• Step 3: CGT averaging

    Attention

    Warning:

    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

    End of attention

    Work out the amount of your CGT averaging reduction as follows:

    Gross adjustment amount (step 1) x capital gain adjustment percentage (step 2)

    The reduction is subtracted from what would otherwise have been your basic income tax liability on your actual taxable income worked out without CGT averaging. It cannot reduce that amount to less than zero.

    Example

    Sally bought 2 CGT assets in June 1990. She sold one asset in July 1999 when it had a cost base of $2,200, including indexation worked out using the September 1999 indexation number. The capital proceeds were $5,000, giving a capital gain of $2,800.

    She sold the second asset in November 1999 for $8,000. Sally chose not to include indexation in the cost base, and had no capital losses. The cost base without indexation was $2000 and she made a discount capital gain of $6,000. She reduced the capital gain by 50 per cent to $3,000.

    Her net capital gain is $5,800 ($2,800 + $3,000) . Sally has other income of $36,000 salary and wages and no deductions. Her taxable income is $41,800 ($36,000 + $5,800) .

    Calculate the notional net capital gain

    She does not need to recalculate the July gain of $2,800 as this was calculated under the old rules.

    She recalculates the November gain including indexation in the cost base. She uses the indexation number for the December 1999 quarter, when the CGT event happened.

    Sally calculates her notional net capital gain as follows:

    Cost base including indexation (2000 x 124.1/102.5)

    $2,422

    Recalculated capital gain (8,000 - 2,422)

    $5,578

    Notional net capital gain (2,800 + 5,578)

    $8,378

    Calculate the modified net capital gain amount

    Sally was over 18 on 30 June 2000, and has no net capital losses from earlier income years. Therefore, her modified net capital gain amount is $8,378 - the same as her notional net capital gain. She shows this amount at label Z.

    Calculate the pre-announcement net capital gain amount

    In working out her pre-announcement net capital gain amount, Sally disregards the second capital gain because she made it after 11.45 am on 21 September 1999. Her pre-announcement net capital gain amount is $2,800 (8,378 - 5,578) . She shows this amount at label V.

    The ATO calculates basic income tax liability for the 2000 income year

    Sally's basic income tax liability for the 2000 income year is worked out as follows:

    1. Tax on $41,800 taxable income without CGT averaging (assuming that Sally is a resident subject to general tax rates)

    $10,576

    2. Notional net capital gain (see above)

    $8,378

    3. Notional taxable income ($41,800 taxable income less $5,800 actual net capital gain plus $8,378 notional net capital gain)

    $44 378

    4. Tax on notional taxable income from step 3 (without CGT averaging)

    $11 684.54

    5. Tax on notional taxable income from step 3, applying CGT averaging to the notional net capital gain from step 2

     

    (a) Tax on $36,000 ($44,378 - $8,378)

    $8,262.00

    (b) Tax on $37,675 ($36,000 + $1,675)

    $8,831.50

    5 x ($8,831.50 - $8,262.00) = $2,847.50

     

    (c) $8,262.00 + $2,847.50

    $11,109.50

    6. Gross adjustment amount (step 4 less step 5)

    $575.04

    7. Capital gain adjustment percentage ($2,800 pre-announcement net capital gain amount divided by $8,378 modified net capital gain amount)

    33.420864%

    8. CGT averaging reduction (step 6 times step 7)

    $192.18

    9. Basic income tax liability (step 1 less step 8)
    ($10,576.00 - $192.18)

    $10,383.82

    Last modified: 18 Sep 2009QC 18323