Sell a business, an investment property, or a parcel of shares for more than you paid, and the profit is not simply yours to keep. A slice belongs to the Australian Taxation Office as capital gains tax (CGT), and for a lot of business owners, it is the single largest tax bill they will ever face.
The good news is that CGT is one of the most manageable taxes there is, provided you understand how it works before you sell. The difference between planning ahead and reacting after the sale can be tens, sometimes hundreds, of thousands of dollars.
This guide explains, in plain English, what capital gains tax is, how it is calculated, and the legitimate ways Australian business owners reduce it.
What is capital gains tax?
Capital gains tax is the tax you pay on the profit made when you dispose of an asset. It is not a separate tax with its own rate; your net capital gain is added to your assessable income for the year and taxed at your marginal rate.
A “disposal” is broader than a sale. It includes selling, gifting, or transferring an asset, and it usually happens on the date of the contract, not the date settlement money lands in your account. That timing point alone catches people out every June.
CGT applies to assets acquired after 20 September 1985, which covers almost everything relevant today: investment properties, shares, business goodwill, cryptocurrency, and units in trusts. Your main residence and personal-use assets such as your car are generally exempt.
How is capital gains tax calculated?
At its simplest, your capital gain is the difference between what you received for the asset and what it cost you:
- Capital proceeds: what you sold the asset for (or its market value if you gave it away).
- Cost base: what you paid, plus buying and selling costs such as stamp duty, legal fees, agent commission, and certain holding costs.
Capital proceeds minus cost base equals your capital gain. If the cost base is higher than the proceeds, you have a capital loss instead, which can’t reduce your ordinary income, but can be offset against other capital gains now or carried forward to future years.
Here is a simple example. Say you bought an investment property for $600,000, spent $40,000 on stamp duty and purchase costs, and later sold it for $900,000 after $20,000 in selling costs. Your cost base is $660,000 and your capital proceeds are $880,000, giving a capital gain of $220,000. That $220,000 is what CGT is applied to, before any discount or concession.
The 50% CGT discount
This is the most valuable CGT rule most people know about, and the one that rewards patience. If you are an individual or a trust and you have owned the asset for at least 12 months before selling, you generally only pay tax on half of the capital gain.
In the example above, holding the property for more than a year reduces the taxable gain from $220,000 to $110,000. That $110,000 is then added to your income and taxed at your marginal rate.
One important catch: companies do not get the 50% discount. A company selling the same asset would be taxed on the full $220,000. This is one of many reasons the structure that owns an asset matters enormously, and why the right structure needs to be in place well before you sell, not scrambled together afterwards. Our guide on company versus trust structures explains the trade-offs in detail.
Planning to sell a business or property in the next few years?
At Pinnacle Accounting & Advisory, we help Melbourne business owners structure and time a sale so they keep more of the gain, legally. The best results come from planning years ahead, not weeks. Book a consultation with Mina to map out where you stand.
Book a Consultation →The small business CGT concessions
For business owners, this is where the real money is. On top of the 50% discount, the tax law provides four small business CGT concessions that can reduce, and in some cases completely eliminate, the tax on the sale of an active business asset:
- The 15-year exemption: sell an asset you have owned for 15 years and, if you are over 55 and retiring, the entire gain can be tax-free. We cover this in our 15-year exemption guide.
- The 50% active asset reduction: a further 50% reduction on an active business asset, on top of the general discount.
- The retirement exemption: up to $500,000 of gains exempt over your lifetime; see our retirement exemption explainer.
- The rollover: defer the gain by rolling it into a replacement active asset.
These concessions have strict eligibility tests: the maximum net asset value test, the active asset test, and the significant individual test among them. Get the conditions right and the saving is life-changing. Get them wrong and you can lose access to all of it. Our full breakdown of the four small business CGT concessions walks through each test.
Capital gains tax on property and shares
The same framework applies to investment properties and share portfolios. Two points are worth flagging for property investors in particular.
First, the main residence exemption can make the home you live in fully CGT-free, but it can be partial if you have rented the property out or used part of it to run a business. Second, any capital works and depreciation you have claimed over the years generally reduces your cost base, which increases the gain on sale. Investors are often surprised by this, so it pays to model the numbers before listing.
For a broader look at how property is taxed, see our guide on negative gearing in Australia, and our perspective on whether a property capital gain is real wealth or just inflation.
How to legally reduce your capital gains tax
There is no single trick: reducing CGT is about stacking legitimate rules in the right order. The levers we most often use with clients include:
- Timing the sale. Holding an asset past the 12-month mark unlocks the 50% discount. Choosing the financial year of sale can also matter if your income differs year to year.
- Owning the asset in the right structure. Individuals and trusts access the discount; companies do not. The ownership decision is made at purchase, not sale.
- Using capital losses. Crystallising an unrelated loss in the same year can offset the gain.
- Making super contributions. Concessional contributions can reduce assessable income in a high-gain year, within the caps.
- Applying the small business concessions. For active business assets, these are the heaviest lever of all.
Every one of these depends on your circumstances and, critically, on decisions made before you sell. This is exactly the kind of planning a proactive advisor should be raising with you well ahead of a sale, not explaining after the return is lodged. You can read the official rules on the ATO’s capital gains tax pages.
Frequently Asked Questions
What is capital gains tax in Australia?
Capital gains tax (CGT) is the tax on the profit you make when you sell or dispose of an asset such as property, shares or a business. The gain is added to your assessable income and taxed at your marginal rate, so CGT is part of income tax rather than a separate tax.
How is a capital gain calculated?
A capital gain is broadly the sale proceeds less the asset’s cost base, which is what you paid plus certain buying, holding and selling costs. If you have held the asset for more than 12 months, individuals and trusts can generally apply the 50% CGT discount to halve the taxable gain.
What is the CGT discount?
The CGT discount lets individuals and trusts reduce a capital gain by 50%, and complying super funds by one third, where the asset has been owned for at least 12 months. Companies do not receive the discount, which is an important structuring consideration before you buy an asset.
How can I reduce capital gains tax?
Common strategies include holding assets for over 12 months to access the discount, using the small business CGT concessions on business asset sales, timing disposals across income years, and offsetting gains with capital losses. Advice before you sell is where most CGT is legitimately saved.
If you have moved out of your home and rented it out, the CGT 6 year rule can keep that property exempt for up to six years, and it changes the calculation above significantly.
General Advice Disclaimer: The information in this article is general in nature and does not constitute personal financial, tax, or legal advice. It has been prepared without taking into account your personal objectives, financial situation, or needs. Before acting on anything in this article, consider its appropriateness to your circumstances and seek advice from a registered tax adviser or CPA. Liability limited by a scheme approved under Professional Standards Legislation.
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