Let’s look at how a capital gain is treated for tax purposes and how it affects your taxable income.

In Australia, capital gains tax was introduced on 20 September 1985 to tax capital gains made on the disposal of most assets held by an entity, including investments. There are a few assets that are exempted. Most assets purchased before this date are exempt from capital gains tax.

A capital gain generally occurs when you sell an investment for more than you bought it for.

When you buy an investment, the ATO recognises that whilst many ongoing costs are generally tax deductible, any initial expenditure and some ongoing costs are of a capital nature and are not eligible for a tax deduction. These costs are added to the purchase price to form the total cost of buying an asset. Capital costs are expenditure associated with establishing, replacing, enlarging or improving the asset.

The total cost of buying an asset is called the cost base.

The cost based is then compared to the net sale proceeds to determine the capital gain.