Capital Gains Tax (AU) glossary
Capital gains tax in Australia is not a separate tax — it forms part of income tax, with net capital gains included in assessable income. The rules in Parts 3-1 and 3-3 of the ITAA 1997 are complex, with numerous concessions, exemptions, and rollover provisions. This glossary explains the terms practitioners need to advise clients on CGT obligations.
This glossary covers 40 terms that tax and property lawyers encounter when advising on capital gains tax in Australia. Each definition references the relevant ITAA 1997 provision or ATO guidance where applicable.
Definitions
Absence rule
The rule allowing a taxpayer to treat a former main residence as their main residence for up to six years while renting it out, provided no other dwelling is nominated.
Active asset
A CGT asset used, or held ready for use, in carrying on a business — a prerequisite for the small business CGT concessions.
Adjacent land
Land adjacent to the dwelling that is used primarily for private purposes and is reasonably necessary for the dwelling — included in the main residence exemption up to two hectares.
Adjustable value
The cost base of an asset reduced by any capital allowance deductions — relevant to depreciating assets and balancing adjustments.
Balancing adjustment
The CGT-like calculation triggered when a depreciating asset is disposed of — comparing termination value against adjustable value.
Capital gain
The amount by which the capital proceeds from a CGT event exceed the cost base of the asset.
Capital loss
The amount by which the reduced cost base of an asset exceeds the capital proceeds — can only be offset against capital gains, not ordinary income.
Capital proceeds
The money and market value of property received in respect of a CGT event — the amount against which the cost base is measured.
CGT asset
Any kind of property or legal or equitable right that is not trading stock — the broadest possible definition of assets subject to CGT.
CGT discount
A 50% reduction (individuals and trusts) or 33.33% reduction (complying super funds) of a capital gain on an asset held for at least 12 months.
CGT event
A specified event that triggers a capital gain or loss — there are over 50 CGT events categorised from A1 to L7 in the legislation.
CGT event A1
The most common CGT event — disposal of a CGT asset by change of ownership, including sale, gift, or compulsory acquisition.
CGT small business entity
An entity with aggregated turnover below the small business threshold ($2 million) or net CGT assets below $6 million — eligible for small business concessions.
Collectables
Personal-use CGT assets like artwork, jewellery, and antiques — capital losses on collectables can only offset gains on other collectables.
Cost base
The sum of five elements — acquisition cost, incidental costs, ownership costs (non-deductible), capital improvements, and preservation costs — used to calculate a capital gain.
Depreciating asset
An asset with a limited effective life used to produce assessable income — subject to capital allowance deductions under Division 40 rather than standard CGT rules.
Discount method
The most common method of calculating a capital gain for assets held more than 12 months — applying the CGT discount after offsetting capital losses.
Fifteen-year exemption
A small business CGT concession providing a full exemption for assets owned continuously for at least 15 years, if the individual is 55 or over and retiring.
Fifty per cent reduction
The active asset reduction available under the small business CGT concessions — halving the remaining capital gain after applying the CGT discount.
Indexation method
A method of calculating the cost base by indexing acquisition costs to CPI — frozen at 30 September 1999 and only available for assets acquired before that date.
Main residence exemption
A full CGT exemption for the family home if it has been the taxpayer's main residence for the entire ownership period and not used to produce income.
Market value substitution
A rule substituting market value as capital proceeds where no consideration is received, or the parties are not dealing at arm's length.
Maximum net asset value test
The test requiring net CGT assets of the taxpayer and connected entities to be below $6 million to access small business CGT concessions.
Net capital gain
The total capital gains for the year less capital losses and the CGT discount — the amount included in assessable income.
Net capital loss
An unapplied capital loss carried forward to future income years — it cannot be deducted against ordinary income.
Partial exemption
A proportional CGT exemption applied when a main residence was income-producing for part of the ownership period or was not the main residence for part.
Personal use asset
A CGT asset used mainly for personal enjoyment — gains are assessable only if the cost base exceeds $10,000, and losses are disregarded.
Pre-CGT asset
An asset acquired before 20 September 1985 — gains are exempt from CGT unless there has been a post-CGT improvement or a CGT event other than disposal.
Reduced cost base
A modified cost base used to calculate a capital loss — excludes certain elements that form part of the cost base for gain calculations.
Replacement-asset rollover
A rollover that defers CGT by reducing the cost base of a replacement asset by the amount of the deferred gain.
Retirement exemption
A small business CGT concession exempting up to $500,000 of capital gains on active assets over a lifetime, with contributions to super if under 55.
Rollover relief
A deferral of CGT by transferring the cost base to a replacement asset — available for restructures, marriage breakdowns, and compulsory acquisitions.
Same-asset rollover
A rollover where the original cost base is transferred to the recipient of the same asset — commonly used in family trust distributions and company restructures.
Significant individual
An individual with at least a 20% interest in a company or trust — relevant to eligibility for small business CGT concessions.
Small business CGT concessions
Four concessions in Division 152 — the 15-year exemption, 50% reduction, retirement exemption, and rollover — available to eligible small business entities.
Small business rollover
A concession deferring a capital gain for two years (or longer if a replacement asset is acquired) — the gain crystallises if no replacement is acquired.
Stacking
The ability to apply multiple small business CGT concessions in sequence — for example, the CGT discount, then the 50% reduction, then the retirement exemption.
Subdivision 118-B
The legislative subdivision containing the main residence exemption rules, including the absence choice, adjacent land, and partial exemptions.
Third element (cost base)
Non-deductible ownership costs incurred to hold a CGT asset — such as interest, rates, and insurance — included in the cost base for indexation method only.
Trustee CGT obligations
The rules requiring trustees to calculate net capital gains at the trust level, with the character of the gain flowing through to beneficiaries who are presently entitled.
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These definitions are general explanations for educational purposes — not legal or tax advice. CGT rules are complex and change frequently. Always verify against the current legislation, ATO rulings, and practice statements.
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