What is capital gains tax?

A capital gain or loss is the difference between what it cost you to buy a parcel of shares and what you received when you sold them.

If you make a capital gain it is added to your income in the year you sell the shares and is subject to your marginal rate of tax.

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

Some of your personal assets are exempt from capital gains tax (CGT), including your main residence, car and most personal assets, such as furniture. Pre-CGT assets or assets you acquired before 20 September 1985 are also generally exempt from CGT.

Working out your capital gain

There are three ways to work out your capital gain. You can choose the method that gives you the best result, that is, the method that gives you the smallest capital gain.

The Australian Taxation Office (ATO) outlines the three CGT calculation methods.

What is the cost base?

The cost base of a capital gains tax (CGT) asset is generally the cost of the asset when you bought it. However, it also includes other costs associated with acquiring, holding and disposing of the asset.

For most CGT events, you need the cost base of the CGT asset to work out whether you have made a capital gain. If you have made a capital loss from these events, the reduced cost base of the CGT asset is relevant for your calculation.

Visit the ATO website for more information on the cost base and the reduced cost base.

Taxation considerations are general and based on present taxation laws and may be subject to change. You should seek independent, professional tax advice before making any decision based on this information.

Commonwealth Bank is also not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and you should seek tax advice from a registered tax agent or a registered tax (financial) adviser if you intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law.