Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 17

Taxing as revenue or capital gains and why it matters

Investors are often confused about the difference between a revenue profit and a capital gain. People are even more confused by whether a loss is a revenue loss or a capital loss and are frequently bamboozled as to which type of loss can be applied against which gain.

Does it matter?

Characterisation as revenue or capital

By way of illustration, assume an investor, in addition to their salary, has gross gains from sale of shares of $10,000, an equivalent loss from sale of shares and also a $10,000 loss from a negatively geared rental property. All equities have been held for longer than 12 months and the investor is not a share trader.

There are three fundamental questions to answer:

  • is the gain a revenue profit or a capital gain?
  • are the losses revenue losses or capital losses?
  • are there any restrictions in applying the losses against income or gains?

Characterisation of a gain or loss as revenue or capital is a matter of fact and circumstance having regard to many matters such as whether the investor is an individual or other legal entity, the investor’s intention and the nature of the activity undertaken.

In forming a view, the ATO will have regard to various factors including the dollar value of the portfolio, the type of securities, the frequency and dollar value of turnover, the average holding period and whether or not the investor has what the ATO would regard as a sophisticated trading strategy or methodology. Weighing these up, the ATO may reach a conclusion that the securities are held as revenue assets.

In contrast, a passive holding where equities are bought and sold infrequently is more likely to be regarded as capital. Unfortunately, there are no hard and fast rules as to what constitutes frequent activity.

Just to confuse matters, it is possible for an investor to designate one parcel of shares as a trading (revenue) portfolio and another as capital. Provided this is carefully documented and shares do not ‘drift’ from one parcel to another, the distinction can be made. Experience shows that the loss- making investments tend to drift towards the trading portfolio and the gains towards the capital portfolio – all too often after the event. This approach seldom survives close scrutiny by the ATO.

Rules of thumb

Given all of this, are there any rules of thumb? Whilst there are many exceptions the following could be adopted as guidelines:

  • where a person holds an investment for longer than 12 months, any gain should be regarded as capital (but not always)
  • likewise, any loss on sale of such an asset would be regarded as a capital loss
  • a loss where expenses exceed income (such as a negatively geared rental property) is a revenue loss
  • regular, high volume trading will be viewed as revenue gains and losses.

Moving to the loss rules, the following matters should be noted:

  • revenue losses can be applied against either income or capital gains
  • capital losses can only be applied against capital gains, not against income
  • one dollar of capital loss offsets one dollar of gross capital gain
  • one dollar of revenue loss offsets two dollars of gross long-term capital gain. That is, if the gain relates to an asset which a person has held for longer than 12 months, the 50% CGT discount applies to reduce the taxable amount to half of the gross gain. The revenue loss is then applied against this reduced amount.

The worked example

Where do these rules take us in the above example? The investor would offset the capital loss on shares dollar for dollar against the capital gain. The rental loss could be offset against salary.

If we change the example and assume the investor had no capital losses, they could apply the rental loss, either in full against their salary or part against the ‘after 50% discount’ gain of $5,000 and the remaining $5,000 against salary. The tax outcome would be the same in either case.

As an alternative, they might consider crystallising capital losses by selling shares with otherwise unrealised losses. Care would need to be taken with such a strategy as it may be viewed unfavourably by the ATO, particularly if the investor sold the investments prior to 30 June and bought back the same investments shortly after year-end.

As 30 June approaches, investors should take the time to review their portfolios and also the position they are taking in respect of tax treatment.

 

Ray Cummings is Principal of Greenoak Advisory Pty Ltd, and for 15 years was a Tax Partner at Pitcher Partners.

 

RELATED ARTICLES

The when and why of four million Australian retirees

Who needs the Caymans? 10 ways to avoid paying tax

A capital gains tax discount is legitimate but how much?

banner

Most viewed in recent weeks

Australian house prices close in on world record

Sydney is set to become the world’s most expensive city for housing over the next 12 months, a new report shows. Our other major cities aren’t far behind unless there are major changes to improve housing affordability.

The case for the $3 million super tax

The Government's proposed tax has copped a lot of flack though I think it's a reasonable approach to improve the long-term sustainability of superannuation and the retirement income system. Here’s why.

Tariffs are a smokescreen to Trump's real endgame

Behind market volatility and tariff threats lies a deeper strategy. Trump’s real goal isn’t trade reform but managing America's massive debts, preserving bond market confidence, and preparing for potential QE.

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

The super tax and the defined benefits scandal

Australia's superannuation inequities date back to poor decisions made by Parliament two decades ago. If super for the wealthy needs resetting, so too does the defined benefits schemes for our public servants.

Getting rich vs staying rich

Strategies to get rich versus stay rich are markedly different. Here is a look at the five main ways to get rich, including through work, business, investing and luck, as well as those that preserve wealth.

Latest Updates

The revolt against Baby Boomer wealth

The $3m super tax could be put down to the Government needing money and the wealthy being easy targets. It’s deeper than that though and this looks at the factors behind the policy and why more taxes on the wealthy are coming.

Superannuation

How to prevent excessive superannuation balances

There is an alternative, simpler approach which could be used to mitigate some of the difficulties that the proposed super tax has for holders of large assets such as properties, businesses and farms in SMSFs.

Shares

US shares: Ambitious multiples on ambitious EPS forecasts

Here's a detailed look at how current valuations and profit forecasts for the S&P 500 stack up versus history. The answer? Both seem excessive, making the market vulnerable to a correction or worse.

Taxation

Family trust tax: When is a loan not a loan?

A recent ruling could change the tax payable by beneficiaries of family trusts. If the ATO has previously demanded extra payments on unpaid present entitlements in your family group, you should watch this space.

Property

Things you must consider before subdividing a property

Subdividing can offer a lucrative first step into property development. Yet it comes with legal, planning and unexpected tax considerations that should be understood from an early stage to avoid surprises.

Investment strategies

5 insights that put market volatility in perspective

Though it may feel like this time is different, markets have shown resilience throughout history when confronted by wars, pandemics and other crises. In many cases, the best course of action has been none at all.

Strategy

Concerns about China's rise to power seem overblown

China has always managed its affairs in a very different way to Western countries and empires. For those concerned about China's rise as a global power, the big question is whether this approach could change.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.