Pre-CGT Assets: Understanding Tax Implications and Reporting Requirements

Estimated reading time: 8 minutes

Key Takeaways

• Pre-CGT assets are properties or investments acquired before 20 September 1985, exempt from Capital Gains Tax.
• This tax exemption offers significant advantages in investment portfolios and estate planning.
• It’s critical for investors and accountants to understand the conditions preserving pre-CGT status.

Introduction

Pre-CGT assets are investments or properties acquired before the introduction of the Capital Gains Tax (CGT) on 20 September 1985. This date marks a crucial dividing line in Australia’s tax landscape, creating two distinct asset categories with different tax treatments.

These assets hold special status in the Australian tax system, potentially offering significant tax advantages. For investors and accountants, understanding pre-CGT assets is crucial for optimizing tax outcomes and developing effective tax planning strategies.

The tax-exempt nature of pre-CGT assets substantially reduces tax liabilities upon sale, making them valuable in investment portfolios and estate planning. This exemption is one of the few remaining “grandfathered” benefits in the Australian tax system.

Financial advisors, accountants, and investors need a clear understanding of pre-CGT assets, their status, and limitations for informed financial decisions and tax compliance.

Understanding Pre-CGT Assets

What Exactly is a Pre-CGT Asset?

Tax legislation defines a pre-CGT asset as any CGT asset last acquired before 20 September 1985 and maintaining its pre-CGT status under current laws. This definition establishes the timing requirement and the condition that the asset hasn’t undergone changes affecting its protected status.

The date—20 September 1985—marks the introduction of the capital gains tax regime in Australia, significantly changing how investment gains were taxed. Before this date, capital gains were untaxed, creating a clear distinction between assets acquired before and after.

The Critical Distinction: Pre-CGT vs. Post-CGT Assets

The asset’s acquisition timing fundamentally impacts tax treatment:

• Pre-CGT assets: Properties, shares, or other investments acquired before 20 September 1985 are generally exempt from CGT upon disposal. Profit from selling these assets is not subject to capital gains tax.
• Post-CGT assets: Assets acquired on or after 20 September 1985 are subject to CGT provisions. Profit from selling these assets is typically included in assessable income and taxed accordingly.

This distinction benefits long-term investors holding assets from before the CGT introduction, providing a tax shield on potential growth and appreciation.

Read more about pre-CGT assets

Capital Gains Tax Overview

How Capital Gains Tax Works

Capital gains tax is part of Australia’s income tax system. It applies to profit realised when disposing of an asset. Disposal includes selling, gifting, transferring, or destruction of the asset.

The process involves:

• Determining your capital gain (generally the difference between the asset’s purchase price and sale price).
• Applying any available discounts or concessions.
• Including the resulting amount in your assessable income.
• Paying tax at your marginal income tax rate.

Individuals and small businesses may use discounts to reduce the taxable gain, such as the 50% CGT discount for assets held over 12 months. However, these discounts don’t apply to pre-CGT assets, which are wholly exempt.

Explore how capital gains tax works

The “Grandfathering” Principle

In tax law, “grandfathering” allows existing arrangements to continue under old rules even after new legislation. For CGT, grandfathering allows assets acquired before 20 September 1985 to retain tax-free status under specific conditions.

This ensured fairness and prevented retroactive taxation when CGT was introduced. It recognised that investment decisions were made without expecting capital gains tax.

This tax-free status benefits long-term asset holders, but it’s not absolute; certain actions can cause a pre-CGT asset to lose its protected status and become subject to CGT.

Learn more about the grandfathering principle

Treatment of Pre-CGT Assets

CGT Exemptions for Pre-CGT Assets

The main advantage of pre-CGT assets is their general exemption from capital gains tax. When disposing of a pre-CGT asset, any capital gain or loss is disregarded for tax purposes. This means:

• You don’t include the gain in your assessable income.
• You don’t need to apply any CGT discount or concessions.
• You don’t report the gain on your tax return as a capital gain (though you may need to report the sale).

This exemption applies regardless of the gain’s size—a profit of $10,000 or $1 million is tax-free if the asset qualifies as pre-CGT.

Investors with diversified portfolios can strategically manage asset sales, potentially prioritizing post-CGT assets with losses and pre-CGT assets with significant gains.

Find out more about CGT exemptions

When Pre-CGT Assets Lose Their Exempt Status

While pre-CGT assets generally have tax-free status, certain actions can change this, making subsequent gains subject to CGT. Key scenarios include:

• Transferring to a trust: Placing a pre-CGT asset into a trust may trigger a CGT event, causing it to lose its pre-CGT status.
• Business restructuring: Moving assets between entities during restructuring might create a new CGT acquisition date.
• Substantial changes: Significant asset changes may be treated as a new asset acquired at the time of the change.
• Certain overseas transfers: Special rules apply when transferring assets to foreign residents or entities.

These situations create a new acquisition date for CGT purposes, meaning the asset is treated as if acquired when the trigger event occurred, not when originally purchased before 1985.

Learn more about pre-CGT status loss

Special Scenarios and Considerations

Specific scenarios require careful attention when dealing with pre-CGT assets:

• Partial disposals: If you sell part of a pre-CGT asset, the exemption only applies to that portion. Additions or improvements after the CGT introduction date may be subject to CGT.
• Significant improvements: Substantial improvements after 20 September 1985 may be treated as separate CGT assets. For example, building a house on pre-CGT land after 1985 may make the house a separate post-CGT asset.
• Inherited assets: Inherited pre-CGT assets generally retain their status. However, if the deceased acquired the asset after 20 September 1985, normal CGT rules apply.
• Jointly owned assets: For jointly owned assets, pre-CGT status applies to each owner’s share based on when they acquired their interest.

Understanding these nuances is crucial for tax planning and avoiding unexpected tax liabilities.

Explore special scenarios with pre-CGT assets