You own 3,000 shares in the same company, bought across three different years at three different prices. You decide to sell 1,000 of them. Which 1,000 did you just sell?
It sounds like a meaningless question. The shares are identical, they sit in the same holding, and the sale proceeds are the same either way. But the answer determines your cost base, your holding period, whether the capital gains tax discount applies, and ultimately how much tax you pay. On a modest sale the difference can be a few thousand dollars. On a large portfolio rebalance it can be tens of thousands.
Most Australian investors never make this decision consciously. Their broker’s tax report applies first in, first out by default, the figure flows through to the accountant, and the return is lodged on that basis. The assumption underneath is that first in, first out is the rule.
It is not. It is the fallback that applies when you cannot identify which shares you sold. If you can identify them, you have a choice, and the Australian Taxation Office has accepted that position for more than thirty years.
This guide explains how parcel selection works, why the parcel with the smallest gain is often not the parcel that produces the smallest tax bill, and how the whole exercise changes after 1 July 2027.
What a parcel is, and why you have more of them than you think
Every time you acquire shares or units, you create a parcel. Each parcel carries its own acquisition date, its own cost base including brokerage, and its own quantity. Two parcels of the same security bought six months apart are legally indistinguishable in your holding, but for tax purposes they are entirely separate assets.
Investors routinely underestimate how many parcels they hold. Common sources include:
- Dollar cost averaging. A monthly investment plan into one ETF creates twelve parcels a year. After a decade you have 120.
- Dividend reinvestment plans. Every DRP allocation is a new parcel, often for an odd number of shares at an unusual price. Two dividends a year for twenty years is forty parcels of one holding.
- Topping up on dips. The extra buying most investors do during volatility.
- Corporate actions. Bonus issues, rights issues, share purchase plans, demergers and returns of capital each create or adjust parcels with their own rules.
This is one of the quieter costs of a regular investment habit. It is still the right habit, and our guide on whether to invest a lump sum or dollar cost average sets out why. It simply means the record keeping matters more than people expect.
The rule most investors get wrong
The Commissioner’s position is set out in Taxation Determination TD 33 and expanded in Taxation Ruling TR 96/4. In substance:
- Where you can identify which particular shares were disposed of, whether by reference to holding records, certificate numbers or appropriate accounting records, that identification is used to work out the gain or loss.
- Where you cannot identify them, first in, first out is accepted as a reasonable basis.
- The Commissioner will accept the taxpayer’s own selection of which shares were disposed of.
- Average cost is generally not available for CGT purposes, because the rules require an acquisition date and a cost base for a particular asset.
So first in, first out is a default, not an obligation. Where you keep proper records you can nominate the parcel. This is sometimes called specific identification or specific parcel selection.
The condition that actually matters
The identification has to be genuine, supportable, and made at or around the time of the sale. You cannot wait until your accountant is preparing the return in the following March, look at the outcome, and then decide retrospectively which parcel produced the best answer. That is reverse engineering rather than identification, and it is exactly the pattern that fails under review.
In practice that means one of two things. Some brokers and platforms let you nominate the parcel at order entry, or allow you to change the default in your tax settings before the sale. Where that facility does not exist, the standard approach is a contemporaneous note or spreadsheet entry recording which parcel you intended to sell, dated on or before the sale date, kept with your CGT records.
It is a five minute administrative step. It is also the step that separates a defensible position from an assumption.
Same sale, three different tax bills
Assume you hold 3,000 shares in one listed company, acquired in three parcels, and you sell 1,000 shares at $30.00 on 20 May 2027 for proceeds of $30,000. Your marginal rate including the Medicare levy is 39 per cent. Brokerage is ignored for clarity, though in practice it forms part of the cost base and reduces the proceeds.
| Parcel | Acquired | Cost base | Raw gain | Discount? | Taxable gain | Tax at 39% |
|---|---|---|---|---|---|---|
| A | March 2014 at $8.00 | $8,000 | $22,000 | Yes | $11,000 | $4,290 |
| B | August 2021 at $22.00 | $22,000 | $8,000 | Yes | $4,000 | $1,560 |
| C | September 2026 at $25.00 | $25,000 | $5,000 | No | $5,000 | $1,950 |
Three observations fall out of that table.
First, the default is the worst outcome. First in, first out sells Parcel A and produces a tax bill of $4,290. That is nearly three times the best available result on exactly the same transaction.
Second, the smallest gain is not the smallest tax bill. Parcel C has the lowest raw gain at $5,000, and an investor optimising naively for minimum gain would select it. But Parcel C has been held for around eight months, so no discount applies and the whole $5,000 is taxable. Parcel B has a larger raw gain of $8,000, but the discount halves it to $4,000. Parcel B wins by $390.
Third, the difference is real money for a routine transaction. $2,730 of avoidable tax on a $30,000 sale, from a decision most people do not know they are making.
Our broader explainer on how capital gains tax works in Australia for investors covers the underlying calculation. Parcel selection is the layer that sits on top of it.
Why “minimum gain” is the wrong objective
Selecting the parcel with the highest cost base reduces this year’s assessable gain. That is not the same as reducing your lifetime tax.
Every dollar of gain you avoid recognising today is still sitting in the holding. Selling your highest cost base parcels first means the low cost base parcels remain, and they will eventually be sold by you, transferred, or dealt with by your estate. Minimum gain selection is a deferral strategy dressed up as a saving.
Deferral is often worth having. Money kept working for another decade compounds, and a gain realised in retirement at a lower marginal rate can genuinely cost less than the same gain realised while you are working. But there are situations where the reverse is true, and it is worth naming them:
- You are in an unusually low income year. A career break, a business loss, or the year before a pension starts. Recognising a large gain cheaply now can be better than deferring it into a higher rate year.
- You are carrying capital losses. Unapplied losses have no time limit but no value until a gain arrives. Selecting a high gain parcel to absorb them can be the correct move.
- Your rate is heading up, not down. Someone mid career with rising income may be better off recognising gains earlier.
- The holding is concentrated. If a single stock has grown to an uncomfortable share of your portfolio, the risk of holding it is a bigger issue than the tax of selling it. This is one of the patterns in our list of investment mistakes we see time and time again.
The order of operations that decides the answer
One mechanical point catches people out constantly. Capital losses are applied against capital gains before the discount is applied, not after.
That means a $10,000 loss offsets $10,000 of gross gain, not $10,000 of discounted gain. Applying a loss against a discount eligible parcel effectively wastes half its value, because you lose a gain that would only have been taxed at half. Where you have both discount eligible and non-eligible gains in the same year, applying losses against the non-eligible gains first generally produces a better result. Parcel selection and loss utilisation therefore have to be planned together, not separately.
How parcel selection changes after 1 July 2027
The replacement of the 50 per cent CGT discount is now law. From 1 July 2027, for individuals, trusts and partnerships, the discount gives way to cost base indexation plus a minimum 30 per cent tax rate on real capital gains.
The transitional mechanism matters enormously here. Every CGT asset held at 30 June 2027 is deemed to be sold and immediately reacquired just before 1 July 2027. The gain accrued to that point keeps the old 50 per cent discount and is deferred until you actually sell. Growth after that date falls under the new rules.
Work through what that does to parcel selection.
The cost base differences between parcels get frozen, not erased
After the deemed reacquisition, every parcel of the same security has the same reacquisition cost, because they are all valued at the same market value on the same date. In that sense the parcels converge.
But each parcel carries its own deferred pre-reform notional gain, and those amounts remain wildly different. Parcel A in the example above carries a much larger deferred gain than Parcel C. When you eventually sell, that deferred component crystallises. So parcel selection does not become irrelevant. The variable simply changes: instead of choosing between cost bases, you are choosing between deferred pre-reform gains.
The holding period test loses its force for individuals
A large part of today’s parcel selection logic is about the twelve month test, since a parcel one day short of twelve months is taxed on the whole gain. Once the discount is replaced, that cliff edge disappears for the post-reform component, and indexation runs only from 1 July 2027 rather than from your original purchase date. The decision becomes less about dates and more about the size of the deferred amount attached to each parcel.
The practical consequence right now
Two jobs follow from this. First, the period to 30 June 2027 is the last window in which the current parcel selection logic applies in full, which makes it the right time to review any holding where the parcels differ substantially. Our guide to CGT aware rebalancing before 30 June 2027 works through that in detail, including why accelerating sales is usually not the answer.
Second, and more importantly, your parcel records need to survive the transition. The split between pre-reform and post-reform gain is set primarily by market valuation at 1 July 2027 or by an elected apportioning method, applied parcel by parcel. If your parcel history is incomplete now, it will be considerably harder to reconstruct after the deemed sale has run through it.
The dividend reinvestment problem
DRP participants have the messiest parcel histories of any investor group, and often the least documentation. A holding built over twenty years through reinvestment can consist of forty or more parcels, each for an irregular number of shares at a price set by the DRP allocation formula rather than the market close.
Two consequences follow. Selling part of that holding without parcel records leaves you defaulting to first in, first out on your oldest and cheapest shares, which is usually the worst available outcome. And the reinvested dividends were assessable income in the year received, which means the cost base of each DRP parcel is the allocation value, not nil. Investors who forget this pay tax twice on the same money.
If you hold long standing DRP positions, reconstructing the parcel history from your annual dividend statements is worth doing while the statements still exist. Registries do not keep them indefinitely. This also interacts with franking credits and your overall tax position on investments.
Where parcel selection matters most
Rebalancing a portfolio that has drifted
Trimming an overweight holding is the most common trigger. The trim is usually partial, which is exactly when you have a choice of parcels. Our guide on when to rebalance your portfolio covers the timing question; parcel selection is what determines the cost of executing it.
Funding a large purchase
Where you need a specific dollar amount for a house deposit, a renovation or a tax bill, the number of shares to sell is fixed by the amount needed. The only lever you have is which parcel, and it is the cheapest lever available.
Transitioning into retirement
Drawing down a portfolio in retirement is a multi year sequence of partial sales, which means a multi year sequence of parcel decisions. Done deliberately across several low income years, the cumulative saving is significant. Our guides on how investment strategy changes in retirement and whether to draw income from super or investments first deal with the surrounding decisions.
Moving assets into another structure
Transferring shares into a super fund or family trust is a disposal at market value, and if you are transferring part of a holding, parcel selection applies to that transfer as much as to a market sale. Our guide on off market transfers of shares into super or a trust covers that interaction.
Deliberate loss realisation
Where one parcel is underwater and another is in profit, selecting the loss parcel realises a loss you can carry forward indefinitely. Be careful here. Selling a loss parcel and buying back substantially the same position shortly afterwards, with the dominant purpose of generating a tax benefit, can attract the ATO’s anti avoidance position on wash sales. The loss realisation needs to be commercially genuine.
What records you actually need
For each parcel, retain the contract note or transaction confirmation showing date, quantity, price and brokerage; DRP statements for reinvested parcels; documentation of any corporate action affecting cost base; and, for any sale where you nominate a parcel, a contemporaneous record of that nomination.
The ATO expects records to be kept for five years after the CGT event, but the practical standard is longer, because the cost base of an asset you still hold has to be substantiated whenever you eventually sell it. A parcel bought in 2009 and sold in 2035 needs 2009 documentation. Nobody regrets keeping a well organised CGT register. A great many people regret not starting one.
Where Professional Advice Adds Value
Parcel selection sits in an awkward gap. It is too technical for most investors to handle intuitively, too transaction specific for a broker’s default settings to get right, and often too late by the time an accountant sees it, because the return is prepared months after the decision could have been made.
At Money Path we look at it in the opposite order. Before a sale, we work out how much needs to be realised and why, map the parcels available and their holding periods, model the after tax outcome of the realistic alternatives, factor in carried forward losses and the rest of your income for that year, and coordinate with your accountant so the nomination is documented properly at the time rather than reconstructed later.
Reasonably often the analysis changes the transaction itself. Splitting a sale across two financial years, selling a different quantity, or drawing from a different asset entirely can produce a better outcome than optimising the parcel within a fixed plan. That is the value of running the tax question at the same time as the investment question rather than after it. If you are approaching a rebalance, a drawdown or a large sale, our portfolio structuring and investment advice services are built around exactly that sequence.
Frequently asked questions
Does the ATO require me to use first in, first out?
No. First in, first out is accepted where you cannot identify which particular shares were disposed of. Where you can identify them through proper records, that identification is used, and the Commissioner accepts the taxpayer’s selection of which shares were sold. Your broker’s default report setting is a software convention, not a tax rule.
Can I choose the parcel after I have sold, when I do my tax return?
No. The identification needs to be made at or around the time of the sale and supported by contemporaneous records. Choosing retrospectively once you can see which option produces the lowest tax is not identification, and it is unlikely to be sustained if the ATO reviews the position.
Should I always sell the parcel with the highest cost base?
Not necessarily. The parcel with the smallest raw gain can still produce the largest taxable gain if it has been held for less than twelve months and misses the CGT discount. Selling your highest cost base parcels also leaves the low cost base parcels in your portfolio, so it defers tax rather than removing it.
Can I use an average cost across all my parcels?
Generally no. The CGT rules require an acquisition date and a cost base for a particular asset, and the ATO’s position is that averaging is not acceptable for CGT purposes other than in narrow circumstances. Each parcel has to be dealt with on its own terms.
How does parcel selection work for ETFs and managed funds?
The same principles apply, because you hold units acquired in parcels. Managed investment trusts add a further layer, since annual cost base adjustments can increase or decrease the cost base of your units, and those adjustments need to be tracked per parcel. Our guides on ETFs versus individual shares and managed funds versus ETFs cover the structural differences.
Does parcel selection still matter after the CGT changes in 2027?
Yes, but differently. Assets held at 30 June 2027 are deemed sold and reacquired, so all parcels of a security take the same reacquisition value. Each parcel still carries its own deferred pre-reform gain, and that deferred amount is what differs between them when you eventually sell. Good parcel records become more important through the transition, not less.
What if I have no records for shares I bought years ago?
Start with your share registry, your broker’s historical statements, and your old tax returns, which may show dividend income that helps date a holding. Where records genuinely cannot be reconstructed, you will generally be limited to first in, first out. It is worth doing this work before a sale rather than during one, and well before 1 July 2027.
Taking the next step
If you are planning to sell part of a holding, the useful question is not just how much to sell. It is which parcels, in which financial year, against which losses, and with what documented at the time. Those decisions are made before the trade, not after it, and they are worth a conversation.
General advice warning: This article contains general information only. It does not take into account your objectives, financial situation or needs, and it is not tax advice. Taxation laws are complex and change regularly, and the capital gains tax rules described here are subject to transitional arrangements and pending administrative guidance. Examples are illustrative and use assumed figures. You should consider whether the information is appropriate for you and seek personal advice from a licensed financial adviser and a registered tax agent before acting.
