in the deceased’s estate is disregarded (s. 128-15).
Where a CGT asset is transferred to a legal personal representative or beneficiary, the following
modifications are made to the cost base and reduced cost base as a result of the death.
• If the asset was acquired by the deceased before 20 September 1985, it is taken to be acquired by the
trustee or beneficiary on the date of death at its market value.
• If the asset was acquired by the deceased on or after 20 September 1985, it is taken to be acquired by
the trustee or beneficiary on the date of death at the deceased’s cost base or reduced cost base (unless it
was the main residence of the deceased just before the time of death).
• If the asset was a dwelling that was the main residence of the deceased just before death and not being
used to earn assessable income at that time, it is taken to be acquired by the trustee or beneficiary on the
date of death at its market value.
Under these rules, when a CGT asset is taken to be acquired for its market value at the time of death,
and then the beneficiary later triggers a CGT event (such as by selling the inherited asset), only the gain
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(or loss) accrued since the deceased passed away is accounted for. In contrast, when the beneficiary’s cost
base is based on the deceased’s cost base, and the beneficiary later triggers a CGT event on behalf of the
asset (usually by selling it), CGT will be based on the accrued gain that occurred during the combined
ownership period of both the deceased and the beneficiary. Figure 3.8 illustrates this concept.

FIGURE 3.8 Capital gain on an inherited asset that is subsequently sold

Deceased acquired asset post Deceased acquired asset pre

20 September 1985, and not their 20 September 1985, or it was their
main residence. main residence.
Date deceased acquired asset

Date deceased passed away

Date beneficiary sold inherited asset

As the first element of the cost base As the first element of the cost
of the beneficiary is the deceased’s base of the beneficiary is the
cost base, the net effect is that when market value at the time the
the beneficiary disposes of the asset, deceased passed away, the net
CGT will be payable on the gain effect is that when the beneficiary
attributable to the combined disposes of the asset, CGT is
ownership period of the deceased payable on the gain attributable to
and the beneficiary. the ownership period of
the beneficiary.
Source: CPA Australia 2025.

Different rules apply where the asset was trading stock of the deceased (s. 128-15(4), Item 2).
Moreover, a beneficiary can include in the cost base (or reduced cost base) of any CGT asset, any
expenditure incurred by the legal representative that would have been able to be included in the asset’s
cost base at the time the asset passes to the beneficiary (s. 128-15(5)).
As a result of these provisions, it is important that any beneficiary keeps appropriate records, especially
concerning:
• the market value of assets acquired by the deceased before 20 September 1985 or the deceased’s main
residence, and
• the cost base and reduced cost base of assets acquired by the deceased on or after 20 September 1985.

QUESTION 3.14

Laura Lovell passed away in January 2025 and left her estate to her daughter Jill Jackson. Laura
had owned the following assets.
• Property 1, which had been used as an investment property by Laura. This was purchased in
1984 for $100 000. At the time, stamp duty of $4000 was paid. The property had renovations worth
$20 000 undertaken in 1994. Its market value at the time of Laura’s death was $800 000.
• Property 2, which was also used as an investment property by Laura. This was purchased in 1991
for $200 000. At the time, stamp duty of $10 000 was paid. It had $30 000 of renovations undertaken
in 2002. Its market value at the time of Laura’s death was $900 000.
• Property 3, used by Laura exclusively as a main residence for the entire time she owned it. It was
purchased in 2002 for $300 000. At the time, stamp duty of $15 000 was paid. Its market value at
the time of Laura’s death was $1.5 million.
Jill wishes to use all three properties as long-term investments. What will be the CGT implications
of her inheriting the properties from Laura?
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3.5 CALCULATING NET CAPITAL GAIN/LOSS
FORMULA TO LEARN

As introduced in the first section, ‘CGT core concepts’, a taxpayer’s net capital gain for a tax year is
calculated as follows (s. 102-5(1)).

Net capital gain = Capital gains − Capital losses − CGT discount − CGT small business concessions

The earlier section ‘Determining gain/loss from CGT event’ covered the calculation of each individual
capital gain or loss.
This section examines the determination of net capital gain, which can be reduced by capital losses, the
CGT discount and CGT small business concessions.

DETERMINING NET CAPITAL LOSS

A net capital loss arises in a tax year:
• if a taxpayer incurred a capital loss in the year and did not make a capital gain that could be offset against
that loss, or
• where a capital gain arose during the year, and the sum of the capital losses realised during the year
exceeded the capital gain made during the year (s. 102-10).
We already know that net capital losses are able to be carried forward and offset against any capital gains
arising in future years. However, net capital losses cannot be used to reduce any other assessable income
of the taxpayer.

DETERMINING NET CAPITAL GAIN

Capital gains arising in a tax year can be reduced by:
• capital losses arising in the current tax year
• any unused net capital losses and collectable losses brought forward from previous tax years.
Note that, for companies, using prior year capital losses to reduce current year’s gains depends upon the
continuity of ownership or the business continuity test being satisfied (see module 5).
Example 3.23 illustrates how to calculate a net capital gain when a variety of CGT assets have been
disposed of.

EXAMPLE 3.23

Realising Capital Gains and Losses

During the year ending 30 June 2025, Frederick Ho disposed of some shares. Electing to use the indexation
method for his capital gains, he realises the following capital gains and losses.

Company Result $
ABC Ltd Gain 5 000
DEF Group Ltd Loss (2 500)
Hello Ltd Gain 500
IJK Ltd Gain 1 750
Lolly Ltd Loss (450)

Consider Frederick’s net capital gain for the year ending 30 June 2025. The example also shows how
the result would differ if the loss from Lolly Ltd was $4950 rather than $450.
The sum of the capital gains of $7250 would be reduced by the sum of the capital losses ($2950) to
produce a net capital gain of $4300. However, if the loss from Lolly Ltd had been $4950 (rather than $450),
a net capital loss of $200 would have arisen that could be carried forward to the 2025–26 tax year to be
offset against any subsequent capital gain.

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 Where the taxpayer has more than one capital gain (such as two capital gains due to selling two
properties), as well as a capital loss (current or carried forward), the taxpayer can decide in which order
to apply the capital loss against the capital gains.
Note that, where there are capital losses from both the current year as well as carried-forward ones
from previous years, the current year capital losses are to be applied first (s. 102-5). Also, where there are
carried-forward capital losses from multiple previous years, they are applied in the order in which they are
made (s. 102-15).

QUESTION 3.15

In the 2024–25 tax year, James Sinclair (who does not own any collectables) made capital gains
of $20 000 and capital losses of $12 000. James also had net capital losses carried forward from
previous years, as follows.

Year Net capital loss

2023–24 $6000
2022–23 $4000

How will James reduce his capital gain for 2024–25 to zero?

APPLYING THE CGT DISCOUNT

After applying capital losses, the next step is to apply the CGT discount (s. 102-5, Step 3). It is important
that the CGT discount percentage is only applied after the gain is reduced by any capital losses.
The CGT discount applies to individuals, trusts, complying superannuation funds and certain life
insurance companies. All other companies are not able to claim the CGT discount.
The CGT discount percentage for individuals and trusts is 50 per cent. The CGT discount percentage
for complying superannuation funds and life insurance companies is 33.33 per cent.
To qualify for the CGT discount, the following four conditions must be satisfied (Subdivision 115-A).
1. The underlying CGT event creating the gain must occur after 11.45 am on 21 September 1999
(s. 115-15).
2. Indexation must not have been applied in calculating the capital gain (s. 115-20).
3. The CGT event must relate to a CGT asset that has been owned by the taxpayer for at least 12 months
(s. 115-25). (This is the 12-month rule — see the next section.)
4. The taxpayer must generally be an Australian resident.
Note that, for assets acquired after 8 May 2012, the CGT discount of 50 per cent is generally not
available to foreign and temporary resident individuals (including beneficiaries of trusts and partners in
a partnership).

The 12-Month Rule

To qualify for the CGT discount, a CGT asset must have been acquired by the taxpayer making the capital
gain at least 12 months before the CGT event.
The 12-month period excludes both the day of acquisition and the day of the CGT event. Therefore, a
period of 365 days (or 366 in a leap year) must elapse between the day of acquisition and the occurrence
of the CGT event to satisfy the 12-month rule (Taxation Determination TD 2002/10). For example, if
the asset was acquired on 30 June 2024, the discount would not apply if the CGT event occurred before
1 July 2025.
Example 3.24 gives an example involving whether a buy and sale of shares by an individual can benefit
from the CGT discount in calculating the net capital gain of the individual.

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 EXAMPLE 3.24

12-Month Rule
In May 2024, John Norris (an Australian resident) acquired 1000 ordinary shares in a listed public company
for $10 per share. He sells these shares in April 2025 for $16 per share. Consider if John is eligible for the
CGT 50 per cent discount.
At the date of sale, John has owned the shares for less than 12 months and, therefore, is unable to
choose the CGT discount. John must, therefore, include a capital gain of $6000 ($6 per share for 1000
shares) in calculating his net capital gain for the 2024–25 tax year.
Certain CGT events, such as those that create a new asset, cannot qualify for the CGT discount because
the asset will not have been acquired at least 12 months before the CGT event (s. 115-25(3)). The CGT
events for which the CGT discount cannot apply are CGT events D1, D2, D3, E9, F1, F2, F5, H2, J2, J5,
J6 and K10.
Under s. 115-125, taxpayers who invest in certain types of affordable housing are also eligible to an
additional 10 per cent discount on their capital gain on such dwellings. To be eligible under this law, the
taxpayer, must have used their investment property to provide affordable housing for at least three years.
A dwelling will be regarded as providing affordable housing where it is managed by an eligible
community housing provider, and that provider has given the owner a housing certificate (in its approved
form). Further, only amounts subject to the general CGT discount can be eligible for this further
10 per cent discount.

QUESTION 3.16

Kirsty Sweeney is an Australian resident who works as a school teacher and makes the following
share sales in the 2024–25 tax year:
• ANH Ltd shares sold for $100 000, purchased six months beforehand for $90 000
• BNS Ltd shares sold for $200 000, purchased 18 months beforehand for $185 000
• CJL Ltd shares sold for $50 000, purchased eight months beforehand for $70 000.
Assuming that Kirsty wishes to minimise her tax liability, what would be her net capital gain?

CGT SMALL BUSINESS CONCESSIONS

Four specific CGT concessions may be available to qualifying SBEs, which may allow them to disregard
or defer part or all of a capital gain from an active asset used in a small business.
The basic conditions, as set out in s. 152-10 of ITAA97, that must be met before any of the four
concessions can be considered are:
(a) a CGT event happens in relation to a CGT asset of yours in an income year. Note: This condition does
not apply in the case of CGT event D1: see section 152-12
(b) the event would (apart from this Division) have resulted in the gain
(c) at least one of the following applies:
(i) you are a CGT small business entity for the income year;
(ii) you satisfy the maximum net asset value test (see section 152-15);
(iii) you are a partner in a partnership that is a CGT small business entity for the income year and the
CGT asset is an interest in an asset of the partnership;
(iv) the conditions mentioned in subsection (1A) or (1B) are satisfied in relation to the CGT asset in
the income year;
(d) the CGT asset satisfies the active asset test (ITAA97, s. 152-35).

Condition (a) is that a defined CGT event happens in relation to a CGT asset in the income year (except
for CGT event D1). Under condition (b), the CGT event in condition (a) results in a capital gain. Under
condition (c), the entity must be a CGT SBE for the income year with an aggregated turnover of less than
$2 million, or they must meet the maximum net asset value test under s. 152-15 of ITAA97. Under this
maximum net asset value test, the entity (including related entities or affiliates) must have net assets of no
more than $6 million (excluding personal use assets such as a home, to the extent that it has not been used
to produce income).

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 Condition (d) is that the CGT asset satisfies the active asset test. A CGT asset satisfies the ‘active asset
test’ under s. 152-35 if the taxpayer has owned the asset for:
• 15 years or less and the asset was an active asset of theirs for a total of at least half of the relevant
period, or
• more than 15 years and the asset was an active asset of theirs for a total of at least 7.5 years during the
relevant period.
The ‘relevant period’ commences at the time of acquiring the asset and ceases upon the time of the CGT
event. However, if the business ceased within 12 months of the CGT event, the relevant period will end at
that time instead.
Note that for gains from CGT event D1, rather than the active asset test being satisfied, the taxpayer
must show that the CGT event D1 was inherently connected with an active asset of theirs (s. 152-12).
For instance, if the taxpayer sells a restaurant that was an active asset and has entered into a restrictive
covenant to not compete with this restaurant for three years, then the covenant will trigger CGT event D1,
and will fulfil this alternative test as it was inherently connected with an active asset of theirs, that is, the
restaurant business.
A CGT asset is an active asset if the taxpayer owns it, and:
• they use it or hold it ready for use in the course of carrying on a business (whether alone or in partnership)
• it is an intangible asset (e.g. goodwill) inherently connected with a business they carry on (whether alone
or in partnership) (s. 152-40).
Example 3.25 illustrates the application of the active asset test.

EXAMPLE 3.25

Active Asset
Rachel Ward runs a guest house as a small business on the outskirts of Melbourne, mainly for interstate
travellers. Rachel purchased the guest house in March 2004 and conducted some renovations and
improvements to it during the last 20 years of its operation before selling it in November 2024. As the
guest house had been used exclusively by her as a business for the entire 20-year period, it would satisfy
the active asset test. Note that Rachel does not solely derive rental income from the guest house, and
generates other types of income including, but not limited to, providing meals and bicycle hire.

Certain CGT assets cannot be active assets, even if they are used or held ready for use in the course
of carrying on a business — for example, assets whose main use is to derive rent (unless the asset was
rented to an affiliate or connected entity for use in their business). Generally, a rental property will not be
an active asset.
Shares in a resident company or interests in a resident trust are active assets if the market value of the
company or trust’s active assets, cash and financial interests that are connected with the running of the
business is 80 per cent or more of the market value of all the company’s or trust’s assets (s. 152-40(3)).
Note that where the capital gain has arisen from a sale (or other CGT event) of shares in a company or units
in a trust, then there are other conditions that also need to be fulfilled for CGT small business concession
eligibility. They are as follows.
• The individual making the sale has to be a CGT concession stakeholder in the company or trust just
before the CGT event occurs (s. 152-10(2)(d)). This means that either they, or their spouse, must be a
significant individual of the company or trust that is sold (s. 152-60). (If it is their spouse who is the
significant individual, then the taxpayer themselves must also directly or indirectly have some interest
in the entity before it is sold.) A significant individual is one who has a direct or indirect interest in the
company or trust of at least 20 per cent (s. 152-55). Note that there are alternative rules where there is
an interposed entity between the individual and the company/trust that is sold, and the interposed entity
is the one that has actually made the sale (e.g. Bill owns X Ltd, which owns Y Ltd, and X Ltd sells
Y Ltd), but these situations are beyond the scope of this course.
• The company or trust being sold must be a CGT SBE by having an aggregated turnover of less than
$2 million or pass the maximum net asset value test by having net assets of no more than $6 million
(s. 152-10(2)(c)). In other words, it is not sufficient that the taxpayer making the sale fulfils one of the
requirements in condition (c); the entity sold must also pass one of these two tests as well. Note that the
way the maximum net asset value test is calculated for such purposes is slightly modified as compared
to how it is usually calculated, but such modifications are beyond the scope of this course.
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• Unless the taxpayer making the sale of the shares or units, in fulfilling condition (c), is relying on
satisfying the maximum net asset value test, then they must also show that they themselves have been
carrying on a business just before the CGT event. This means that if a taxpayer is not themselves carrying
on a business but sells an interest in a company/trust that does, then in fulfilling condition (c), they must
rely on the maximum net asset value test (s. 152-10(2)(b)).
Example 3.26 contains an example of a company’s properties being excluded from being active assets.

EXAMPLE 3.26

Not an Active Asset

ABC Co. owns five commercial rental properties. The properties have been leased for several years under
formal lease agreements to various tenants who have used them for office and warehouse purposes. The
commercial tenants are neither affiliates nor connected entities of the taxpayer. The terms of the leases
have ranged from one year to three years with a three-year option and provide for exclusive possession.
The company has not engaged a real estate agent to act on its behalf and manages the leasing of the
properties itself.
In this situation, the company has derived rental income from the leasing of a number of properties.
Accordingly, the main and only use of the properties is to derive rent, and they are therefore excluded
from being active assets under s. 152-40(4)(e), regardless of whether the activities constitute the carrying
on of a business.
Source: Based on ATO 2012, ‘Taxation Determination TD 2006/78’, accessed October 2024, [Link]/law/
view/print?DocID=TXD%2FTD200678%2FNAT%2FATO%2F00001.

CGT Cap Amount

The non-concessional CGT cap allows individuals to make non-concessional superannuation contribu-
tions, up to the lifetime CGT cap amount. The CGT cap amount applies to capital gains subject to the CGT
small business concessions, where the retirement exemption or 15-year exemption applies (see below), and
the gain is contributed to superannuation.
The CGT cap applies to all excluded CGT contributions and is a lifetime cap. For the 2024–25 income
year, the CGT cap is $1.78 million (it was $1.705 million for 2023–24). The CGT cap amount is indexed
in line with average weekly ordinary time earnings (AWOTE) in increments of $5000 (rounded down)
(s. 292-105).

Four Types of CGT Small Business Concessions

The four concessions available are as follows.
• A 15-year exemption — if the business has continuously owned an active asset for at least 15 years and
the taxpayer is aged 55 or over and is retiring or permanently incapacitated, then there will not be an
assessable capital gain upon sale of the asset (Subdivision 152-B).
• A 50 per cent reduction — reduction of the capital gain on an active asset by 50 per cent. This is in
addition to the 50 per cent CGT discount, if applicable (Subdivision 152-C).
• Retirement exemption — capital gains from the sale of active assets are exempt up to a lifetime limit of
$500 000. If the taxpayer is under 55, the exempt amount must be paid into a complying superannuation
fund or a retirement savings account (Subdivision 152-D).
• Rollover — upon sale of an active asset, all or part of the capital gain can be subject to a rollover where
the taxpayer makes an election to do so (Subdivision 152-E). However, if such an election is made, then
by the end of two years after the CGT event, the amount subject to the rollover must have been used
for the acquisition of a replacement active asset, and/or for incurring expenditure on making capital
improvements to an existing active asset. If this is not the case, the rollover will be reversed and the
taxpayer will be subject to a CGT liability (refer CGT events J5 and J6 in table 3.2).
These four CGT small business concessions are separate to the small business restructure rollover
discussed in the earlier section ‘Small business restructure rollover’. Eligible taxpayers can apply as many
of the concessions available to them until the capital gain is reduced to nil. There are rules about the order
in which you apply the concessions, any current year or prior year capital losses, and the application of
the 50 per cent CGT discount. Specifically, the 15-year exemption, if applicable, will mean that the other
concessions are irrelevant as no CGT will be payable (i.e. it will be 100 per cent exempt). If it is not
applicable, then the 50 per cent reduction is generally applied. After that, the remainder of the gain will
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be potentially subject to the retirement exemption and/or the rollover to the extent that the taxpayer elects
to use one or both of them (each of these two concessions can be used if the abovementioned conditions
for each of them are fulfilled).
Figure 3.9 illustrates the order in which the CGT small business concessions are generally applied.

FIGURE 3.9 Order of applying CGT small business concessions

Does the
15-year No CGT payable
exemption Yes on the gain.
apply?

No

Apply the 50 per cent

reduction.

Part or all remaining Part or all remaining gain can be

gain can be further further reduced if there is an
reduced by the retirement election made to utilise the
exemption if requirements rollover (though this might be
fulfilled. subsequently reversed).

Source: CPA Australia 2025.

QUESTION 3.17

Cameron Cooke, a 47-year-old Australian tax resident, owns premises from which he operates a
restaurant business. Cameron acquired the newly built premises three years ago for $500 000 and
has operated the restaurant there from that time. Prior to this, Cameron had been an employee, not
a business owner. Turnover for the restaurant was approximately $1 million per annum.
In the 2024–25 tax year, Cameron entered into a contract to sell the business. The contract
includes the following amounts:
• $700 000 for the business premises
• $150 000 for the goodwill attached to the business
• $60 000 to not compete with the new owner of the business for three years.
(a) What is Cameron’s net capital gain before applying the CGT small business concessions?
(b) Which of the small business concessions could Cameron utilise, and how would they affect his
net capital gain?

QUESTION 3.18

Mohamad purchased a residence (called Property A) on 1 June 2017 and lived in it for four years
before moving to a new suburb on 1 June 2021. He then rented Property A for four years and sold
it on 1 June 2025 for $850 000. He purchased and moved into a new residence on 1 June 2021
(Property B), at which time Property A was valued at $700 000.

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 The costs incurred for Property A were as follows.

$
Purchase price (1 June 2017) 600 000
Valuation fees at time of purchase 4 500
Selling costs (1 June 2025) 18 000
Capital improvements undertaken during March 2024 70 000

Mohamad had previously claimed $12 000 in Division 43 capital works deductions on the improve-
ments for the period that it was a rental property.
Mohamad purchased a parcel of shares for his investment portfolio in May 1995 for $15 000. He
sold these shares in November 2024 for $35 000.
(a) What is the maximum period for which Mohamad can claim the main residence exemption on
Property A, which was sold on 1 June 2025?
(b) Mohamad has chosen to make Property B his main residence for the purposes of the main
residence exemption. Calculate the capital gain amount to be included in Mohamad’s income
tax return.
(c) Calculate the indexed cost base of the share package sold in November 2024 for $35 000.
(d) Assuming that Mohamad has chosen to treat Property B as his main residence, use the facts
from the former parts of this question to calculate the net capital gain amount to be included in
Mohamad’s income tax return.

The key points covered in this module, and the learning objectives they align to, are as follows.

KEY POINTS

The first section ‘CGT core concepts’ gives an overview of the CGT regime and introductory points.
• Figure 3.1 illustrates different components of the Australian CGT regime and provides a
module overview.
• Figure 3.2 contains the important terms relating to CGT, as well as a summary of the relevant steps
for applying the CGT.
• Figure 3.3 shows how CGT interacts with other taxation legislation.
• Table 3.1 explains the six-step process used to determine a taxpayer’s net capital gain.
• Figure 3.4 illustrates the CGT six-step process using a flowchart.
• The formula used to calculate the net capital gain or loss in Step 6 in the CGT six-step process is
introduced. (CGT Equation)
• Taxpayer’s record-keeping requirements for CGT events are outlined.
3.1 Determine which CGT event(s) applies/apply in a given situation.
• A capital gain or loss will potentially arise only where a CGT event has been triggered.
• Table 3.2 summarises most of the CGT events, including when they occur, and how to calculate
the capital gain/loss for each of them.
• The main CGT events that are more common than others, and discussed in greater detail in this
module, are as follows.
– CGT event A1 — Disposal of a CGT asset, which will typically occur when a CGT asset is sold,
gifted or otherwise disposed of.
– CGT event C1 — Loss or destruction of a CGT asset, which will typically occur when a tangible
asset is destroyed or lost, such as by being burned or stolen.
– CGT event C2 — Cancellation, surrender and similar ending, which will typically occur when
an intangible CGT asset ends, such as when a legal right to operate a certain type of
business expires.
– CGT event D1 — Creating contractual or other rights, which will typically occur when someone
creates a legal right in another, such as by entering into a restraint of trade.
– CGT event F1 — Granting a lease, which will typically apply when a lessor rents out a property
and receives a lease premium.
– CGT event H1 — Forfeiture of a deposit, which will typically occur when someone receives a
deposit for selling a CGT asset, but then the contract falls through and the sale does not proceed,
leading to the seller keeping the deposit.
• If potentially more than one CGT event could apply to a transaction, figure 3.5 illustrates which
CGT event to apply.

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 3.2 Analyse the tax implications of different types of CGT assets.
• Many (though not all) of the CGT events involve an existing CGT asset.
• A CGT asset is defined in s. 108-5 as including both property, as well as legal/equitable rights other
than property.
• Collectables are a subset of CGT asset, and there is an exhaustive list of what is a collectable in
s. 108-10(2). When a CGT asset is a collectable, it is exempt from CGT if the first element of its
cost base is $500 or less. Further, if a non-exempt collectable results in a capital loss, then that
loss can only be offset against a capital gain from a collectable.
• Personal use assets are also a subset of CGT assets, and are defined in s. 108-20(2) as assets that
are kept mainly for personal use or enjoyment of the taxpayer. They are exempt from CGT if the
first element of their cost base is $10 000 or less. Further, regardless of their cost, capital losses
made on personal use assets are disregarded for CGT purposes.
• Separate CGT assets have their own rules. A capital improvement to an original pre-CGT asset
that is then taken to be a separate CGT asset if its cost base when a CGT event occurs in relation
to the original asset is:
(a) more than the improvement threshold of $182 665 for the 2024–25 income year in which the
event happened, and
(b) more than 5 per cent of the capital proceeds from the event.
3.3 Calculate the capital gain or capital loss that arises from a CGT event.
• For many of the CGT events, a capital gain will be equal to the capital proceeds less the cost base,
and a capital loss will be equal to the reduced cost base less capital proceeds.
• Figure 3.6 illustrates the process for determining the capital gain/loss for these CGT events.
• Capital proceeds will consist of what the taxpayer receives and is entitled to receive for the CGT
event. In the case of a sales contract, this will typically be the sales price.
• As illustrated by table 3.3, in some cases, the capital proceeds will be subject to modifications.
• Cost base is defined in s. 110-25, and consists of five elements, which are explained in table 3.4.
• A reduced cost base is defined in s. 110-55, and is calculated similarly to a cost base, but with
some differences, including that it has no third element (costs of owning the CGT asset), and is not
subject to indexation.
• The cost base and reduced cost base can, in a similar way to capital proceeds, also be subject
to modifications.
• In some instances, the capital gain can be reduced by indexing the cost base, which will increase
the cost base to account for general inflationary price rises that occurred up till the September
1999 quarter, as noted in table 3.5.
• There are a number of CGT exemptions, including an exemption that applies to assets acquired
prior to 20 September 1985.
• One of the most important exemptions is the main residence exemption (s. 118-110), which allows
a CGT exemption where the taxpayer has owned and lived in a house or other residence.
• In some instances, a taxpayer who lived in their house and then moves out of it can continue to
claim their house as their main residence under the absence provision (s. 118-145), but they can
only generally do this where they are not claiming another main residence at the same time.
• Where a taxpayer is eligible to claim a house as their main residence for only part of the time that
they own it, depending on the circumstances, the pro-rata formula in s. 118-185 will potentially
apply; in other situations, the property will be regarded, under s. 118-192, as reacquired for its
market value when it started being used for rental purposes. In some instances, as illustrated by
example 3.14, both sections will apply. Figure 3.7 summarises the application of these sections.
• In most instances, a taxpayer can claim only one main residence at a time. However, under
s. 118-140, when changing main residences, in some instances, taxpayers can claim both as their
main residence for a period of up to six months.
• If spouses simultaneously claim different properties as their main residences, under s. 118-170
there are limits as to how much of an exemption they can each claim on their individual properties.
• The law in many instances prevents foreign tax residents from claiming the main residence
exemption.
• Under Subdivision 122-A, in some circumstances transferring a business to a company structure
can benefit from rollover relief. When this is the case, no CGT liability will be incurred from the
transfer, the assets in the company will continue to have the same tax attributes as they did
prior to the transfer, and the shares in the company will adopt the tax attributes of the transferred
underlying assets.
• Table 3.7 lists the situations in which a replacement asset rollover is available under Division 124.
These cover various situations where a taxpayer stops owning CGT assets and instead ends up
owning replacement CGT assets. When this is the case, the replacement CGT asset takes on the
attributes of the original CGT asset.

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 • Under Division 328-G, a small business restructure rollover relief applies to an SBE that transfers
their active assets to a different type of business entity. This rollover will only apply where is no
change to the ultimate economic ownership of the transferred assets.
• Under Division 125, demerger relief is available where a parent company or trust demerges from
another entity, and the holder in the parent entity receives interests in the demerged entity. When
this rollover applies, no CGT liability will be triggered.
• Table 3.8 lists the situations under Division 126 where an asset can be transferred without the
transferor triggering a CGT liability. When this occurs, as noted in table 3.9, the CGT asset will
have the same tax attributes for the transferee as it did for the transferor.
• In most instances, the transfer of CGT assets due to death does not trigger a CGT liability
(s. 128-10). The first element of cost base for the beneficiary of the asset will be the cost base
of the deceased if the asset was acquired by the deceased on or after 20 September 1985 and
was not their main residence (s. 128-15(4)). On the other hand, when the CGT asset was acquired
by the deceased prior to 20 September 1985 or was their main residence just before their death
(and was not being used to produce income), then the cost base for the beneficiary will be its
market value at the time the deceased passed away (s. 128-15(4)), as illustrated in figure 3.8.
3.4 Calculate an entity’s net capital gain or capital loss.
• The net capital gain is the amount that increases the assessable income of a taxpayer. In contrast,
a net capital loss is carried forward and can be used to offset future capital gains.
• The net capital gain is calculated by offsetting capital gains and capital losses, and then applying
the general discount and any of the small business concessions if applicable.
• The general discount is set at a rate of 50 per cent for most taxpayers, except for superannuation
funds, where it is set at the rate of 33.33 per cent. Companies cannot benefit from the discount.
• For eligible taxpayers to benefit from the discount, the CGT event must have occurred after
21 September 1999, they must generally be an Australian resident for tax purposes, and they must
have held the asset for at least 12 months.
• For taxpayers to be eligible for the small business concessions, they must fulfil the requirements
in s. 152-10 and, where the gain is a result of CGT event D1, s. 152-12.
• Once taxpayers are eligible to use the small business concessions, depending on the facts, they
can benefit from one or more of the four concessions: the 15-year exemption, the 50 per cent
reduction, the retirement exemption and the rollover. Figure 3.9 illustrates the order in which these
exemptions are generally applied.

REVIEW
This module introduced and reviewed the laws regarding the CGT provisions in the income tax legislation.
It began by discussing the core CGT concepts, including an overview and definition of capital gains, capital
losses and CGT events. It then went on to discuss CGT events in more detail.
Many of the CGT events involve a CGT asset of the taxpayer, and so the module explained what is
considered a CGT asset. This included an examination of collectables, personal use assets, and separate
assets that are subsets of CGT assets and which are subject to specific rules.
The module then discussed how to calculate the capital gain or loss resulting from a CGT event being
triggered. Many of the CGT events utilise the concepts of capital proceeds, cost base and reduced cost
base in determining the capital gain or loss, and so these concepts were explained in some detail.
The topic of when capital gains and losses are disregarded for CGT purposes was covered, along with a
discussion of the highly important main residence exemption, and rollovers, which also allow CGT relief
in certain situations.
Lastly, the module described how to calculate the net capital gain/loss of the taxpayer. This is an
important step, as the net capital gain is the amount included in the taxpayer’s assessable income. This
part of the module comprised an explanation of the general 50 per cent discount, as well as the small
business CGT exemptions.

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