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  • Chapter 1 - Does capital gains tax apply to you?

    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

    This chapter provides general background information about capital gains tax and whether and how it applies to you.

    New terms

    We may use some terms that are new to you. These words explained are in Definitions. Generally they are also explained in more detail in the section where they first appear.

    What is capital gains tax and what rate of tax do you pay?

    Capital gains tax (CGT) is the tax that you pay on any capital gain you include on your annual income tax return. It is not a separate tax, merely a component of your income tax. You are taxed on your net capital gain at your marginal tax rate.

    Your net capital gain is:

    • your total capital gains for the year

    minus

    minus

    If your total capital losses for the year are more than your total capital gains, the difference is your net capital loss for the year. It can be carried forward to later income years to be deducted from future capital gains. There is no time limit on how long you can carry forward a net capital loss. You apply your net capital losses in the order that you make them.

    There are special rules for capital losses made on collectables. You cannot make a capital loss on a personal use asset.

    If you are completing a tax return for an individual and want more information on how to apply your capital losses, see steps 5 and 6 in Part B of this guide. For more information for companies, trusts and funds or for completing the CGT summary worksheet, see step 2 in part C of this guide.

    Capital gain or capital loss

    You make a capital gain or capital loss if a CGT event happens. You can also make a capital gain if a managed fund or other trust distributes a capital gain to you.

    For most CGT events, your capital gain is the difference between your capital proceeds and the cost base of your CGT asset - for example, if you sell an asset for more than you paid for it, the difference is your capital gain. You make a capital loss if your reduced cost base of your CGT asset is greater than the capital proceeds.

    Generally, you can disregard any capital gain or capital loss you make on an asset if you acquired it before 20 September 1985 (pre-CGT). For details of some other exemptions, see Exemptions and rollovers.

    There are special rules that apply when working out gains and losses from depreciating assets. A depreciating asset is a tangible asset (other than land or trading stock) that has a limited effective life and can reasonably be expected to decline in value over the time it is used. Certain intangible assets are also depreciating assets.

    If you use a depreciating asset for a taxable purpose (for example, in a business) any gain you make on it is treated as ordinary income and any loss as a deduction. It is only when a depreciating asset has been used for a non-taxable purpose (for example, used privately) that you can make a capital gain or capital loss on it. For details on the CGT treatment of depreciating assets, see CGT and depreciating assets.

    To work out whether you have to pay tax on your capital gains, you need to know:

    • whether a CGT event has happened to you
    • the time of the CGT event
    • what assets are subject to CGT
    • how to calculate the capital gain or capital loss (how to determine your capital proceeds, cost base and reduced cost base; how to apply capital losses and the methods available to calculate a capital gain)
    • whether there is any exemption or rollover that allows you to reduce or disregard the capital gain or capital loss
    • whether the CGT discount applies, and
    • whether you are entitled to any of the small business CGT concessions.

    What is a CGT event?

    CGT events are the different types of transactions or events that may result in a capital gain or capital loss. Many CGT events involve a CGT asset; some relate directly to capital receipts (capital proceeds).

    You need to know which type of CGT event applies in your situation because it affects how you calculate your capital gain or capital loss and when you include it in your net capital gain or net capital loss.

    The range of CGT events is wide. Some happen often and affect many people while others are rare and affect only a few people. There is a summary of the various types of CGT events at appendix 1.

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

    Note: If you are registered for GST, or required to be registered for GST, a GST liability may also arise when you dispose of a business asset.

    A CGT event also happens when:

    • 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 payment to you from a managed fund or other unit trusts
    • a company makes a payment (not a dividend) to you as a shareholder
    • a liquidator or administrator declares that shares or financial instruments you own are worthless
    • you receive an amount from a local council for disruption to your business assets by roadworks
    • you stop being an Australian resident
    • you enter into a conservation covenant, or
    • you dispose of a depreciating asset that you used for private purposes.

    Subdividing land does not result in a CGT event if you retain ownership of the subdivided blocks. Therefore, you do not make a capital gain or a capital loss at the time of the subdivision.

    Australian residents make a capital gain or capital loss if a CGT event happens to any of their assets anywhere in the world. As a general rule, non-residents make a capital gain or capital loss only if a CGT event happens to a CGT asset that has a 'necessary connection with Australia'.

    Non-Australian residents may also make a capital gain or capital loss where CGT events create:

    • contractual or other rights (CGT event D1), or
    • a trust over future property (CGT event E9).
    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 determines in which income year you report your capital gain or capital loss.

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

    Example: Contract

    In June 2005, Sue enters into a contract to sell land. The contract is settled in October 2005.

    Sue makes the capital gain in the 2004–05 income year (the year she enters into the contract), not the 2005–06 income year (the year 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. If you do not receive any compensation, the CGT event happens when the loss is discovered or the destruction occurred.

    Example: Insurance policy

    Laurie owned a rental property that was destroyed by fire in June 2004. He received a payment under an insurance policy in October 2004. The CGT event happened in October 2004.

    End of example

    The CGT events relating to shares and units, and the times of the events, are dealt with in chapter 5.

    What is a CGT asset?

    Many CGT assets are easily recognisable - for example, land, 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. All assets are subject to the CGT rules unless they are specifically excluded.

    CGT assets fall into three categories:

    • collectables
    • personal use assets, and
    • other assets.
    Collectables

    Collectables include the following items that you use or keep mainly for the personal use or enjoyment of yourself or your associate(s):

    • paintings, sculptures, drawings, engravings or photographs, reproductions of these items or property of a similar description or use
    • jewellery
    • antiques
    • coins or medallions
    • rare folios, manuscripts or books, and
    • postage stamps or first day covers.

    A collectable is also:

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

    You can only use capital losses from collectables to reduce capital gains (including future capital gains) from collectables. However, you disregard any capital gain or capital loss you make from a collectable if any of the following apply:

    • you acquired the collectable for $500 or less
    • you acquired an interest in the collectable for $500 or less before 16 December 1995, or
    • you acquired an interest in the collectable when it had a market value of $500 or less.

    If you dispose of a number of collectables individually that you would usually dispose of as a set, you are exempt from paying CGT only if you acquired the set for $500 or less. This does not apply to collectables you acquired before 16 December 1995.

    Personal use assets

    A personal use asset is:

    • a CGT asset, other than a collectable, that you use or keep mainly for the personal use or enjoyment of yourself or your associate(s)
    • an option or a right to acquire a personal use asset
    • a debt resulting from a CGT event involving a CGT asset kept mainly for your personal use and enjoyment, or
    • a debt resulting from you doing something other than gaining or producing your assessable income or 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. Any capital loss you make from a personal use asset is disregarded.

    If a CGT event happened to a personal use asset during or after the 1998-99 income year, you disregard any capital gain you make if you acquired the asset for $10,000 or less. If you dispose of a number of personal use assets individually that would usually be sold as a set, you get the exemption only if you acquired the set for $10,000 or less.

    Other assets

    Assets that are not collectables or personal use assets include:

    • land
    • shares in a company
    • rights and options
    • leases
    • units in a unit trust
    • goodwill
    • licences
    • convertible notes
    • your home (see Exemptions)
    • contractual rights
    • foreign currency, and
    • any major capital improvement made to certain land or pre-CGT assets.
    Partnerships

    It is the individual partners who make a capital gain or capital loss from a CGT event, not the partnership itself. For CGT purposes, each partner owns a proportionate share of each CGT asset. Each partner calculates a capital gain or capital loss on their share of each asset.

    Tenants in common

    Individuals who own an asset as tenants in common may hold unequal interests in the asset. Each tenant in common makes a capital gain or capital loss from a CGT event in line with their interest in the asset. For example, a couple could own a rental property as tenants in common with one having a 20% interest and the other having an 80% interest. The capital gain or capital loss made when the rental property they dispose of (or another CGT event happens) is split between the individuals according to their legal interest in the property.

    Joint tenants

    For CGT 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 (see Joint tenants for more information). Each joint tenant makes a capital gain or capital loss from a CGT event in line with their interest in the asset. For example, a couple owning a rental property as joint tenants split the capital gain or capital loss equally between them.

    Separate assets

    For CGT 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 CGT asset separate from the land.

    Other improvements to an asset (including land) acquired before 20 September 1985 may also be treated as a separate CGT asset.

    Buildings, structures and other improvements to land you acquired on or after 20 September 1985

    A building, structure or other capital improvement on land that you acquired on or after 20 September 1985 is a separate CGT asset, not part of the land, if a balancing adjustment provision applies to it. For example, a timber mill building is subject to a balancing adjustment if it is sold or destroyed, so it is treated as an asset separate from the land it is on.

    Buildings and structures on land acquired before 20 September 1985

    A building or structure on land that you acquired before 20 September 1985 will be a separate asset if:

    • you entered into a contract for the construction of the building or structure after that date, or
    • construction began on or after that date.
    Other capital improvements to pre-CGT assets

    If you make a capital improvement to a CGT asset you acquired before 20 September 1985, this improvement will be treated as a separate asset and is subject to CGT if, at the time a CGT event happens to the original asset, the cost base of the capital improvement is:

    If there is more than one capital improvement and they are related, they are treated as one separate CGT asset if the total of their cost bases is more than the threshold.

    The improvement threshold is adjusted to take account of inflation. The thresholds for 1985-86 to 2004-05 are shown in the following table.

    Improvement thresholds for 1985-86 to 2004-05

    Income 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

    2000-01

    $92,802

    2001-02

    $97,721

    2002-03

    $101,239

    2003-04

    $104,377

    2004-05

    $106,882

     

    Example: Adjacent land

    On 1 April 1984, Dani bought a block of land. On 1 June 2005, she bought an adjacent block. Dani amalgamated the titles to the two blocks into one title.

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

    End of example

    What are capital proceeds?

    Whatever you receive as a result of a CGT event is referred to as your 'capital proceeds'. For most CGT events, your capital proceeds are an amount of money or the value of any property you receive (or are entitled to receive).

    In some cases, if you receive nothing in exchange for a CGT asset (for example, if you give it away 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 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.

    This is known as the market value substitution rule for capital proceeds.

    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.

    You reduce your capital proceeds from a CGT event if:

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

    Provided you are not entitled to a tax deduction for the amount you repaid, your capital proceeds are also reduced by:

    • any part of the proceeds that you repay, or
    • any compensation you pay that can reasonably be regarded as a repayment of the proceeds.

    If you are registered for goods and services tax (GST) and you receive payment when you dispose of a CGT asset, any GST payable is not part of the capital proceeds.

    There are special rules for calculating the proceeds from a depreciating asset. For more information, see CGT and depreciating assets.

    What is the cost base?

    The cost base of a CGT asset is generally the cost of the asset when you bought it; however, it also includes certain other costs associated with acquiring, holding and disposing of the asset.

    For most CGT events, you need the cost base of the CGT asset to work out whether or not you have made a capital gain. If you may have made a capital loss, you need the reduced cost base of the CGT asset for your calculation. The capital gain and capital loss columns in the table at appendix 1 indicate whether the cost base and reduced cost base of an asset are relevant for a CGT event.

    For those CGT events where the cost base and reduced cost base are not relevant, the explanation of the CGT event given in the table explains the amounts to use to work out your capital gain or capital loss. 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 capital loss by comparing the capital proceeds with the incidental costs.

    Cost base is not relevant when working out a capital gain from a depreciating asset.

    There are special rules for calculating the cost of a depreciating asset. For details, see CGT and depreciating assets, and the Guide to depreciating assets 2004–05 (NAT 1996-6.2005).

    Elements of the cost base

    The cost base of a CGT asset is made up of five elements. You need to work out the amount for each element, then add them together to work out the cost base of your CGT asset.

    If you are registered for GST, you reduce each element of the cost base of your asset by any related GST net input tax credits. (For CGT events that occurred on or before 19 February 2004 only the first, second and third elements of the cost base of an asset you acquired after 13 May 1997 are reduced by GST input tax credits.)

    First element: money or property given for the asset

    The money paid (or required to be paid) for the asset and the market value of property given (or required to be given) to acquire the asset are included in the first element.

    Second element: incidental costs of acquiring the CGT asset or of the CGT event

    There are five incidental costs you may have incurred in acquiring the asset or in relation to the CGT event that happens to it, including its disposal. They are:

    • remuneration for the services of a surveyor, valuer, auctioneer, accountant, broker, agent, consultant or legal adviser (you can only include the cost of advice concerning the operation of the tax law as an incidental cost if the advice was provided by a recognised tax adviser and you incurred the cost after 30 June 1989)
    • costs of transfer
    • stamp duty or other similar duty
    • costs of advertising to find a seller or buyer, and
    • costs relating to the making of any valuation or apportionment for the purposes of determining your capital gain or capital loss.

    Do not include costs if you can claim a tax deduction for them in any year.

    Third element: non-capital costs associated with owning the asset

    Non-capital costs associated with owning an asset include rates, land taxes, repairs and insurance premiums. Non-deductible interest on borrowings to finance a loan used to acquire a CGT asset and on loans used to finance capital expenditure you incur to increase an asset's value are also third element costs.

    You can only include non-capital costs of ownership in the cost base if you cannot claim a tax deduction for them and if you acquired the asset on or after 21 August 1991. You cannot include them at all in the cost base of collectables or personal use assets.

    You cannot index these costs or use them to work out a capital loss. See Indexation of the cost base.

    Fourth element: capital costs associated with increasing the value of your asset

    This element is relevant only if you incurred the expenditure to increase the asset's value and it is reflected in the state or nature of the asset at the time of the CGT event - for example, if you paid for a carport to be built on your rental investment property.

    Fifth element: capital costs of preserving or defending your ownership of or rights to your asset

    Capital expenses you incur to preserve or defend your ownership of or rights to the asset - for example, if you paid a call on shares - come under this element.

    Assets acquired after 13 May 1997

    If you acquired a CGT asset after 13 May 1997, the cost base of the asset also excludes:

    • any expenditure in the first, fourth or fifth element that you have claimed or can claim as a tax deduction, or
    • heritage conservation expenditure and landcare and water facilities expenditure incurred after 12 November 1998 that give rise to a tax offset.

    Special rules apply for land and buildings. See Cost base adjustments for capital works deductions.

    Reversal of deduction: effect on cost base

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

    Indexation of the cost base

    If a CGT event happened to a CGT asset you acquired before 11.45am (by legal time in the ACT) on 21 September 1999 and owned for at least 12 months, you can use either the indexation method or the discount method to calculate your capital gain.

    If you use the indexation method, some of the cost base expenditure you incurred up to 11.45am (by legal time in the ACT) on 21 September 1999 may be indexed to account for inflation up to the September 1999 quarter. Only expenditure incurred before 11.45am (by legal time in the ACT) on 21 September 1999 may be indexed because changes to the law mean indexation was frozen at that date. See chapter 2 for more information on the indexation and discount methods.

    What is the reduced cost base?

    When a CGT event happens to a CGT asset and you haven't made a capital gain, you need the asset's reduced cost base to work out whether you have made a capital loss. (Remember, you can only use a capital loss to reduce a capital gain - you cannot use it to reduce other income.)

    Elements of the reduced cost base

    The reduced cost base of a CGT asset has the same five elements as the cost base, except for the third element:

    1. money or property given for the asset
    2. incidental costs of the CGT event or of acquiring the CGT asset
    3. balancing adjustment amount - any amount that is assessable because of a balancing adjustment for the asset or that would be assessable if certain balancing adjustment relief were not available
    4. capital costs associated with increasing the value of your asset, and
    5. capital costs of preserving or defending your title or rights to your asset.

    These elements are not indexed.

    You need to work out the amount for each element then add the amounts together to find out your reduced cost base for the relevant CGT asset.

    If you are registered for GST, you exclude the GST net input tax credits from the reduced cost base for all CGT events that happen after 19 February 2004. For CGT events that occurred on or before 19 February 2004, none of the elements of the reduced cost base are reduced by the amount of any GST input tax credits included in the cost.

    The reduced cost base does not include any costs you have incurred that you have claimed or can claim as tax deductions - for example, capital works deductions for capital expenditure.

    Example: Capital works deduction: effect on reduced cost base

    Danuta acquired a new income-producing asset on 28 September 1994 for $100,000. She sold it for $90,000 in November 2004. During the period she owned it she claimed capital works deductions of $7,500 for expenditure she incurred. Her capital loss is worked out as follows:

    Cost base

    $100,000

    less capital works deductions

    $7,500

    Reduced cost base

    $92,500

    less capital proceeds

    $90,000

    Capital loss

    $2,500

     

    End of example
    Modifications to the 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, you may substitute the market value for the first element of the cost base and 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.

    This is known as the market value substitution rule for cost base and reduced cost base.

    You do not include expenditure you subsequently recoup - such as an insurance pay-out you receive or an amount paid for by someone else - in the cost base and reduced cost of a CGT asset unless you include the recouped amount in your assessable income.

    Example: Recouped expenditure

    John bought a building in 2000 for $200,000 and incurred $10,000 in legal costs associated with the purchase. As part of a settlement, the vendor agreed to pay $4,000 of the legal costs. John did not claim as a tax deduction any part of the $6,000 he paid in legal costs.

    He later sells the building. As he received reimbursement of $4,000 of the legal costs, in working out his capital gain he includes only the $6,000 he incurred in the cost base.

    End of example

    If you acquire a CGT asset and only part of the expenditure relates to the acquisition of the CGT asset, you can only include that part of the expenditure that is reasonably attributable to the acquisition of the asset in its cost base and reduced cost base.

    Apportionment is also required if you incur expenditure and only part of that expenditure relates to another element of the cost base and reduced cost base.

    Similarly, if a CGT event happens only to part of your CGT asset, you generally apportion the asset's cost base and reduced cost base to work out the capital gain or capital loss from the CGT event.

    Consolidated groups

    The rules that apply to members of a consolidated group modify the application of the capital gains tax rules.

    For more information about the consolidation rules, visit our website or for technical enquiries, phone the Tax Reform Infoline on 13 28 74.

    General value shifting regime

    Value shifting generally occurs when a dealing or transaction between two parties is not at market value and results in the value of one asset decreasing and (usually) the value of another asset increasing.

    The general value shifting regime (GVSR) rules apply to:

    • value shifts that arise because interests in a company or trust are issued or bought back at other than market value, or because their rights are varied so that the value of some interests increases while the value of others decreases (direct value shifts on interests)
    • value shifts that arise because two entities under the same control or ownership conduct dealings or transactions that are neither at market value nor arm's length, so that the value of interests in one entity decreases while (usually) the value of interests in the other entity increases (indirect value shifting), and
    • value shifts that arise from the creation of a right over a non-depreciating asset in favour of an associate for less than market value (direct value shifts by creating rights).

    The rules on direct value shifts on interests target only equity or loan interests held by an individual or entity that controls the company or trust, the controller's associates and, if the company or trust is closely held, any active participants in the arrangement.

    The indirect value shifting rules target only equity or loan interests held by an individual or entity that controls the two entities conducting the dealing or transaction and the controller's associates. But if the two entities are closely held, the rules also target equity or loan interests held by two or more common owners of those entities, the common owner's associates and any active participants in the arrangement.

    There are also exclusions and safe harbours that limit the operation of the rules.

    If the rules apply, you may need to:

    • adjust the cost base and reduced cost base of equity and loan interests affected by the value shift, or
    • adjust a realised loss or gain on the disposal of the relevant assets.

    In some cases, there may also be an immediate capital gain.

    For more information on whether the GVSR rules apply to you, see General value shifting regime – who it affects. For detailed information on the operation of the rules, see Overview of provisions.

    Other special rules

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

    • if the asset is your main residence and you use it to produce income for the first time after 20 August 1996 (see chapter 6)
    • if you receive the asset as a beneficiary or as the legal personal representative of a deceased estate (see chapter 9)
    • for bonus shares or units, rights and options and convertible notes (see chapter 5)
    • under a demerger (see chapter 5), and
    • where you have been freed from paying a debt (see Debt forgiveness).
    Debt forgiveness

    A debt is forgiven if you are freed from the obligation to pay it. 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
    • unapplied net capital losses from earlier years
    • deductible expenditure
    • assets' cost base and reduced cost base.

    These rules do not apply if the debt is forgiven:

    • as a result of an action under bankruptcy law
    • in a deceased person's will, or
    • for reasons of natural love and affection.

    Example: Applying a forgiven debt

    On 1 July 2004, Josef had available net capital losses of $9,000. On 1 January 2005, he sold shares he had owned for more than 12 months for $20,000. They had a cost base (no indexation) of $7,500. On 1 April 2005, a commercial debt of $15,000 that Josef owed to AZC Pty Ltd was forgiven. Josef had no prior year revenue losses and no deductible capital expenditure.

    Josef must use part of the forgiven commercial debt amount to wipe out his net capital losses and the rest to reduce the cost base of his shares. He works out what net capital gain to include in his assessable income as follows:

    Adjust net capital losses

    Available net capital losses

    $9,000

    less debt forgiveness adjustment

    $9,000

    Adjusted net capital losses

    Nil

    Adjust cost base

    Cost base of shares (no indexation)

    $7,500

    less debt forgiveness adjustment

    $6,000

    Adjusted cost base (no indexation)

    $1,500

    Calculate net capital gain

    Sale of shares

    $20,000

    less adjusted cost base (no indexation)

    $1,500

    less adjusted net capital losses

    Nil

    Capital gain (eligible for discount)

    $18,500

    less discount percentage (50%)

    $9,250

    Net capital gain

    $9,250

     

    End of example

    Acquiring CGT assets

    Generally, you acquire a CGT asset when you become its owner. You may acquire a CGT asset because:

    • A CGT event happens to someone else (for example, the transfer of land to you under a contract of sale). If you acquired an asset because of a CGT event, you are generally taken to have acquired the asset at the time of the CGT event.

      For example, if you enter into a contract to purchase a CGT asset, the time of acquisition is when you enter into the contract (as that is the time CGT event A1 happened to the seller). However, if you obtain an asset without entering into a contract, the time of acquisition is when you start being the asset's owner.
    • Other events or transactions happen that are not the result of a CGT event happening to someone else. For example, if a company issues or allots shares to you (which is not a CGT event), 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.
    • Other special CGT rules. For example, if a CGT asset passes to you as a beneficiary of someone who has died, you are taken to have acquired the asset on the date of the person's death. Also, if you start using your main residence to produce income for the first time after 20 August 1996, you are taken to have acquired it at its market value at the time it is first used to produce income.
    Time of acquisition

    The time a CGT asset is acquired is important for four reasons:

    • CGT generally does not apply to assets acquired before 20 September 1985 (pre-CGT assets)
    • different cost base rules apply to assets acquired at different times - for example, non-capital costs are not included in the cost base of an asset acquired before 21 August 1991
    • it determines whether the cost base can be indexed for inflation and the extent of that indexation (see chapter 2), and
    • it determines whether you are eligible for the CGT discount - for example, one requirement is that you need to have owned a CGT asset for at least 12 months (see chapter 2).

    Compensation

    There can be CGT consequences when you receive compensation.

    You disregard some capital gains made as a result of you receiving compensation - for example, compensation for personal injury or compensation payable under certain government programs. For details of other compensation you disregard, see Exemptions. You may defer a capital gain made as a result of compensation for the loss, destruction or compulsory acquisition of an asset - see chapter 7.

    A compensation payment may relate to the disposal of, or permanent damage to, an underlying asset. The underlying asset is the most relevant asset to which the compensation amount is most directly related. For example, if you receive compensation for damage to a rental property, the most relevant asset - the underlying asset - is the rental property.

    If the payment relates to the disposal (in whole or part) of an underlying asset, the compensation is treated as additional capital proceeds for the disposal of that asset.

    If the payment relates to permanent damage to, or permanent reduction in the value of, an underlying asset, the compensation is treated as a recoupment of all or part of the acquisition cost of the asset (that is, you reduce the cost base and reduced cost base by the amount of the compensation).

    If the payment is not in relation to an underlying asset, it relates to the disposal of the right to seek compensation. The capital gain or capital loss will be the difference between the incidental costs and the compensation received.

    For more information about the CGT consequences of receiving compensation, see Taxation Ruling TR 95/35: Income tax: capital gains: treatment of compensation receipts.

    Becoming a resident and ceasing to be a resident

    There are special CGT rules that apply when you become or stop being a resident of Australia for tax purposes. These rules do not affect pre-CGT assets.

    Becoming a resident

    If you become a resident you are taken to have acquired certain assets - specifically, those that do not have a necessary connection with Australia - at the time you become a resident. You are taken to have acquired them for their market value at that time. This does not apply to assets you acquired before 20 September 1985 (pre-CGT assets) and assets that had the necessary connection within Australia.

    The general rules apply to any assets that had the necessary connection with Australia (for example, land in Australia) when you became a resident.

    Ceasing to be a resident

    If you stop being an Australian resident for tax purposes, you are taken to have disposed of assets that don't have the necessary connection with Australia for their market value on the day you stopped being a resident.

    Short-term resident

    You disregard the capital gain or capital loss if you are an individual and were an Australian resident for less than five years during the 10 years before you stopped being one, and either:

    • owned the asset before last becoming an Australian resident, or
    • inherited the asset after last becoming an Australian resident.
    Choosing to disregard making a capital gain or capital loss

    If you are an individual, you can choose to disregard all capital gains and capital losses you made when you stopped being a resident. If you make this choice the assets are taken to have the necessary connection with Australia until the earlier of:

    • a CGT event happening to the assets (for example, their sale or disposal)
    • you again becoming an Australian resident.

    The effect of making this choice is that the increase or decrease in value of the assets from the time you stop being a resident to the time of the next CGT event or you again becoming a resident is also taken into account in working out your capital gains or capital losses on those assets.

    Necessary connection with Australia

    Assets you may own that have a necessary connection with Australia include:

    • land or a building in Australia (or an interest in land or a building)
    • a CGT asset you have used in carrying on a business through a permanent establishment in Australia
    • a share in a private company that is an Australian resident company for the income year in which the CGT event happens
    • a share, or an interest in a share, in a public company that is an Australian resident company and in which you and your associates have owned at least 10% of the value of the shares at any time during the five years before the CGT event happens
    • a unit in a unit trust that is a resident trust and in which you and your associates have owned at least 10% of the issued units at any time during the five years before the CGT event happens
    • an interest (other than a unit) in a trust that is a resident trust for CGT purposes for the income year in which the CGT event happens, and
    • an option or right to acquire any of the preceding CGT assets.

    Assets that do not fall within one of the above categories - for example, land or a building overseas or shares in a foreign company - do not have the necessary connection with Australia.

    On 10 May 2005, as part of the Budget, the Government announced that it proposes to change the law for temporary residents. The change will ensure no capital gain or capital loss arises on the disposal of foreign assets by a person who is a resident for four years or less. The Government's intention is for the change to generally have effect for the first income year after the date of Royal Assent of the amending legislation.

    Choices

    In some cases you are given a choice as to how the CGT rules apply to you. As a general rule, if you wish to make a choice you must make it by the day you lodge your tax return - the way you prepare your tax return is sufficient evidence of your choice. However, there are some exceptions:

    • companies must make some decisions about replacement asset rollovers earlier
    • choices relating to the small business retirement exemption must be made in writing, and
    • a longer period is allowed to choose the small business rollover.

    Exemptions and rollovers

    There are exemptions and rollovers that may allow you to reduce, defer or disregard your capital gain or capital loss. There is no rollover or exemption for a capital gain you make when you sell an asset and put the proceeds into a superannuation fund or use the proceeds to purchase an identical or similar asset. For example, if you sell a rental property and put the proceeds into a superannuation fund or use the proceeds to purchase another rental property, rollover is not available. To find out when rollover is available - see Rollovers.

    Exemptions

    Generally, capital gains and capital losses from pre-CGT assets (that is, an asset you acquired before 20 September 1985) are exempt. However, CGT event K6 can result in capital gains if certain CGT events happen to pre-CGT shares in a company or pre-CGT interests in a trust - see Taxation Ruling TR 2004/18: Income tax: capital gains: application of CGT event K6 (about pre-CGT shares and pre-CGT trust interests) in section 104-230 of the Income Tax Assessment Act 1997.

    Another important exemption is for a capital gain or capital loss you make from a CGT event relating to a dwelling that was your main residence. This rule 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 (see chapter 6 for more information).

    The following capital gains and capital losses are also disregarded:

    • a car (that is, a motor vehicle designed to carry a load of less than one tonne and fewer than nine passengers) or 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
    • a capital gain from a personal use asset acquired for $10,000 or less
    • any capital loss from a personal use asset
    • CGT assets used solely to produce exempt income or some amounts of non-assessable non-exempt income
    • a CGT asset that is your trading stock at the time of a CGT event
    • shares in a pooled development fund
    • compensation or damages you receive for any
      • wrong or injury you suffer in your occupation
      • 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
    • a reimbursement or payment of your expenses under the General Practice Rural Incentives Program or the Sydney Aircraft Noise Insulation Project
    • a reimbursement or payment made under the M4/M5 Cashback Scheme
    • a re-establishment grant made under section 52A of the Farm Household Support Act 1992
    • a dairy exit payment under the Farm Household Support Act 1992
    • a sugar industry exit grant paid under the Sugar Industry Reform Program
    • payments made under the German Forced Labour Compensation Programme (GFLCP), and certain payments or property received by Australian residents after 30 June 2001 as a result of persecution during the Second World War
    • some types of testamentary gifts
    • any capital gain or capital loss that would otherwise arise from the assignment of a right in relation to a general insurance policy held with an HIH company to the Commonwealth, the trustee of the HIH trust or a prescribed entity
    • any capital gain or capital loss you make from rights being created in you or your rights ending in relation to the making of a superannuation agreement (as defined in the Family Law Act 1975), the termination or setting aside of such an agreement or such an agreement otherwise coming to an end
    • any capital gain or capital loss that a complying superannuation entity makes from a CGT event happening in relation to a segregated current pension asset
    • in certain circumstances, a general insurance policy, a life insurance policy or an annuity instrument
    • the transfer on or after 28 December 2002 of a superannuation interest in a small superannuation fund to another small superannuation fund on the breakdown of a legal (but not a de facto) marriage
    • your gain on disposal of eligible venture capital investments, if you are a qualifying investor see Venture capital and early stage venture capital limited partnerships.
    Other exemptions: capital gains

    You may reduce your capital gain if, because of a CGT event, you have included an amount in your assessable income other than as a capital gain.

    There are a range of concessions that allow you to disregard part or all of a capital gain made from an active asset you use in your small business. For more information, see the Guide to capital gains tax concessions for small business (PDF, 174KB)This link will download a file.

    Other exemptions: capital losses

    You disregard any capital loss you make:

    • from the expiry, forfeiture, surrender or assignment of a lease if the lease is not used solely or mainly for the purpose of producing assessable income
    • from a payment to any entity of personal services income that is included in an individual's assessable income under the alienation of personal services income provisions, or any other amount attributable to that income
    • as an exempt entity.
    Rollovers

    You may defer or disregard - rollover - a capital gain or capital loss until a later CGT event happens. The types of rollover available are listed here but only the following four types are covered in this guide. If you would like information on the others, please contact the Tax Office.

    Marriage breakdown

    In certain cases where an asset or a share of an asset is transferred from one spouse to another after their marriage breaks down, any CGT is deferred until a later CGT event happens (for example, when the former spouse sells the asset to someone else). For more examples of how CGT obligations are affected by marriage breakdown, see chapter 8.

    Loss, destruction or compulsory acquisition of an asset

    You may defer a capital gain in some cases where a CGT asset has been lost or destroyed or is compulsorily acquired (see chapter 7).

    Scrip-for-scrip

    You may be able to defer a capital gain if you dispose of your shares in a company or interest in a trust as a result of a takeover (see chapter 5).

    Demergers

    You may be able to defer a capital gain or capital loss if a CGT event happens to your shares in a company or interest in a trust as a result of a demerger (see chapter 5).

    Other replacement asset rollovers

    You may be able to defer a capital gain or capital loss when you replace an asset in the following circumstances (if you would like information on these rollovers, contact the Tax Office or your recognised tax adviser):

    • an individual or trustee disposes of assets to, or creates assets in, a wholly owned company
    • partners dispose of assets to, or create assets in, a wholly owned company
    • a CGT event happens to small business assets and you acquire replacement assets
    • your statutory licence is renewed or extended
    • you are a financial service provider who had assets - for example, licences - replaced on transition to the financial services reform (FSR) regime
    • your property is converted to strata title
    • you exchange shares in the same company or units in the same unit trust
    • you exchange rights or options to acquire shares in a company or units in a unit trust
    • you exchange shares in one company for shares in an interposed company
    • you exchange units in a unit trust for shares in a company
    • a body is converted to an incorporated company
    • you acquire a Crown lease
    • you acquire a depreciating asset
    • you acquire prospecting and mining entitlements
    • you dispose of a security under a securities lending arrangement
    • a trust restructure ends your ownership of units or interests.
    Other same asset rollovers

    You may be able to defer a capital gain or capital loss when you transfer or dispose of assets in the following circumstances (if you would like information on these rollovers, contact the Tax Office or your recognised tax adviser):

    • an individual or trustee transfers a CGT asset to a wholly owned company
    • a partner transfers their interest in a CGT asset to a wholly owned company
    • a CGT asset is transferred between related companies
    • a trust disposes of a CGT asset to a company under a trust restructure
    • a CGT event happens because of a change to a trust deed of a complying approved deposit fund, a complying superannuation fund or a fund that accepts worker entitlement contributions
    • a superannuation entity that merges with another superannuation entity because it does not satisfy requirements under the new superannuation safety arrangements
    • a transfer of a CGT asset from one small superannuation fund to another because of a marriage breakdown.

    CGT and depreciating assets

    The uniform capital allowance system (UCA) applies from 1 July 2001 and replaces the previous capital allowance regime for plant. Under the UCA system, a capital gain or capital loss from the disposal of a depreciating asset will only arise to the extent that you have used the asset for a non-taxable purpose (for example, used for private purposes).

    You calculate a capital gain or capital loss from a depreciating asset used for a non-taxable purpose using the UCA concepts of cost and termination value, not the concepts of capital proceeds and cost base found in the CGT provisions.

    If a balancing adjustment event occurs for a depreciating asset that you have at some time used for a non-taxable purpose, a CGT event happens (see CGT event K7 in appendix 1). The most common balancing adjustment event for a depreciating asset occurs when you stop holding it (for example, you sell, lose or destroy it) or stop using it.

    Calculating capital gain or capital loss for a depreciating asset

    You make a capital gain if the termination value of your depreciating asset is greater than its cost; you make a capital loss if the reverse is the case and the asset's cost is more than its termination value.

    You use different formulas to calculate a capital gain or capital loss depending on whether the asset is in a low-value pool or not.

    Depreciating asset not in a low-value pool: capital gain

    If your depreciating asset is not a pooled asset, you calculate the capital gain as follows:

    (Termination value − cost) × (sum of reductions [see note 1] ÷ total decline [see note 2])

    Depreciating asset not in a low-value pool: capital loss

    You calculate the capital loss from a depreciating asset that is not a pooled asset as follows:

    (Cost − termination value) × (sum of reductions [see note 1] ÷ total decline [see note 2])

    Example: Capital gain on depreciating asset

    Larry purchased a truck in August 2004 for $5,000. He used the truck 10% for private purposes. The decline in value of the truck up to the date of sale was $2,000. Therefore, the sum of his reductions relating to his private use is $200 (10% of $2,000). Larry disposes of the truck in June 2005 for $7,000. Larry calculates his capital gain from CGT event K7 as follows:

    ($7,000 − $5,000) × ($200 ÷ $2,000)

    Capital gain from CGT event K7 = $200

    End of example
    Depreciating asset in a low-value pool: capital gain

    You calculate the capital gain from a depreciating asset in a low-value pool as follows:

    (Termination value − cost) × (1 − taxable use fraction [see note 3])

    Depreciating asset in a low-value pool: capital loss

    You calculate the capital loss from a depreciating asset in a low-value pool as follows:

    (Cost − termination value) × (1 − taxable use fraction [see note 3])

    Note 1: The sum of the reductions in your deductions for the asset's decline in value that is attributable to your use of the asset, or having it installed ready for use, for a non-taxable purpose.

    Note 2: The decline in the value of the depreciating asset since you started to hold it.

    Note 3: 'Taxable use fraction' is the percentage of the asset's use that is for producing your assessable income, expressed as a fraction. This is the percentage you reasonably estimate at the time you allocated the asset to the low-value pool.

    Application of CGT concessions

    A capital gain from a depreciating asset may qualify for the CGT discount if the relevant conditions are satisfied. If the CGT discount applies, there is no reduction of the capital gain under the indexation method, as detailed in chapter 2.

    The small business CGT concessions do not apply to a capital gain made from the disposal of a depreciating asset - because a capital gain can only arise for an asset's use for non-taxable purposes (for example, to the extent it is used for private purposes).

    Do any CGT exemptions apply to a depreciating asset?

    A number of exemptions may apply to a capital gain or capital loss made from the disposal of a depreciating asset:

    • Pre-CGT assets - You disregard a capital gain or capital loss from a depreciating asset if the asset was acquired before 20 September 1985.
    • Simplified tax system (STS) assets - You disregard a capital gain or capital loss from a depreciating asset if you have elected to become an STS taxpayer and you can deduct an amount for the depreciating asset's decline in value under the STS provisions for the income year in which the balancing adjustment event occurred.
    • Personal use asset - If a depreciating asset is a personal use asset (that is, one used or kept mainly for personal use and enjoyment), you disregard any capital loss from CGT event K7. You also disregard a capital gain under CGT event K7 from a personal use asset costing $10,000 or less.
    • Collectables - You disregard a capital gain or a capital loss from a depreciating asset that is a collectable costing $500 or less.
    • Balancing adjustment event and CGT event - You only include a balancing adjustment event that gives rise to a capital gain or capital loss under CGT event K7. However, capital proceeds received under other CGT events - for example, CGT event D1 - may still be relevant for a depreciating asset as CGT events are not the equivalent of balancing adjustment events.
    Changed treatment of intellectual property

    Intellectual property is a depreciating asset for the purposes of the UCA. Under this system, the former special treatment for partial realisations of intellectual property no longer applies.

    If you grant or assign an interest in an item of intellectual property, you are treated as if you had stopped holding part of the item. You are also treated as if, just before you stop holding that part, you had split the original item of intellectual property into two parts, the part you stopped holding and the rest of the original item. You determine a first element of the cost for each part.

    This treatment applies if a licence is granted over an item of intellectual property. To this extent, the treatment of intellectual property is different from other depreciating assets. The grant of a licence in respect of other depreciating assets would result in CGT event D1 (about creating contractual rights) happening.

    Need more information?

    For more information about depreciating assets, see the Guide to depreciating assets 2004–05.

    Where to now?

    Chapter 2 in part A explains how to calculate a capital gain using one of the three methods (indexation, discount or 'other').

    Chapter 4 in part A explains how to calculate your capital gain if a managed fund or trust has distributed a capital gain to you. You must take into account capital gains included in trust distributions in working out your net capital gain or capital loss.

    For more specific directions on how to complete your tax return, please go to:

    • part B for individuals
    • part C for companies, trusts and funds (individuals who use the worksheets may find steps 1, 2 and 3 in part C useful - ignore the word 'entity').
    Last modified: 09 Apr 2020QC 27596