How do I manage capital gains on my investments?

When you sell an asset or give it to someone else it's called a 'CGT event'. This is the point at which you make a capital gain or capital loss.

Your marginal rate of tax is the income tax you pay, based on the tax scales set by the government.

• An individual income tax rates table for 2016/17 can be found on the Australian Taxation Office (ATO) website.

Before your capital gain is added to your other assessable income it can be reduced by capital losses you have made in the current or past financial years or the individual 50% CGT discount.

How are capital gains reduced?

Capital losses

If you make a capital loss, you cannot claim it against income but you can use it to reduce a capital gain in the same income year.

If your capital losses exceed your capital gains or you make a capital loss in an income year and you don't have a capital gain, you can carry the loss forward indefinitely and deduct it against capital gains in future years.

50% CGT discount

Since 19 September 1999, if you acquire CGT assets such as shares or property and subsequently sell or transfer ownership after holding the investment for more than 12 months, you are entitled to a 50% discount.

This means only half of the capital gain will be added to your assessable income. If you hold a CGT asset for less than 12 months the full capital gain will be added to your assessable income.

Case Study: the 50% CGT discount method

Ken earns $85,000 per year as a landscape gardener. He buys 3,000 shares for $2.00, valued at $6,000, with brokerage paid separately on 15 July 2012. The shares are trading at $4.00 throughout July 2013. There are no other costs associated with acquiring, holding or disposing of the shares.

Scenario 1: If Ken sells his shares for $4.00 on 14 July 2013, his assessable capital gain will be $6,000: 3,000 x $4.00 = $12,000 less what he paid for them which was $6,000.

Scenario 2: If Ken sold his shares on 16 July 2013 his assessable capital gain would be $3,000 because he is entitled to the 50% CGT discount. This is because he held the shares for more than 12 months.

Assuming he had no other capital losses or deductions, holding his shares for longer than 12 months has earned Ken a tax saving of $1,110.