Part B - Sale of shares or units

Chapter B1 - How to work out your capital gain or capital loss

To calculate your capital gain from the sale of shares or units in a unit trust (for example, a managed fund), the main steps are to:

1. work out how much you have received from each CGT event (your capital proceeds)
2. work out how much each CGT asset cost you (the cost base)
3. subtract 2 (the cost base) from 1 (the capital proceeds).

If you received more from the CGT event than the asset cost you (that is, the capital proceeds are greater than the cost base), the difference is your capital gain. There are 3 ways of calculating capital gain. These are:

• the indexation method
• the discount method and
• the 'other' method if you bought and sold your asset within 12 months (this is the basic method explained in the 3 steps above).

For a more detailed description of these methods, see part A or Explanation of terms.

Note-New terms: We may have used some terms that are not familiar to you. The first time these words are used, they are linked to their entry in Explanation of terms.

While we have used the word 'bought' rather than 'acquired' in our examples, you may have acquired your asset without paying for it (for example, as a gift or through an inheritance or through the demutualisation of an insurance company such as the NRMA). Similarly, we refer to 'selling' an asset, when you may have disposed of it in some other way (for example, by giving it away or transferring it to someone else). All of these transactions are CGT events.

If you made a capital loss (that is, you received less from the CGT event than the asset cost you), you need to work out the reduced cost base for the asset. Generally, for shares, the cost base and reduced cost base are the same. If the reduced cost base is greater than 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 not made a capital gain or a capital loss.

The steps on the following pages show you the calculations to work out your CGT obligation using the 'other' and discount methods. If you want to use the indexation method (by indexing your cost base for inflation) you will need to do this at step 2. You may find the worked examples in chapter B2 easier to follow.

You may find it useful to use the margins provided beside the following steps to do your own calculations so you can transfer the relevant amounts to item 17 on your tax return.

Step 1 Work out your capital proceeds from the CGT event

The capital proceeds are what you receive, or are deemed to receive, when you sell or otherwise dispose of your CGT asset.

For example, with shares the capital proceeds may be:

• the amount you receive from the purchaser
• the amount you receive from a liquidator
• the amount or value of shares or other consideration you receive on a merger/ takeover, or
• the market value if you give shares away.

Step 2 Work out the cost base of your asset

The cost base of your asset is what your asset cost you, including the incidental costs of buying, selling, maintaining and preserving it.

The cost base for an asset such as a share or unit may also need to be reduced by the amount of any non-assessable payment you received from the company or fund during the time you owned the share or unit. This is explained under Non-assessable payments.

Interest you have paid on money borrowed to buy shares or units will not form part of your cost base if you have claimed a deduction for it in any income year.

For shares, the cost base is usually the cost of buying the shares including brokerage and stamp duty and costs on selling the shares.

Information: There are certain circumstances where a cost base may be indexed. This is called the indexation method and the cost base would then become an 'indexed' cost base. For more information, see part A of this guide or the worked examples in chapter B2.

Step 3 Did you make a capital gain?

Subtract the amount in step 2 from the amount in step 1.

If the capital proceeds are greater than the cost base, the difference is your capital gain.

Fred made a capital gain of $875.

Step 4 If you did not make a capital gain, work out the reduced cost base of the asset

If you did not make a capital gain, you need to calculate a reduced cost base of your asset before you can work out any capital loss.

The reduced cost base is the cost base less any amounts you need to deduct from the cost base. Interest on borrowings and indexation are not included.

Note-Reduced cost base

For shares, generally the cost base and reduced cost base are the same. For units, the cost base and reduced cost base need to be adjusted for tax-deferred amounts and CGT-concession amounts received before 1 July 2001. CGT concession amounts paid after 1 July 2001 are no longer taken off the cost base nor the reduced cost base. Only the reduced cost base needs to be further adjusted for a tax-free amount. A tax-exempted amount does not affect the cost base or reduced cost base. The fund should advise you of these amounts in its statements.

Step 5 Did you make a capital loss?

If the capital proceeds are less than your reduced cost base, the difference is your capital loss.

Step 6 Did you make neither a capital gain nor a capital loss?

If the capital proceeds are less than or equal to the cost base but more than the reduced cost base, you have not made a capital gain or a capital loss.

Step 7 Work out your total current year capital gains-H item 17

Now you need to show the total of all of your capital gains at H . If you have more than one asset which resulted in a capital gain, you should add those amounts. If you only had one asset, show the amount of the capital gain relating to that asset. If you have any capital losses, do not deduct them from the capital gains before showing the total amount at H.

Handy hint

If you also received a distribution from a managed fund, you should include here your total capital gains (from step 3 in chapter C1).

Step 8 Applying capital losses against capital gains

If you have no capital losses from assets you disposed of this year nor a net capital loss from an earlier year that you were told to carry forward to this year, go to step 9.

Otherwise, you can now deduct your capital losses from the amount you wrote at H. You may do this in the order that gives you the greatest benefit.

If your capital losses are greater than your capital gains, go to step 11.

Handy hint: The greatest benefit is probably to deduct capital losses against:

1. capital gains for which neither the indexation method nor the discount method applies (that is, if you bought and sold your shares within 12 months)
2. capital gains calculated using the indexation method and then
3. capital gains to which the CGT discount can apply.

Note-When you cannot apply the CGT discount

Remember, you cannot apply the CGT discount to capital gains calculated using the indexation method. You also cannot apply the CGT discount to other capital gains for which the discount is not available-for example, CGT assets you bought and sold within 12 months.

Step 9 Applying the CGT discount

Where available, you can now apply the CGT discount to any remaining capital gains calculated using the discount method by reducing these capital gains by 50 per cent.

Step 10 Work out your net capital gain-A item 17

At A you show the total of your remaining:

• capital gains calculated using the indexation method
• capital gains to which the CGT discount of 50 per cent has been applied and/ or
• capital gains calculated using the 'other' method.

Step 11 Work out your carry-forward losses-V item 17

If your capital losses were greater than your capital gains, you were directed to this step from step 8.

If you have capital losses remaining, you should show '0' (zero) at A on your tax return.

At V, show the amount by which all your capital losses are greater than your capital gains. You can now carry these capital losses forward to later income years until you have capital gains from which to deduct these capital losses.