Using Capital Losses Against Capital Gains in Australia

Capital gains tax (CGT) is a key consideration for Australian investors and business owners when disposing of assets. Understanding how to use capital losses to offset capital gains is an important strategy for minimising tax liability. This article outlines how capital losses work, how they can be applied against capital gains, and what rules and limitations apply under Australian tax law.

What Is a Capital Loss?

A capital loss occurs when you dispose of a capital asset, such as shares, real estate (not your main residence), or other investments, for less than its cost base (generally the amount you paid for the asset plus associated costs). For example, if you bought shares for $10,000 and sold them for $7,000, the $3,000 difference is a capital loss.

Using Capital Losses to Offset Capital Gains

In Australia, capital losses can only be used to offset capital gains, not other types of income such as wages, interest, or dividends.

Applying Capital Losses in the Current Year

If you make a capital gain and also realise a capital loss in the same financial year, the loss must be applied against the gain before any CGT discounts are applied.

Example:

• You sell an investment property and make a capital gain of $40,000.
• You also sell some shares at a capital loss of $15,000.
• Your net capital gain is reduced to $25,000.
• If the remaining gain qualifies for the 50% CGT discount (e.g., held for more than 12 months by an individual or trust), the taxable gain becomes $12,500.

Carrying Forward Capital Losses

If your capital losses exceed your capital gains in a financial year, the excess loss cannot be used to reduce other income. However, you can carry forward the unused capital losses to offset capital gains in future years.

To do this:

• You must record the capital loss in your tax return.
• The carried-forward losses can be used indefinitely until fully applied.
• You cannot apply carried-forward losses against income other than capital gains.

Important Rules and Considerations

1. No Indexation for Post-1999 Assets
   Capital losses are calculated without applying the indexation method (which adjusts the cost base for inflation). This method is no longer available for assets acquired after 21 September 1999.
2. Order of Application
   Capital losses must be applied before CGT discounts or small business concessions.
3. Net Capital Losses
   You have a net capital loss if your losses exceed your gains for the year. This is not deductible from income but must be recorded to carry forward.
4. Trusts and Companies
   Trusts and companies have more complex rules, including continuity of ownership and same business tests for companies to utilise prior year losses.

Strategic Considerations

Using capital losses strategically can significantly reduce your tax bill. Investors often review their portfolios before the end of the financial year to identify underperforming assets and potentially realise losses to offset gains—a process known as tax-loss harvesting. However, always ensure that:

• You are not engaging in wash sales (selling an asset to create a loss and repurchasing it shortly after), which may attract scrutiny from the ATO.
• You keep detailed records of asset purchase and sale dates, costs, and related transactions.

Capital losses are a valuable capital gains tax planning tool in Australia. When used correctly, they can reduce your overall CGT liability over time. Investors and business owners can better manage their tax position by offsetting capital losses against capital gains and carrying forward any unused losses.

However, CGT rules can be complex, especially when dealing with multiple assets, structures like trusts or companies, or when combining CGT concessions. Seeking advice from a registered tax agent or accountant can help you stay compliant and ensure you’re making the most of your available strategies.

Do you need help managing your capital gains and losses?

Our expert team at Sharp Accounting can help you structure your investments, understand your CGT obligations, and make tax-smart decisions. Get in touch with us today to book a consultation.