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  • 3 Removal of 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

    Prior to the 1999-2000 income year, for an individual and in some cases trustees, the amount of tax payable on your net capital gain was generally worked out by taking the amount of tax payable on one-fifth of your gain and multiplying that amount by 5. The result was then added to the tax payable on your other income. If including the net capital gain did not cause your taxable income to cross a tax threshold, your tax payable was calculated in the normal manner. This method of calculating the tax payable on the net capital gain was often referred to as CGT averaging.

    The CGT averaging concession has been removed with effect from 11.45 am on 21 September 1999.

    For the 1999-2000 income year only, you may still be entitled to a CGT averaging reduction. This will ensure that the averaging provisions continue to apply for CGT events happening up to 11.45 am on 21 September 1999.

    For the 1999-2000 income year, tax is first worked out without CGT averaging for the whole year. However, if you have any additional tax from the removal of the concession, and it is attributable to capital gains or losses you made in the year up until 11.45 am on 21 September 1999, the tax you would otherwise pay may be decreased by the CGT averaging reduction.

    Individuals will be eligible for the CGT averaging reduction if all the following conditions are met:

    • Your taxable income includes a net capital gain.
    • You have a capital gain (that is not disregarded because of an exemption or exception) from a CGT event that happened in the 1999–2000 year, before11.45am on 21 September 1999. This can include a capital gain against which losses have been applied under the small business CGT concessions—even if some or all of the remainder has been disregarded. If you are a trust beneficiary, in some situations it may include a capital gain made in the trust. Read on for more information.
    • Your pre-announcement net capital gain amount (the amount shown at V) must be greater than zero. Your pre-announcement net capital gain amount may be greater than zero if your capital gains from CGT events that happened up until 11.45am on 21 September 1999 are greater than your capital losses for the same period. Read on for more information.
    • The additional tax from the removal of averaging is greater than zero— see below for more information on how this is calculated. You may not have any additional tax if, apart from your net capital gain, your taxable income (or, for some primary producers, average income and in certain other circumstances, reduced notional income) exceeds the top individual marginal rate threshold.

    If you received a lump sum payment for unused annual leave or unused long service leave of the type at question 3 in TaxPack 2000, or you received an eligible termination payment of the type at question 4 of TaxPack 2000, you may receive a benefit from the CGT averaging reduction even though there is no additional tax from the removal of averaging. You may receive a benefit through a greater rebate.

    To obtain the reduction, you must complete labels V and Z. If, after reading these instructions and making any further enquiries, you are still unsure whether you qualify for the reduction (or the benefit of the reduction through a greater rebate) you may still complete labels V and Z, as explained below. The Australian Taxation Office (ATO) will work out whether or not there will be any benefit. If you need further information, contact the ATO.

    The CGT averaging reduction can also apply to trustee assessments which use individual stepped tax rates. For information on how to claim the reduction in trust returns, see the P and T 2000 instructions, available from the ATO. If you are a trust beneficiary and your net capital gain includes amounts arising from the trust's net capital gain, you may need certain information from the trust to complete labels V and Z.

    Competing labels V and Z

    Notional net capital gain

    The notional net capital gain is worked out as a step in calculating the amounts at V and Z. Do not show this amount at net capital gain label W. The notional net capital gain is used instead of your actual net capital gain in working out your additional tax from the removal of averaging. If your notional net capital gain is zero, you will not have any additional tax from the removal of averaging. In that case, you will not have any CGT averaging reduction so will not need to complete labels V and Z.

    Your notional net capital gain is the amount that would have been your net capital gain if the changes involving frozen indexation, the CGT discount and the new small business CGT concessions had not been made to the tax law from 11.45 am on 21 September 1999.

    To calculate the notional net capital gain, capital gains made throughout the 1999-2000 year are worked out using the indexation rules applying in the first part of the year, and without the CGT discount rules (for further information refer to Indexation and the CGT discount). For example, a discount capital gain made in December 1999 is recalculated to include (where otherwise allowable) indexation in the cost base. The indexation is worked out using the index number for the December 1999 quarter. The gain is not reduced by the discount percentage. Capital losses, and capital gains made up to 11.45 am on 21 September 1999, will not need to be recalculated.

    If your taxable income includes a share of the net income of a trust, and the share includes part of the trust's net capital gain, ignore any capital gain you are taken to have under the new rules concerning net capital gains in shares of trust income (see Capital gains, trusts and the CGT concession). In working out your notional net capital gain, include instead a proportion of the notional net capital gain of the trust. The proportion you include would be the same as the proportion of the trust's net capital gain attributable to your share of the trust's net income. For example, if this is one half of the trust's net capital gain, and assuming that the trust's net capital gain is less than its net income, include one half of the trust's notional net capital gain in your notional net capital gain. You would obtain this information from the trustee.

    Finally, the notional net capital gain is also worked out as though the former small business CGT concessions (the 50 per cent goodwill exemption, and the versions of the small business retirement exemption and the small business roll-over which applied before 11.45am on 21 September 1999) applied for the whole year, and the new small business CGT concessions did not apply. Any former concession you apply in working out your notional net capital gain must be one that would have been available in your actual circumstances.

    Modified net capital gain amount - label Z

    Note: You must calculate your modified net capital gain amount and show it at Z before you work out the amount to show at V.

    If you are 18 years of age or over at 30 June 2000, you work out your modified net capital gain amount by adding the amount you have shown at X (prior year net capital losses applied) to your notional net capital gain. If your notional net capital gain includes part of the notional net capital gain of a trust, do not add any of the trustee's prior year net capital losses.

    When you worked out your notional net capital gain, if you applied net capital losses of earlier income years against a capital gain or a notional capital gain before disregarding all or part of the remainder under the small business retirement exemption or the small business roll-over, your modified net capital gain amount will include part of that gain. The part included will be the amount of the gain or notional gain (which you may have had to recalculate if it was made after 11.45 am on 21 September 1999) less the amount you disregarded under the exemption or roll-over and less any current year capital losses applied against the gain. Any prior year net capital losses you applied against the gain will be included in the amount at X, which is added to your notional net capital gain to give your modified net capital gain amount.

    If you are under 18 years of age at 30 June 2000, refer to question A1 Under 18 excepted income on page 102 of TaxPack 2000. If you answered YES to the second question ('Did any of the following apply to you?'), work out the modified net capital gain amount as explained in this section.

    If you answered NO to that question, work out the modified net capital gain amount as explained above. Then, as an additional step, calculate any part of the amount (including amounts from trusts) which would not have been excepted income if the amount had been your net capital gain. Subtract that part. The remaining amount is your modified net capital gain amount. For information about excepted income, refer to step 1 in question A1.

    If you answered NO to that question and none of your net capital gain at W was excepted income, you will not have any CGT averaging reduction, so you do not need to complete labels V and Z. If all or part of your net capital gain was excepted income, you may still have a reduction. If part of your net capital gain was excepted income and part was not, to claim the reduction you must complete a schedule of additional information as well as labels V and Z (see Circumstances when additional information is needed: Net capital gains of minors).

    Pre-announcement net capital gain amount - label V

    Your pre-announcement net capital gain amount is the modified net capital gain amount at label Z, to the extent that it relates to CGT events that happened up to 11.45 am on 21 September 1999 (pre-announcement CGT events). Capital losses and capital gains for later CGT events are ignored.

    If your notional net capital gain includes an amount from a trust, and part of it relates to pre-announcement CGT events in that trust, that part is included in your pre-announcement net capital gain amount. For example, if one-third of your share of the trust's notional net capital gain is attributable to pre-announcement CGT events in the trust, include that third in your pre-announcement net capital gain amount.

    If you are under 18 years of age at 30 June 2000, and you answered NO to the second question within TaxPack 2000 question A1, your pre-announcement net capital gain amount will only include any amounts that would have been excepted income, because any non-excepted income will already have been excluded in completing label Z.

    Circumstances when additional information is needed: Net capital gains of minors

    If you are under 18 years of age at 30 June 2000, and answered NO to the second question within TaxPack 2000 question A1, and only part of your net capital gain is excepted income, you will need to provide additional information. On a separate piece of paper print SCHEDULE OF ADDITIONAL INFORMATION: CGT AVERAGING REDUCTION - PARTLY EXCEPTED INCOME then explain your circumstances, including the following:

    • the amount of the net capital gain at W which is considered to be excepted income, and why;
    • the amount you subtracted in working out yourmodified net capital gain amount at Z, because it would not be excepted income, and details of how it was worked out;
    • details of how you worked out your pre-announcement net capital gain amount at V.

    Also include your name, address and tax file number. Print X in the YES box at Taxpayer's declaration question 2a on page 8 of your tax return. Sign and attach your schedule to page 3 of your tax return.

    Calculating CGT averaging

    You do not need to calculate the amount of CGT averaging – the ATO will calculate it for you. However, the following steps show how the reduction is worked out.

    Step 1: Additional tax from the removal of CGT averaging (gross adjustment amount)

    For the 1999-2000 income year, calculate any additional tax liability incurred because of the removal of CGT averaging. To do this:

    • Recalculate your taxable income, including your notional net capital gain (which you worked out as a step in calculating the amount at label Z) instead of your actual net capital gain (the amount at label W).
    • Work out your basic income tax liability (tax apart from the Medicare levy and rebates/tax offsets) on this notional taxable income, without CGT averaging.
    • Work out your basic income tax liability on this notional taxable income as if CGT averaging still applied.

    Any excess of the first amount of tax over the second is the additional tax from the removal of CGT averaging (the gross adjustment amount) .

    Step 2: Capital gain adjustment percentage

    Work out your capital gain adjustment percentage as follows:

    (A ÷ B) × 100

    Where:

    A is pre-announcement net capital gain amount (label V)

    B is modified net capital gain amount (label Z)

    Note: Your capital gain adjustment percentage cannot be more than 100 per cent.

    Step 3: CGT averaging

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

    Gross adjustment amount (step 1) × 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 ($2,000 × (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

    1. Notional net capital gain (see above)

    $8,378

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

    $44,378

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

    $11,684.54

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

    -

    1. Tax on $36,000 ($44,378 − $8,378)

    $8,262.00

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

      5 × ($8,831.50 − $8,262.00) = $2,847.50

    $8,831.50

    1. $8,262.00 + $2,847.50

    $11,109.50

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

    $575.04

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

    33.420864%

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

    $192.18

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

    $10,383.82

     

    End of example
    Last modified: 18 Sep 2009QC 18323