7 Capital Gains Tax Myths That Cost Investors Thousands

Myth 1: The CGT Discount Always Applies After 12 Months

The Myth

Many investors believe that simply holding an asset for 12 months automatically qualifies them for the 50 percent CGT discount, regardless of circumstances.

The Reality

While the 12-month holding period is essential, several situations disqualify you from the discount:

• Companies: Companies cannot claim the CGT discount at all, only individuals and trusts
• Foreign residents: If you are a foreign resident when you sell, you cannot claim the discount on assets acquired after 8 May 2012
• Certain assets: Some collectables and personal use assets have special rules

The dollar impact is significant. On a $100,000 capital gain, the 50 percent discount saves $18,500 in tax for someone in the 37 percent bracket. Losing eligibility costs real money.

What to Do Instead

Track your residency status carefully. If you are planning to become a foreign resident, consider triggering capital gains before departure to lock in discount eligibility.

Myth 2: Inheriting Property Means No CGT

The Myth

A common belief is that inherited property is CGT-free because the deceased already owned it.

The Reality

Inherited property receives a CGT rollover, not an exemption. This means no CGT is payable when you inherit, but when you eventually sell, CGT applies based on specific rules:

• If the deceased acquired the property before 20 September 1985 and it was their main residence at death, you get a market value cost base at death
• If acquired after 20 September 1985, you inherit the deceased's original cost base
• The 50 percent discount applies based on your ownership period, starting from the deceased's original acquisition date

Example: Your grandmother bought a property in 1990 for $150,000. It was her home until she passed in 2024. You inherit it at a value of $900,000. If you sell two years later for $950,000, your capital gain is only $50,000 (the increase since inheritance) because you maintained main residence status.

What to Do Instead

Document the property's status at death and your intended use carefully. Consider whether renting it out affects future main residence exemptions.

Myth 3: Capital Losses Can Offset Any Income

The Myth

Some investors believe capital losses can reduce their salary, rental income, or other assessable income.

The Reality

Capital losses can only offset capital gains. They cannot reduce ordinary income like wages, interest, or rent. If your capital losses exceed your capital gains in a year, the excess carries forward indefinitely to offset future capital gains.

Example: David made a $30,000 capital loss on shares and has a $100,000 salary with no capital gains this year. His taxable income remains $100,000. The $30,000 loss carries forward to reduce capital gains in future years.

What to Do Instead

Time your capital gains and losses strategically. If you have realised losses carried forward, consider triggering capital gains to use them up, especially gains that do not qualify for the CGT discount.

Myth 4: The Main Residence Exemption Covers Everything

The Myth

Homeowners often believe their entire property is CGT-free because it is their main residence.

The Reality

The main residence exemption can be partial or lost entirely in several situations:

• Income-producing use: If you rented out part of your home, that portion is subject to CGT
• Land over 2 hectares: Only the dwelling and up to 2 hectares of land qualify
• Business use: Home offices and business areas may reduce the exemption
• Multiple properties: You can only have one main residence at a time

The 6-year absence rule allows you to treat a property as your main residence for up to 6 years while renting it out, but only if you do not treat another property as your main residence during that time.

What to Do Instead

Keep detailed records of periods of personal use versus rental or business use. Calculate the appropriate apportionment if required.

Myth 5: Transferring Assets to Your Spouse Avoids CGT

The Myth

Some believe transferring assets to a lower-earning spouse eliminates or reduces CGT.

The Reality

Transferring assets between spouses is a CGT event. While an automatic rollover exists for spouses (meaning no immediate CGT), the receiving spouse inherits your cost base. When they eventually sell, CGT applies based on your original acquisition details.

More importantly, if the transfer is done to reduce tax, the ATO may apply Part IVA anti-avoidance provisions. Income splitting arrangements using asset transfers are heavily scrutinised.

What to Do Instead

Consider purchasing future investments in the lower-earning spouse's name from the outset, ensuring genuine ownership and control exists.

Myth 6: CGT Only Applies When You Receive Cash

The Myth

Investors sometimes believe CGT only triggers when they receive cash proceeds from a sale.

The Reality

CGT applies whenever you dispose of an asset, regardless of whether cash changes hands. Disposal events include:

• Selling for cash
• Exchanging one asset for another (including crypto-to-crypto trades)
• Gifting an asset
• Losing or destroying an asset
• Having an asset compulsorily acquired

When no cash is received, the market value at the time of disposal is used to calculate the capital gain or loss.

What to Do Instead

Track all disposal events, not just sales. If you gift shares to family or trade assets, record the market value and calculate CGT implications.

Myth 7: You Can Ignore Small Capital Gains

The Myth

Some investors believe small capital gains below a certain threshold do not need to be reported.

The Reality

There is no de minimis threshold for capital gains reporting. Every capital gain must be included in your tax return, regardless of size. The only exceptions are for certain personal use assets under $10,000 in value.

The ATO matches data from brokers, exchanges, and share registries. Failing to report small gains can trigger compliance action and penalties.

What to Do Instead

Report all capital gains and losses. Use CGT record-keeping tools to track every transaction, no matter how small.