Capital gains tax affects your income tax liability because a taxpayer's assessable income includes any 'net capital gain' made by the taxpayer. The net capital gain is the total of the capital gains made for the income year less certain capital losses that the taxpayer may have.

The tax legislation prescribes a five-step process to work out the net capital gain that is to be included in assessable income.

A capital gain will only arise if a CGT event occurs. CGT events are listed criteria that if satisfied will give rise to a taxpayer potentially having a capital gain or capital loss.

The main CGT event that relates to property transactions is CGT event A1. CGT event A1occurs when you dispose of a CGT asset. You dispose of a CGT asset if a change of beneficial ownership occurs.

There are other CGT events that relate to property particularly dealing with rights to use and enjoyment of property, the granting of options and transactions dealing with leases.

A CGT asset is very broadly defined and it is very difficult to think of an asset that would not be a CGT asset. Rules apply to treat certain assets as separate assets that require separate calculations to be undertaken. For example, buildings built after 19 September 1985, on land acquired before 20 September 1985, are separate assets.

Where a CGT event happens to a CGT asset, it is necessary to work out whether the taxpayer makes a capital gain or a capital loss. A capital gain will usually arise where the capital proceeds received for the disposal of the asset exceed the cost base you have in the asset. In most cases, no capital gain or capital loss is made if the asset was acquired before 20 September 1985. See CGT concepts.

The general rule is that the capital proceeds from a CGT event are the total of:

• the money received, or that you are entitled to receive, in respect of the event happening; and

• the market value of any other property you have received, or are entitled to receive, in respect of the event happening (worked out at the time of the event).

There are six modifications to the general rule, being:

The main modification is the market substitution rule. If no capital proceeds are received, then you have taken to have received the market value of the CGT asset. You are also taken to have received the market value of the CGT asset if some or all of the proceeds cannot be valued or the actual capital proceeds received are more or less than the market value of the CGT asset and the parties to the transaction were not dealing with each other on an arm's-length basis.

Accordingly, CGT may still be payable even where you gift the property to another person and receive no money for the transfer of the property.

The cost base consists of five elements to reflect the money or value provided to acquire the asset. As with capital proceeds, there are a number of modifications to the cost base rules. See Capital proceeds and cost base.

The most significant exemption in the CGT regime is the exclusion of the sale of the family home, in most cases, from being liable to CGT. The rules for the exemption are, however, complicated.

The basic rule is that a capital gain or capital loss made from a CGT event happening to a dwelling is disregarded if:

• the taxpayer is an individual — family homes owned by a company or trust cannot claim the main residence exemption;

• the dwelling was the taxpayer’s main residence throughout the taxpayer’s ownership period;

• the taxpayer’s ownership interest in the dwelling did not pass to them as a beneficiary in or as a trustee of the estate of a deceased person. Special rules apply in these situations; and

• the dwelling was not used for the purpose of producing assessable income in a way that causes the loss of the exemption.

Importantly, the exemption attaches to a dwelling and certain land sold with a dwelling. The sale of land by itself (even if it was the backyard) cannot benefit from the main residence exemption and would be subject to CGT.

There are a number of special rules that allow the exemption in other cases or allow a partial exemption. See Main residence exemption.

The CGT discount is a major concession that reduces the CGT payable on certain capital gains made on assets disposed of after 11.45am (Australian Capital Territory time) on 21 September 1999.

The CGT discount allows taxpayers who are individuals, trusts or complying superannuation funds (but not companies) who derive a capital gain from an asset held for more than 12 months, to include only part of the nominal capital gain (being that amount of the gain excluding any indexation) in its assessable income.

For individuals and trusts, the discount is 50%, meaning half of the capital gain is exempt from tax. For superannuation funds, the discount is 33 1/3%, meaning the effective rate of tax paid by a complying superannuation fund is 10% on any qualifying capital gain rather than the general superannuation tax rate of 15%.

The anti-overlap rule has the effect of reducing an amount of a capital gain if the amount is otherwise assessable income of the taxpayer. As such, the other income provisions have priority over the CGT provisions. The amount is only subject to CGT if it is not otherwise taxable under the other provisions of the tax legislation. See CGT discount, anti-overlap rule and minor CGT exemptions.

A CGT rollover is where a CGT event happens but the taxing event is “deferred” until a later time.

Rollovers are roughly broken into two groups:

• replacement asset rollovers — where one asset is swapped for another; and

• same asset rollovers — where the same asset is transferred from one entity to another.

In the case of a replacement asset rollover, the capital gain is usually deferred until the time of the later disposal of an asset that replaces the asset to which the CGT event happened. That is, the capital gain is rolled over from the old asset to the new asset.

In the case of a same asset rollover, the capital gain is usually deferred until the time of the later disposal of the same asset by the taxpayer that acquires the asset to which the CGT event happened. That is, the capital gain is rolled over from one taxpayer to another. See CGT rollovers.

There are special rules pertaining to CGT considerations in relation to leases. These are spelt out in the Income Tax Assessment Act 1997 (Cth). See CGT and leases.

If an option to purchase is exercised, then effectively the option is ignored for the purposes of the CGT provisions. Separate CGT considerations relating to options are usually only necessary where the option is not exercised. See CGT and options.