Every time you swipe your card at the supermarket or fill up your car, you’re paying some form of tax. But two taxes that often leave people scratching their heads are income tax and capital gains tax. While both hit your hip pocket, they work very differently, and knowing how can make a real difference to your financial wellbeing.
So let’s break it down.
What Is Income Tax?
Income tax is exactly what it sounds like: a tax on the money you earn. If you work a nine-to-five job, run your own business, collect rent from an investment property, or earn interest on a savings account, the Australian Taxation Office (ATO) wants its share.
Australia operates on a progressive tax system. That means the more you earn, the higher percentage you pay. The system is designed so that lower-income earners carry a lighter load, while higher earners contribute more. There is also a tax-free threshold, which means Australians earning below a certain amount pay no income tax at all.
Most salaried employees have tax withheld automatically from their pay through the Pay As You Go (PAYG) system. At the end of each financial year, you lodge a tax return, declare all your income sources, and either receive a refund or pay any outstanding balance.
Deductions, offsets, and certain super contributions can all reduce how much income tax you owe. A registered tax agent or accountant can help you identify what you are legitimately entitled to claim.
What Is Capital Gains Tax?
On the other hand, capital gains tax, commonly called CGT, applies when you sell a capital asset for more than you paid for it. It applies when you sell a capital asset for more than you originally paid. That could be an investment property, a parcel of shares, a managed fund, or even that vintage watch collection sitting in your wardrobe.
Capital gains fall into two categories, short-term and long-term, and the distinction matters enormously.
If you sell an asset within 12 months of buying it, the full capital gain gets added to your income. If you hold the asset for more than 12 months before selling, you are entitled to a 50 per cent CGT discount. That means you only pay tax on half the gain. It is one of the most powerful incentives in the Australian tax system for long-term investing.
How Are They Different?
Figure 1: Difference between Income Tax and Capital Gains Tax
The core difference comes down to what is being taxed and how.
Income tax targets the money you actively earn, your wages, your business profits, and your rental income. It applies consistently throughout the year and is largely unavoidable. You earn it, you pay tax on it.
Capital gains tax targets the profit from selling assets. It is event-driven — it only kicks in when a transaction occurs. That gives you far more control over when and how much CGT you pay. You can time the sale of an asset to fall in a financial year when your income is lower, reducing your overall tax burden. You can also use capital losses, money lost on a bad investment, to offset capital gains and reduce what you owe.
Income tax offers much less flexibility in that regard. Your salary lands in your account when it does, and the tax follows accordingly.
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A Simple Example
Imagine you earn $90,000 a year working in healthcare. That income sits squarely in a tax bracket and gets taxed accordingly through your employer.
Now say you also sell shares that you have held for three years, making a $20,000 profit. Because you held those shares for more than 12 months, you receive the 50 per cent CGT discount, meaning only $10,000 gets added to your assessable income. You pay tax on that $10,000 at your marginal rate, significantly less than if you had sold those shares after just six months.
The timing of that sale was entirely in your hands.
Why Does It Matter?
Understanding these two taxes puts you in control. Knowing when to sell, what to claim, and how different income sources are treated can genuinely reduce your tax bill, legally and strategically.
Tax law is complex, and the rules around CGT in particular can catch people off guard. Speaking with a qualified accountant or financial adviser is always a smart move, especially before making significant inv
