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    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

    What is capital gains tax?

    Capital gains tax affects your income tax liability because your assessable income includes any net capital gain you made for the income year. Your net capital gain is the total of your capital gains for the year reduced by your capital losses.

    Capital gains tax applies when certain events or transactions happen. These events or transactions are referred to as 'CGT events'. As a general rule, you can only make a capital gain or loss if a CGT event happens.

    To determine whether you have an income tax liability on a net capital gain - referred to in this guide for convenience as 'capital gains tax' or 'CGT' - you need to know:

    • whether a CGT event has happened• the time of the CGT event
    • how to calculate the capital gain or loss
    • whether there is any exception, exemption, discount or other concession which allows you to reduce or disregard the capital gain or loss
    • whether any roll-over applies to defer or disregard your CGT liability.

    Generally, any capital gain or loss you make in relation to a CGT event is disregarded for a pre-CGT asset - that is, an asset you acquired before 20 September 1985.

    If a CGT event involving plant happened after 11.45 am on 21 September 1999 any capital gain or loss you make is also disregarded. Other income tax provisions apply.

    What is a CGT event?

    CGT events are the different types of transactions or events which attract capital gains tax. As a general rule, if there is no CGT event, you cannot make a capital gain or loss. You make the capital gain or loss at the time of the event. For most CGT events, you make a capital gain if you receive an amount from the CGT event which exceeds your 'cost base'. You make a capital loss if your 'reduced cost base' exceeds the amount you receive from the CGT event.

    Australian residents make a capital gain or loss if a CGT event happens to any of their assets anywhere in the world. As a general rule, a non-resident makes a capital gain or loss only if a CGT event happens to a CGT asset that has a necessary connection with Australia or certain CGT events apply - that is, those that create:

    • contractual or other rights (CGT event D1) or
    • a trust over future property (CGT event E9).

    There is a wide range of CGT events. Some happen often and affect many different taxpayers. Others are rare and affect only a few taxpayers. CGT events are listed in appendix B.

    Most CGT events involve a CGT asset. However, some CGT events are concerned directly with capital receipts.

    The most common CGT event happens if you dispose of an asset to someone else - for example, you sell or give away an asset.

    Listed below are some of the other CGT events from which you may make a capital gain or loss.

    • An asset you own is lost or destroyed. The destruction may be voluntary or involuntary.
    • Shares you own are cancelled, surrendered or redeemed.
    • You enter into an agreement not to work in a particular industry for a set period of time.
    • A trustee makes a non-assessable distribution to you from a unit trust.
    • A company makes a payment (not a dividend) to you as a shareholder.
    • A liquidator declares that shares you own are worthless.
    • You receive an amount from a local council fordisruption to your business assets by roadworks.
    • You stop being an Australian resident.

    To work out your capital gain or loss you need to know which CGT event applies. There may be different rules for when you include the capital gain in your assessable income and for calculating the capital gain or loss, depending on the CGT event.

    Order in which CGT events apply

    If more than one CGT event could apply to your transaction or circumstances, the most relevant CGT event applies.

    Time of the CGT event

    The timing of a CGT event is important because it tells you whether a capital gain or loss from the event affects your income tax liability for the current income year or another year.

    If you dispose of a CGT asset to someone else, the CGT event happens when the disposal contract is entered into or, if there is no contract, when you stop being the asset's owner.

    Example

    In June 2000 Sue enters into a contract to sell land. The contract is settled in October 2000.

    Sue makes the gain in the 1999-2000 year when she enters into the contract and not the 2000-01 income year when settlement takes place.

    End of example

    If a CGT asset you own is lost or destroyed, the CGT event happens when you first receive compensation for the loss or destruction or, if you do not receive any compensation, when the loss is discovered or the destruction occurred.

    Example

    Rob owned a rental property which was destroyed by fire in June 1999. He received a payment under an insurance policy in October 1999. The CGT event occurred in October 1999.

    End of example

    The CGT events specifically relevant to shares and unit trusts and the times of the events are dealt with in chapter 6.

    What are CGT assets?

    All assets are subject to the capital gains tax rules unless they are specifically excluded. Many CGT assets are easily recognisable - for example, land and buildings, shares in a company and units in a unit trust. Other CGT assets are not so well understood - for example, contractual rights, options, foreign currency and goodwill.

    CGT assets fall into 3 categories - collectables, personal use assets and other assets.

    Collectables

    A collectable is:

    • a painting, sculpture, drawing, engraving or photograph; a reproduction of these items or property of a similar description or use
    • jewellery
    • an antique
    • a coin or medallion
    • a rare folio, rare manuscript or rare book
    • a postage stamp or first day cover

    that is used or kept mainly for your or your associate’s personal use or enjoyment.

    A collectable is also:

    • an interest in any of those items
    • a debt that arises from any of those items
    • an option or right to acquire any of those items.

    Any capital gain or loss you make from a collectable acquired for $500 or less is disregarded.

    A capital gain or loss you make from an interest in a collectable is disregarded if the market value of the collectable when you acquired the interest was $500 or less. Before 16 December 1995, however, if you acquired the interest for $500 or less a capital gain or loss is disregarded.

    If you dispose of collectables individually that you would ordinarily dispose of as a set, you obtain the exemption only if you acquired the set for $500 or less. This does not apply to collectables that you acquired before 16 December 1995.

    Personal use assets

    A personal use asset is:

    • a CGT asset – except a collectable – that is used or kept mainly for your or your associate’s personal use or enjoyment
    • an option or a right to acquire a CGT asset of that kind
    • a debt arising from a CGT event involving a CGT asset kept mainly for your personal use and enjoyment or
    • a debt arising other than in the course of gaining or producing your assessable income or from your carrying on a business.

    Personal use assets include such items as boats, furniture, electrical goods and household items.

    Land and buildings are not personal use assets.

    If a CGT event happens to a personal use asset in the 1998-99 income year or a later year, a capital gain you make from the asset or part of the asset is disregarded if you acquired the asset for $10,000 or less. Before the 1998-99 year, you disregarded the capital gain or loss if you disposed of the personal use asset for $10,000 or less.

    Any capital loss you make from a personal use asset is disregarded.

    If you dispose of personal use assets individually that would ordinarily be sold as a set, you obtain the exemption only if you acquired the set for $10,000 or less.

    All other assets

    These include:

    • land and buildings
    • shares in a company
    • rights and options
    • leases
    • units in a unit trust
    • Instalment Receipts
    • goodwill
    • licences
    • convertible notes
    • your home – see Exemptions
    • contractual rights
    • foreign currency
    • any major capital improvement – above the improvement threshold – made to certain land or pre-CGT assets. See Improvement thresholds.

    Partnerships

    It is the individual partners who make a capital gain or loss from a CGT event, not the partnership. In other words, any capital gain or loss from a CGT event that happens in relation to a partnership or one of its CGT assets is made by the partners individually.

    For capital gains tax purposes each partner owns a proportionate share of each CGT asset.

    Joint tenants

    For capital gains tax purposes, individuals who own an asset as joint tenants are each treated as if they own an equal interest in the asset as a tenant in common. For more information see Chapter 5: Joint tenants.

    Separate assets

    Buildings and structures on land

    For capital gains tax purposes, there are exceptions to the rule that what is attached to the land is part of the land. In some circumstances a building or structure is considered to be a separate CGT asset from the land.

    A building or other structure on land, or a capital improvement made to land, that you acquired on or after 20 September 1985 is, in limited circumstances, considered a CGT asset separate from the land. This applies to the building or structure if you entered into the contract for construction, or construction commenced, on or after that date.

    Land you acquire on or after 20 September 1985, adjacent to land you acquired before that date, is taken to be a separate CGT asset even if it and the adjacent land is merged into one title.

    Example

    On 1 April 1984 Robert bought a block of land. On 1 June 1999 he bought another block adjacent to the first one. Robert amalgamated the titles to the 2 blocks into one title.

    The second block is treated as a separate CGT asset acquired on or after 20 September 1985 and therefore subject to the capital gains tax rules.

    End of example

    Capital improvements to assets acquired before 20 September 1985

    A capital improvement to a CGT asset acquired before 20 September 1985 may also be treated as a separate asset and be subject to capital gains tax.

    The capital improvement is treated as a separate CGT asset if its cost base - see Cost base and reduced cost base - when a CGT event happens in relation to the original asset is:

    • more than the improvement threshold for the year in which the event happens and
    • more than 5 per cent of the amount of money and property you receive from the event

    If the improvements are related to each other, the capital improvements are treated as one separate CGT asset if the total of their cost bases satisfies the threshold.
    The improvement threshold is changed to take account of inflation. The thresholds for 1985-86 to 1999-2000 are shown below.

    Improvement thresholds for 1985-86 to 1999-2000

    Financial year

    Threshold ($)

    1985-86

    50,000

    1986-87

    53,950

    1987-88

    58,859

    1988-89

    63,450

    1989-90

    68,018

    1990-91

    73,459

    1991-92

    78,160

    1992-93

    80,036

    1993-94

    80,756

    1994-95

    82,290

    1995-96

    84,347

    1996-97

    88,227

    1997-98

    89,992

    1998-99

    89,992

    1999-2000

    91,072

     

    Example

    In 1983 David bought a boat. In August 1997 he installed a new mast for $30,000. He sold the boat for $150,000 in the 1999-2000 income year.

    If the cost base of the improvement in the year it is sold is $32,000 (includes indexation) and the improvement threshold is $91,072, the new mast is not a separate asset. Therefore, capital gains tax does not apply because David bought the boat before 20 September 1985.

    End of example

    Acquisition of CGT assets

    You may acquire a CGT asset as a result of:

    • CGT event happening – for example, the transfer of land under a contract of sale
    • other events or transactions occurring – for example, the issue by a company of shares and their issue is not a CGT event
    • applying specific rules – for example, if a CGT asset passes to you as a beneficiary when an individual dies.

    Time of acquisition

    The time a CGT asset is acquired is important for 3 main reasons.

    • Capital gains tax generally does not apply to pre-CGT assets – that is, assets acquired before 20 September 1985.
    • It determines whether the cost base of a CGT asset is indexed to take account of inflation and the extent of that indexation. Indexation is only available for assets owned for at least 12 months. Changes to the rules for indexation apply from 11.45am on 21 September 1999. Indexation is not available for assets acquired after 11.45am on 21 September1999 or for expenditure incurred after that time.
    • It also determines whether you are eligible for the CGT discount. To be eligible for this discount, one requirement is that you need to have owned a CGT asset for at least 12 months. See The CGT discount.

    Generally, you acquire a CGT asset when you become its owner.

    If you acquire a CGT asset as a result of a CGT event, specific rules determine when you acquire the asset. These rules depend on which CGT event is involved. For example, if you enter into a contract to purchase a CGT asset from an entity, the time of acquisition is when you enter into the contract. If someone disposes of an asset to you without entering into a contract, you acquire the asset when they stop being the asset's owner. If a CGT asset passes to you as beneficiary in the estate of a deceased person, you acquire the asset on the date the person dies.

    If you acquire a CGT asset without a CGT event happening, different rules apply to determine when you acquire the asset. If, for example, a company issues or allots shares to you, you acquire the shares when you enter into a contract to acquire them or, if there is no contract, at the time of their issue or allotment.

    Becoming a resident

    Special capital gains tax rules apply to assets you own when you become a resident of Australia. You are taken to have acquired the assets at the time you became a resident. This rule does not apply to assets you owned before 20 September 1985 or that have a necessary connection with Australia. Some examples of assets that may have a necessary connection with Australia are land or a building in Australia, a share in a company resident in Australia and a unit in a resident unit trust.

    If capital gains tax affects you, how do you work it out?

    The following steps give you a broad outline of how to calculate the capital gain or loss for most CGT events. The terms used are explained in this guide.

    • Work out your capital proceeds from the CGT event.
    • Work out the cost base for the CGT asset.
    • Subtract the cost base from the capital proceeds.
    • If the proceeds exceed the cost base, the difference is your capital gain.
    • If not, work out the reduced cost base for the asset.
    • If the reduced cost base exceeds the capital proceeds, the difference is your capital loss.
    • If the capital proceeds are less than the cost base but more than the reduced cost base, you have made neither a capital gain nor a capital loss.

    Capital proceeds

    'Capital proceeds' is the term used to describe the amount of money or the value of any property you receive or are entitled to receive as a result of a CGT event happening. In some cases, if you receive nothing in exchange for the CGT asset - for example, you give a CGT asset as a gift - you are taken to have received the market value of the asset at the time of the CGT event.

    You may also be taken to have received the market value of a CGT asset that is the subject of a CGT event if your capital proceeds are more or less than the market value of the CGT asset and you and the purchaser were not dealing with each other at arm's length in connection with the event. You are said to be dealing at arm's length with someone if each party acts independently and neither party exercises influence or control over the other in connection with the transaction. The law looks at not only the relationship between the parties but also the quality of the bargaining between them.

    Capital proceeds from a CGT event are reduced if:

    • you are not likely to receive some or all of those proceeds
    • the non-receipt is not due to anything you have done or failed to do and
    • you took all reasonable steps to obtain payment.

    Capital proceeds are reduced by:

    • any part of them that you repay or
    • any compensation you pay that can reasonably beregarded as a repayment of them

    provided you are not entitled to a tax deduction for the amount you repaid.

    If you are registered for GST purposes and the capital proceeds from a CGT event also constitute the consideration for a taxable supply, any GST payable is not part of the capital proceeds.

    Cost base and reduced cost base

    For most CGT events, the cost base of a CGT asset is important in working out if you have made a capital gain. For some CGT events, however, cost base is not relevant. In these cases the provisions dealing with the relevant CGT event explain the amounts to use to work out your capital gain.

    For example, if you enter into an agreement not to work in a particular industry for a set period of time, CGT event D1 specifies that you make a capital gain or loss by comparing the capital proceeds with incidental costs.

    In working out a capital gain, you determine the cost base of the CGT asset involved in the CGT event. In working out a capital loss, you determine the reduced cost base of the CGT asset involved in the CGT event.

    Cost base

    The cost base of a CGT asset is made up of 5 elements.

    • First element: money paid or required to be paid and the market value of property given or required to be given to acquire the CGT asset. The first element is reduced by the amount of your GST input tax credit (if any) for acquisition or importation of the CGT asset.
    • Second element: incidental costs of acquiring the CGT asset or costs in relation to the CGT event. Examples are: agent’s commission; advertising to find a seller or buyer; fees paid to an accountant, professional tax adviser, valuer or lawyer for professional service; and stamp duty. You can include expenditure for advice concerning the operation of the tax law as an incidental cost only if it was provided by a recognised professional tax adviser and you incurred the expenditure after30 June 1989. Do not include expenditure for which you have, or could be allowed, a deduction for income tax purposes in any year. The second element is reduced by the amount of your GST input tax credit (if any) for your incidental costs.
    • Third element: non-capital costs you incur in connection with your ownership of a CGT asset. Examples are: interest, rates, land taxes, repairs, and insurance premiums. You can include non-capital costs of ownership only in the cost base of assets acquired after 20 August 1991.

      Non-capital costs of ownership include non-deductible interest on borrowings to refinance a loan used to acquire a CGT asset and on loans used to finance capital expenditure you incur to increase an asset’s value.

      Non-capital costs of ownership are not included in the cost base of collectables or personal use assets. These costs cannot be indexed or used to work out a capital loss. Do not include expenditure for which you have, or could be allowed, a deduction for income tax purposes in any year.

      The third element is reduced by your GST input tax credit (if any) for your non-capital costs.
    • Fourth element: capital expenditure you incur to increase the value of the CGT asset if the expenditure is reflected in the state or nature of the asset at the time of the CGT event.
    • Fifth element: capital expenditure you incur to preserve or defend your title or rights to the asset.

    If you acquired a CGT asset after 13 May 1997, the cost base of the asset does not include:

    • any expenditure on the asset that has been allowed or is allowable as an income tax deduction – this applies to all elements of the cost base
    • heritage conservation expenditure and landcare and water facilities expenditure incurred after12 November 1998 that give rise to a tax rebate (also called tax offset).

    Note: Special rules apply if you acquired land before 13 May 1997, but after 13 May 1997 and before 1 July 1999 you incur expenditure on constructing a building that is treated as a separate asset from the land for CGT purposes. If you think this may be relevant to you, contact the ATO for more information.

    Example: Special building write-off deduction

    Roger acquires a rental property on 1 July 1997 for $200,000. Before disposing of the property on 30 June 2000, he claims $10,000 in special building write-off deductions.

    At the time of disposal, the cost base of the property was $210,250. Roger must reduce the cost base of the property by $10,000 to $200,250.

    End of example

    In some cases, a deduction you have claimed on a CGT asset can be partly or wholly 'reversed' - that is, the value of part or all of the deduction may be declared as income in the year the CGT event happens. In this case, the capital gains cost base of the asset is increased by the amount of income you have to include in assessable income.

    Any expenditure you recoup does not form part of the cost base of a CGT asset. In working out whether you have made a capital gain or loss from a CGT event that happens in the 1999-2000 income year or a later year, do not reduce the cost base by a recouped amount included in your assessable income.

    Example

    John bought a building in 1999 for $200,000 and incurred $10,000 in legal costs associated with the purchase. As part of a settlement, the vendor agreed to pay $5,000 of the legal costs. John did not claim as a tax deduction any part of the $5,000 he paid in legal costs.

    He later sells the building. As he received reimbursement of $5,000 of the legal costs, in working out his capital gain he includes only $5,000 in the cost base.

    End of example

    Indexation

    Before the 1999-2000 income year, if you owned a CGT asset for at least 12 months, you were able to increase its cost base to take account of inflation. You could increase each element of the cost base other than the third element (non-capital costs of ownership) by an indexation factor. You did this at the time of the CGT event.

    The law has been changed to no longer allow indexation of the cost base of an asset. If you acquire an asset after 11.45 am on 21 September 1999, indexation of the cost base is not available. However, you may be eligible for the CGT discount. See The CGT discount for more information.

    If a CGT event happened at or before 11.45 am on 21 September 1999 in relation to a CGT asset acquired before that time, you may index the cost base. However, indexation is frozen as at 30 September 1999.

    If the CGT event happens after 11.45 am on 21 September 1999 in relation to a CGT asset acquired before that time, you may choose to claim indexation of the cost base in calculating the capital gain or the CGT discount. If you claim indexation, only expenditure incurred at or before that time may be indexed. See The CGT discount for more information.

    There are some exceptions to the requirement that you must have owned the asset for at least 12 months for indexation to apply. For example:

    • if you acquire an asset as a legal personal representative or a beneficiary of a deceased estate, you are taken to have acquired the asset at the time the deceased acquired it.
    • If you acquired an asset as the result of a marriage breakdown, you will satisfy the 12-monthrequirement if the period your spouse owned the asset and the period you have owned the asset are in total equal to or greater than 12 months.

    The indexation factor is an amount equal to the Consumer Price Index (CPI) figure for the quarter of the year in which the CGT event happened to the asset, divided by the CPI figure for the quarter of the year in which you incurred the expenditure included in any of the cost base elements (except the third element). A list of CPI figures is included in appendix A.

    If the CGT event happens after 11.45 am on 21 September 1999:

    Indexation factor = CPI figure for quarter ending 30.9.1999 ÷ CPI figure for quarter in which expenditure was incurred

    If the CGT event happened at or before 11.45 am on 21 September 1999:

    Indexation factor = CPI figure for quarter when CGT event happened ÷ CPI figure for quarter in which expenditure was incurred

    Generally, you index expenditure from the date you incur it even if you do not pay some of the expenditure until a later time. However, if, for example, shares issued to you are partly paid and the company later makes a call on the shares, you use the CPI figure for the quarter in which you made that later payment. This does not apply to shares you acquired before 16 August 1989.

    If you purchased shares in the Commonwealth Bank of Australia (CBA) or Telstra 1 (the first public offer of Telstra shares), see Purchase of shares by instalments for the dates from which indexation applies to each instalment paid.

    Work out the indexation factor to 3 decimal places, rounding up if the fourth decimal place is 5 or more.

    The CGT discount

    What is a discount capital gain?

    An individual, complying superannuation entity or trust may choose under certain circumstances to include in assessable income a percentage of their capital gain, rather than claim indexation of the cost base of the asset frozen as at 30 September 1999. See Discount percentage for more information.

    You may receive the CGT discount if:

    • you are an individual, complying superannuation entity or trust
    • a CGT event happens in relation to an asset that you own
    • the CGT event happens after 11.45am on 21 September 1999
    • you have owned the CGT asset for at least 12 months
    • you did not choose to apply indexation to the elements of the cost base.

    In certain circumstances you may be eligible for the CGT discount even if you have not owned the asset for at least 12 months. For example:

    • If you acquired an asset as a legal personal representative or a beneficiary of a deceased estate, you are taken to have acquired the asset at the time that the deceased acquired it.
    • If you acquired an asset as the result of a marriage breakdown, you will satisfy the 12-monthrequirement if the period your spouse owned the asset and the period you have owned the asset are in total equal to or greater than 12 months.
    • If a CGT asset is compulsorily acquired, lost or destroyed and you acquire a replacement asset, you will satisfy the 12-month requirement if the period of ownership of the original asset and the new asset is at least 12 months.

    Certain capital gains excluded

    Certain CGT events do not qualify for the CGT discount. For example, if a capital gain is made from a CGT event that creates a new asset - such as a payment for entering into a restrictive covenant - the 12-month ownership rule cannot be satisfied and the taxpayer is not eligible for the CGT discount.

    Certain capital gains are specifically excluded from being a discount capital gain. For example, if you make a capital gain from a CGT event happening to a CGT asset that you acquired more than 12 months before the CGT event, under an agreement entered into within that 12-month period, the capital gain does not qualify for the CGT discount.

    Discount percentage

    This is the percentage by which the capital gain to be included in your assessable income is reduced. You reduce the capital gain only after applying all available capital losses.

    If you are an individual or trust, the discount percentage is 50 per cent. If you are a complying superannuation entity - including a trust that is a complying superannuation entity - the discount percentage is 33 1/3 per cent.

    Example

    Sharon acquires shares in a listed public company in June 1992, and units in a listed unit trust in May 1996. She has a net capital loss of $12,000 in the 1998-99 income year, and incurs a further capital loss of $6,000 in August 1999.

    Sharon sells the shares in July 1999 and makes a capital gain of $4,000. She calculates this capital gain by indexing the elements of the cost base. She also sells the units during February 2000 and makes a capital gain of $22,000. She chooses not to index the elements of the cost base.

    Sharon may choose to apply her capital losses in any order, but she must apply her current and prior year losses against discount gains before reducing them by the discount percentage. She chooses to apply the $6,000 current year capital loss firstly against the $4,000 gain realised in July 1999, leaving a current year capital loss balance of $2,000. She will then apply the remaining $2,000 current year capital loss and the prior year net capital loss of $12,000 against the discount gain of $22,000.

    Sharon reduces the discount capital gain remaining ($8,000) by 50 per cent. Her net capital gain to be included in her assessable income for the 1999-2000 income year is $4,000.

    End of example

    Choosing frozen indexation or the CGT discount

    If you have the option of choosing the CGT discount or calculating the capital gain using indexation frozen as at 30 September 1999, there is no one factor you can use as a basis to select the best option. Relevant factors include the type of asset you own, how long you have owned it, when you owned it and the past and future expected rates of inflation. You will need to work out your capital gain under each option in order to determine the best result in your particular circumstances.

    Example

    Val bought a property for $150,000, under a contract dated 24 June 1991. The contract provided for the payment of a deposit of $15,000 on that date, with the balance of $135,000 to be paid on settlement on 5 August 1991.

    She paid stamp duty of $5,000 on 20 July 1991. On 5 August 1991, she received an account for solicitor's fees of $2,000, which she paid as part of the settlement process.

    She sold the property on 15 October 1999 - the day the contracts were exchanged - for $215,000. She incurred costs of $1,500 in solicitor's fees and $4,000 in real estate fees.

    Val's capital gain using frozen indexation

    Deposit

    $15,000

    123.4 ÷ 106.0 = 1.164

    $17,460

    Balance

    $135,000

    123.4 ÷ 106.6 = 1.158

    $156,330

    Stamp duty

    $5,000

    123.4 ÷ 106.6 = 1.158

    $5,790

    Solicitors fees

    $2,000

    123.4 ÷ 106.6 = 1.158

    $2,316

    No indexation is available for the solicitor's fees in relation to the sale of the property or the real estate fees

    Solicitor's fees for sale of the property

    $1,500

    Real estate fees

    $4,000

    Cost base

    $187,396

    Val's capital gain is worked out as follows:

    Capital proceeds

    $215,000

    Less cost base

    $187,396

    Capital gain

    $27,604

    Assuming that Val has not made any other capital losses or capital gains in the 1999-2000 year and does not have any prior year net capital losses, the net capital gain to be included in Val's assessable income is $27,604.

    Cost base is calculated as follows.

    Val's capital gains using the CGT discount

    Deposit

    $15,000

    Balance

    $135,000

    Stamp duty

    $5,000

    Solicitor's fees

    $2,000

    Solicitor's fees

    $1,500

    Real estate fees

    $4,000

    Cost base

    $162,500

    Val's discount capital gain is calculated as follows:

    Capital proceeds

    $215,000

    Less cost base

    $162,500

    Discount capital gain

    $52,500

    Less 50% discount

    $26,250

    Net capital gain

    $26,250

    Val will choose the CGT discount rather than indexation.

    Download Val's worksheetsThis link will download a file to show you how she might complete the CGT worksheets using both methods.

    End of example

    Reduced cost base

    This is the amount taken into account in determining whether you have made a capital loss when a CGT event happens to a CGT asset and, if so, the amount of the loss. Remember that a capital loss can only be used to reduce a capital gain. It cannot be used to reduce other income.

    The reduced cost base of a CGT asset has 5 elements. These elements are not indexed. Except for the third element, all of the elements of the reduced cost base are the same as those for the cost base. The third element is any amount that is assessable because of a balancing adjustment for the asset or would be assessable if certain balancing adjustment relief was not available.

    The reduced cost base does not include any of those costs that have been allowed or are allowable as deductions - for example, write-off deductions for capital expenditure, and expenditure incurred after 12 November 1998 that qualifies for the heritage conservation rebate or the landcare and water facility rebate.

    The elements of the reduced cost base do not include your GST input tax credits (if any) applicable to those costs.

    The reduced cost base does not include any expenditure that you have recouped - for example, a claim on an insurance policy - except for any amount of the recoupment included in your assessable income.

    Important: You cannot index the reduced cost base.

    Example: Reduced cost base - write-off deduction

    Debra acquired a new income-producing asset on 28 September 1994 for $100,000. She sold it for $90,000 in November 1999. During the period she owned it she was allowed write-off deductions of $7,500. Her capital loss is worked out as follows.

    Capital proceeds

    -

    $90,000

    Cost base

    $100,000

    -

    Less write-off deduction

    $7,500

    -

    Reduced cost base

    -

    $92,500

    Capital loss

    -

    $2,500

    Modifications to cost base and reduced cost base

    In some cases the general rules for calculating the cost base and reduced cost base have to be modified. For example, market value may be substituted for the first element of the cost base or reduced cost base if:

    • you did not incur expenditure to acquire the asset
    • some or all of the expenditure you incurred cannot be valued or
    • you did not deal at arm’s length with the vendor in acquiring the asset.

    Special rules for cost base and reduced cost base

    There are other rules which may affect the cost base or reduced cost base of an asset. For example, they are calculated differently:

    • when you first use your main residence to produce income – see chapter 4 for more information
    • for an asset that you receive as a beneficiary or as the legal personal representative of a deceased estate – see chapter 5 for more information
    • for bonus shares or units, rights and options and convertible notes – see chapter 6 for more information.

    Example: Capital proceeds exceed cost base - capital gain

    In July 1996 Lyn bought 800 Co A shares at $3 per share. She incurred a broker's fee and stamp duty of $100. In December 1999, Lyn sold all 800 shares for $4 per share. She incurred a broker's fee and stamp duty of $75.

    The cost base of the shares if Lyn chooses to index the cost base is:

    Column 1: Date expense incurred

    Column 2: Description of expense

    Column 3: Amount ($)

    Column 4: Indexation factor

    Column 3 × 4

    July 1996

    Purchase price

    $2,400

    123.4 ÷ 120.1 = 1.027

    $2,465

    July 1996

    Broker's fee and stamp duty

    $100

    1.027

    $103

    December 1999

    Broker's fee and stamp duty

    $75

    -

    $75

    Cost base

    -

    $2,575

    -

    $2,643

    Lyn calculates her capital gain as follows:

    Capital proceeds

    $3,200

    Less cost base

    $2,643

    Capital gain

    $557

    If Lyn does not choose to apply indexation, the capital gain is calculated as follows:

    Capital proceeds

    $3,200

    Less cost base (without indexation)

    $2,575

    Capital gain

    $625

    The $625 is a discount capital gain. If Lyn does not have any capital losses to apply against the capital gain, the amount of capital gain she would include in her assessable income is $312 (50% of $625).

    End of example

     

    Example: Reduced cost base exceeds capital proceeds - capital loss

    If, in the above example, Lyn had sold the 800 shares for $2.50 per share she would have made a capital loss, calculated as follows:

    Capital proceeds

    $2,000

    Reduced cost base

    $2,575

    Capital loss

    $575

    Lyn would complete a worksheet and keep it with her records. Download a copy of Lyn's worksheetThis link will download a file

    End of example

    The difference between the cost base in the first example ($2,643) and the reduced cost base in the second example ($2,575) arises because the cost base was indexed. Costs are not indexed in calculating the reduced cost base or discount capital gains.

    Example: Capital proceeds are less than the cost base but more than the reduced cost base

    Rob purchased a block of land for $50,000 in October 1993 and sold it 5 years later for $52, 000. He calculated the cost base (including indexation) to be $55,400. He had no incidental costs so his reduced cost base equals the purchase price of the land ($50,000).

    As the capital proceeds he received are less than the cost base but more than the reduced cost base, Rob has not made a capital gain or a capital loss.

    End of example

    Exceptions

    An exception may apply to allow you to reduce or disregard a capital gain or loss made from a particular CGT event. The most common exception is if you dispose of an asset you acquired before 20 September 1985.

    Exemptions

    An exemption may also apply to reduce or allow you to disregard a capital gain or loss you make from a CGT event.

    General exemptions

    A capital gain or loss you make from the following is disregarded:

    • car – that is, a motor vehicle designed to carry a load of less than 1 tonne and fewer than 9 passengers – and a motor cycle or similar vehicle
    • a decoration awarded for valour or brave conduct, unless you paid money or gave any other property for it
    • collectables acquired for $500 or less and personaluse assets acquired for $10 000 or less
    • CGT assets used solely to produce exempt income
    • compensation or damages you receive for any wrong or injury you suffer in your occupation
    • compensation or damages you receive for any wrong, injury or illness you or your relatives suffer
    • compensation you receive under the firearms surrender arrangements
    • winnings or losses from gambling, a game or a competition with prizes• an amount you receive as reimbursement or payment of your expenses under the General Practice Rural Incentives Program or the Sydney Aircraft Noise Insulation Project
    • CGT asset which is your trading stock at the time of a CGT event
    • a re-establishment grant made under section 52A of the Farm Household Support Act 1992
    • a reimbursement or payment made under the M4/M5 Cashback Scheme
    • plant if the CGT event occurs after 11.45am on21 September 1999.

    Other exemptions

    • Any capital loss you make on the expiry, forfeiture, surrender or assignment of a lease is disregarded if the lease is not used solely or mainly for the purpose of producing assessable income.
    • Any capital gain you make may also be reduced if, because of a CGT event, an amount has been included in your assessable income other than as a capital gain.

    Specific exemption

    Main residence

    You can ignore a capital gain or capital loss you make from a CGT event that happens to a dwelling that was your main residence. This can change, however, depending on how you came to own the dwelling and what you have done with it - for example, if you rented it out. For more information, see chapter 4.

    Can there be a roll-over?

    Roll-over allows a capital gain or loss that would otherwise arise to be deferred or disregarded until a CGT event happens to the asset.

    When a CGT asset is transferred between spouses after marriage breakdown, any capital gains tax is deferred until a later CGT event happens to the asset. For example, if you transfer a CGT asset to your former spouse and certain conditions are met, you will not have to pay capital gains tax on the transfer. Any capital gains tax is payable when a later CGT event happens to the asset - for example, your former spouse disposes of the asset to someone else. See chapter 7 for more information.

    You may disregard a capital gain if a CGT asset has been lost or destroyed or is compulsorily acquired. See chapter 8 for more information.

    A deferral of the capital gain may also be available if you dispose of your shares in a company or interest in a trust as a result of a takeover. See chapter 6 for more information.

    Capital gains, trusts and the CGT concession

    If you are an individual who is a beneficiary in a trust, you have received, or are entitled to, a share of the net income of the trust, and the share includes some of the trust's net capital gain:

    • you deduct the amount of the net capital gain included in your share of the trust income by excluding it as explained in question 11 of TaxPack2000 supplement (step 2 on page s6); and
    • in place of the amount you exclude, you are treated as having a capital gain or gains worked out, as explained below.

    Note: Question 11 asks you to exclude net capital gains from the amount of trust income shown at U item 11 on the supplementary section of the 2000 tax return for individuals. This amount should be shown on your trust distribution statement. However, if your statement shows that your share of the trust's net capital gain is more than the overall net amount of your share of the trust's net income, do not exclude the whole capital gain component when you complete U item 11. In that situation, you exclude instead only the overall net amount of your share of trust income. You also use only this lesser amount in working out your capital gains.

    Example:

    Your trust distribution shows that you have received a share of the net income of the trust of $2,000. This is made up of primary production loss of $5,000, non-primary production income of $2000 and a net capital gain of $5,000. You will show a $5,000 loss from primary production and a $5,000 non-primary production income at item 11. You exclude only $2,000 from item 11 as your share of the net income of the trust ($2,000) is less than your share of the net capital gain. The $2,000 is the amount you use in working out your net capital gain at item 14 on the tax return.

    End of example

    CGT concessions obtained by a trust

    There are special rules that enable concessions obtained by a trust to be passed on to the beneficiaries of the trust.

    If you are an individual beneficiary who is presently entitled to a share of the income of a trust that includes a capital gain reduced by the CGT discount or the small business 50% active asset reduction a 'gross up' mechanism applies.

    You must 'gross up', by multiplying by 2 your share of any net capital gain received from a trust that has been reduced (by the trust) by either the CGT discount or the small business 50% active asset reduction, and by multiplying by 4 your share of any net capital gain received from a trust that has been reduced (by the trust) by both the CGT discount and the small business 50% active asset reduction. If neither concession applies you are treated as having a capital gain equal to your share of the net income of the trust that is attributable to the trust net capital gain.

    The method of calculating a net capital gain is then applied to this 'grossed up' amount to determine your net capital gain.

    The 'grossed up' capital gain is first reduced by any of your own capital losses which you have not used to reduce other capital gains. Any of the 'grossed up' capital gain remaining after capital losses is then reduced by the CGT discount and/ or the small business 50% active asset reduction if the trust's capital gain was reduced by those concessions.

    The 'grossed up' capital gain is an extra capital gain (additional to your share of the trust's net capital gain included in your share of the net income of the trust) and accordingly you are entitled to a deduction for that part of your share of the net income of the trust that is attributable to the trust's net capital gain.

    Example

    Martin is a beneficiary in the Shadows Unit Trust. He receives a distribution of $2,000 from the trust. This distribution includes $250 of net income remaining after a $1,000 capital gain made by the trustee was reduced by the CGT discount and the small business 50% active asset reduction.

    Martin has also made a capital loss of $100 from the sale of shares.

    Martin calculates his net capital gain as follows:

    Share of trust net capital gain

    -

    $250

    Gross up the amount by multiplying by 4

    $1000

    -

    Deduct capital losses

    $100

    -

    Subtotal

    $900

    -

    Apply 50% CGT discount

    $450/$450

    -

    Apply 25% Apply 40$ active asset reduction

    $225/$225

    -

    Assessable capital gain

    -

    $225/$475

    Deduction for share of trust net capital gain

    -

    $250

    Net capital gain

    -

    $225

    Martin will show at H item 14 on his tax return $1,000 (250 plus 1000 less 250). He will show $100 at X. The net capital gain at W is $225. He will show a trust distribution of $1,750 at U item 11.

    End of example

    Debt forgiveness

    A debt is forgiven if you are freed from the obligation to pay it. A commercial debt which is forgiven may reduce your capital loss, your cost base or reduced cost base. Commercial debt forgiveness rules apply to debts forgiven after 27 June 1996. A debt is a commercial debt if part or all of the interest payable on the debt is, or would be, an allowable deduction.

    Under the commercial debt forgiveness rules, a forgiven amount may reduce, in the following order, your:

    • prior year revenue losses
    • prior year net capital losses
    • deductible expenditure
    • cost bases of assets.

    These rules do not apply if the debt is forgiven as a result of:

    • an action under bankruptcy law
    • a deceased person’s will
    • reasons of natural love and affection.

    Example: Debt forgiveness

    On 1 July 1999, John had available net capital losses of $9,000. On 1 January 2000 he sold some shares, which had a cost base (no indexation) of $7,500, for $20,000. On 1 April 2000, a commercial debt of $15,000 that John owed to ABC Pty Ltd was forgiven. John had no prior year venue losses and no deductible capital expenditure.

    John would work out what net capital gain to include in his assessable income.

    Calculation of net capital gain

    Available carried forward losses

    $9,000

    Less forgiveness adjustment

    $9,000

    Adjusted available carried forward loss

    Nil

    Cost base of shares (no indexation)

    $7,500

    Less forgiveness adjustment

    $6,000

    Adjusted cost base

    $1,500

    Calculation of net capital gain

    Sale of shares

    $20,000

    Adjusted cost base (no indexation)

    $1,500

    Less carried forward loss

    Nil

    Discount capital gain

    $18,500

    Less discount percentage (50%)

    $9,250

    Net capital gain

    $9,250

     

    End of example

    Working out your net capital gain or loss

    Your net capital gain is included with your other income in your assessable income on your tax r turn. You cannot deduct a net capital loss. Chapter 2 explains how to work out your net capital gain or loss and how to complete your 2000 tax return for individuals.

    What is the tax payable on your net capital gain?

    Before the 1999-2000 income year, for an individual and certain trustees the amount of tax payable on the net capital gain was worked out using capital gains tax averaging.
    For the 1999-2000 and later income years, the CGT averaging concession is no longer available.
    For the 1999-2000 income year only, you may be eligible for a CGT averaging reduction. This reduces the additional tax from the removal of CGT averaging. For more information refer to chapter 3 Removal of CGT averaging.

    Choices

    You are no longer required to lodge a formal lection with the Commissioner to have certain capital gains tax rules apply to you. For example, if you wish to disregard a capital gain made as a result of a compulsory acquisition, you make that choice by not declaring any capital gain in the relevant tax return.

    Keeping records

    You must keep records of matters that affect the capital gains and losses that you make. The law requires you to keep them for 5 years after the last relevant CGT event has happened.

    You need to keep records of all expenditure made for a CGT asset so that you can correctly work out the amount of capital gain or loss made when the CGT event happens to it. It is important to keep records so that you do not have to pay more capital gains tax than is necessary.

    If you leave an asset to another person when you die, the asset may be subject to capital gains tax when a CGT event happens to it in the future - for example, the beneficiary disposes of the asset. You can help your beneficiaries to minimise the impact of the tax by making sure that you retain all relevant documents relating to assets that you acquire. See chapter 5 for more information.

    What records do you need to keep?

    • You must keep records of every act, transaction, event or circumstance that can reasonably be expected to be relevant to working out whether you have made a capital gain or capital loss from a CGT event. It does not matter whether the CGT event has already happened or may happen in the future.
    • The records must be in English or be readily accessible or convertible to English.
    • The records must show:
      • the nature of the act, transaction, event or circumstance
      • the day when it happened
      • who did the act or who were the parties to the transaction
      • how the act, transaction, event or circumstance is relevant to working out the capital gain or loss.

    The following are examples of records that you may need to keep:

    • receipts of purchase or transfer
    • details of interest on money you borrowed
    • records of agent’s, accountant’s, legal and advertising costs
    • receipts for insurance costs and land rates or taxes
    • any market valuations
    • receipts for the cost of maintenance, repairs or modifications
    • accounts showing brokerage on shares.

    Asset registers

    You can choose to enter information from your capital gains tax records into an asset register. Keeping an asset register may enable you to discard records that you might otherwise be required to keep for long periods of time.

    If you choose to keep an asset register, transfer the following information to it from the normal records you need to keep for capital gains tax purposes:

    • the date of acquisition of an asset
    • the cost of the asset
    • a description, amount and date for each cost associated with the purchase of the asset – these costs may include such things as stamp duty and legal fees
    • other information contained in a record that may be relevant in calculating your capital gains tax liability
    • the date the CGT event happened to the asset
    • the capital proceeds received when the CGT event happened.

    This information must be certified by a registered tax agent or a person approved by the Commissioner.

    If you use an asset register, you must keep the documents from which you have transferred the information for 5 years from the date the asset register entry in question has been certified. You must keep the asset register entries for 5 years from the date the related CGT event happens.

    The publication CGT asset register provides more information on asset registers.

    Exceptions

    You do not need to keep records if, for any CGT event, a capital gain or loss is disregarded. For example, you do not need to keep records for a motor vehicle as it is an exempt asset.

    What do you do if you have not kept the records?

    If you have acquired assets on or after 20 September 1985 and have not kept records, or your records have inadvertently been destroyed, you can still do something about it.

    • If you have bought real estate, your solicitor or real estate agent will have kept copies of most of the records you need. You should be able to obtain copies if you ask for them.
    • If you have made improvements to real estate – for example, if you built an extension – you can ask for a copy of the builder’s receipt for payment.
    • If you have bought shares in a company or units in a unit trust, your stockbroker or investment adviser should be able to supply you with the information you need.
    • If you receive an asset as a gift or an inheritance and you did not get a market valuation at the time, a professional valuer can tell you what its market value was at the relevant date.

    The main thing is to obtain as many details as possible so that you can reconstruct your records. Make sure that you keep sufficient records in the future. There are penalties if you do not keep adequate records.

    Records relating to real estate

    Real estate can include such property as the family home, vacant blocks of land, business premises, rental properties, holiday houses and hobby farms.

    Even though your family home is usually exempt, if you acquired it on or after 20 September 1985 it is advisable to keep all records relating to the home, just as you would for other items of real estate. If the home ceases to be fully exempt at some time in the future, you will need to know the full cost of the home so that you do not pay more capital gains tax than necessary. If you do not have sufficient records, reconstructing them could be difficult. Refer to Partial exemption for details of when your home may not be fully exempt.

    You will need to keep a copy of the purchase contract and all receipts for expenses relating to the purchase of the property e for example, stamp duty, legal fees, survey and valuation fees. You will also need to keep all records relating to the CGT event and all relevant expenses - for example, the sale contract and records of legal fees and stamp duty.

    Keep a record of capital expenditure on improvements, non-capital costs and capital expenditure on maintaining title or right to the asset that you incurred during your period of ownership. These costs may form part of the cost base in working out whether you have made a capital gain or loss at the time the CGT event happens.

    Capital expenditure on improvements may include building an extension, new paving, pergolas, electrical rewiring or the cost of a new bathroom.

    Non-capital costs of real estate may include interest, rates and taxes, insurance premiums, cost of repairs such as cleaning carpets and replacing broken windows. This is not an exhaustive list. You may include only non-capital costs incurred on ownership of a CGT asset acquired on or after 21 August 1991 and only if you are not entitled to a tax deduction for them.

    If the property is your home and you use it to produce income, you will need to keep records of the period the home is income producing and the proportion of the home that you have used to produce income.

    If, after 20 August 1996, you use your home for income producing purposes for the first time, you will be taken to have acquired your home at that time for its market value. You will use this as your acquisition cost to calculate a capital gain or loss at the time the CGT event happens. You will still need to keep details of expenses relating to your home after the date it became income producing.

    Records relating to shares in companies and units in unit trusts

    Most of the records that you need to keep to work out your capital gains tax when you dispose of these investments will be given to you by the company, the unit trust manager or your stockbroker. It is important for you to keep everything that they give you in relation to your shares and units.

    These records will generally provide the following important information:

    • the date of purchase of the shares or units
    • the amount paid to purchase the shares or units
    • the date and amount of any calls if shares were partly paid
    • the sale price if you sell them
    • any commissions paid to brokers when you buy or sell them.

    There are special capital gains tax rules for certain shares and units which may affect the records you keep - for example, bonus shares and units, rights and options and employee shares. See chapter 6 for more information.

    Records relating to inheriting an asset

    You must keep special records when you inherit an asset as a beneficiary of the estate of a person who died on or after 20 September 1985. If the asset was acquired by the deceased person before 20 September 1985, you need to know the market value of the asset at the date of the person's death and the amount of any relevant costs incurred by the executor or trustee. This is the amount that the asset is taken to have cost you. If the executor or trustee has obtained a valuation of the assets, get a copy of that valuation report. Otherwise you will need to obtain your own valuation.

    If the assets you inherit were acquired by the deceased person on or after 20 September 1985, you need to know full details of all relevant costs incurred by the deceased person and by the executor or trustee. Obtain those details from the executor or trustee. Even if you inherit a house that was the family home of the deceased person, you need to keep records of costs paid by the deceased person in case you are not able to claim an exemption for the house after you inherit it.

    If, after 20 August 1996, you inherit a house that was the family home of the deceased and it was not regarded as being used for income producing purposes at the time of death, you will be taken to have acquired the house at its market value at the date of death.

    Keep details of any other costs you have paid out for the assets since the date you inherited them.

    Last modified: 18 Sep 2009QC 18323