Explanatory Memorandum(Circulated by the authority of the Treasurer, the Hon John Dawkins, M.P.)
Capital Gains Tax
Purpose of amendment: To improve the readability of the Capital Gains Tax provisions of Part IIIA of the Act, and to provide an index of the key concepts relevant to the operation of those provisions.
Date of Effect: The amendments will not affect the operation of the law.
The CGT provisions apply generally where there is a disposal of an asset which was acquired after 19 September 1985. The general scheme of Part IIIA is twofold: it sets out the situations in which the CGT provisions apply and, if they do apply, it provides rules for calculating the amount of the capital gain or capital loss in respect of the disposal of the asset.
Because of the variety of situations to which CGT does apply, it is not always appropriate that the general scheme of the CGT provisions apply in their usual manner. For this reason, a number of provisions modify the way in which the general scheme of Part IIIA operates in particular circumstances. The number and scope of these modifications add to the complexity of Part IIIA and make it difficult to read.
The proposed amendments will provide:
- a simplified outline of the scheme of Part IIIA,
- an example of how the Part applies in a typical case, and
- an index of the main circumstances (the key concepts) in which the scheme is modified.
Section 160ZO provides for a net capital gain which accrues to a taxpayer to be included in the assessable income of the taxpayer. This is the object of Part IIIA.
Section 160L sets out the general circumstances in which Part IIIA applies. These are:
- a taxpayer disposes of an asset (the basic definition of "disposal" is in section 160M; the basic definition of "asset" is in section 160A);
- the asset was acquired by the taxpayer on or after 20 September 1985 (the basic definition of "acquisition" is in section 160M; the time of acquisition is primarily dealt with in section 160U); and
- the disposal occurs on or after 20 September 1985 (the time of disposal is primarily dealt with in section 160U).
Section 160Z is the basic provision for determining the amount of a capital gain or capital loss on the disposal of an asset. A comparison is made between:
- the consideration in respect of the disposal of the asset (the basic definition is in section 160ZD)
- the indexed cost base of the asset, if the asset is owned for 12 months or more (see sections 160ZH and 160ZJ),
- the cost base of the asset, if the asset is owned for less than 12 months (see section 160ZH), or
- the reduced cost base of the asset (see sections 160ZH and 160ZK).
Where the consideration in respect of the disposal exceeds the cost base or indexed cost base of the asset, the amount of the excess is the amount of the capital gain.
Where the consideration in respect of the disposal is less than the reduced cost base of the asset, the amount of the difference is the amount of the capital loss.
Where the consideration in respect of the disposal does not exceed the cost base or indexed cost base of the asset and is not less than the reduced cost base of the asset, there is no capital gain and no capital loss.
Where the taxpayer disposes of more than one asset in any year, or has a net capital loss in an earlier year, the capital gains and/or capital losses are netted to determine the net capital gain or net capital loss of the taxpayer - section 160ZC. If there is a net capital gain, the amount of that net capital gain is included in the taxpayer's assessable income - section 160ZO.
There are a number of modifications to this general scheme of the CGT provisions in situations where it is not appropriate for that scheme to operate in its normal manner. The Bill proposes to include an index of the main areas in which that scheme is modified. By indicating these key concepts which are relevant to the operation of Part IIIA, it will be easier to see how the CGT provisions apply in any specific situation.
The index is in three parts. There are a number of provisions, those dealing with exemptions and roll-overs, which have the same general effect:
- An Exemptions Sub Index refers to the main areas where Part IIIA does not apply to the disposal of a particular asset, or where there is deemed to be no capital gain or capital loss resulting from the disposal of an asset.
- A Roll-overs Sub Index refers to the main areas where roll-over relief is given. The general effect of roll-over relief is to maintain the pre-CGT status of an asset or to defer a CGT liability which has accrued in respect of an asset.
- The Main Index refers to the other main areas, both within and outside Part IIIA, where the scheme of Part IIIA is modified.
However, the index is not intended to be comprehensive. It is intended to indicate the more usual circumstances in which the scheme of Part IIIA is modified. Nor should the index be relied upon as indicating the CGT treatment of a particular situation - that will only be determined according to the provisions relevant to the concept, to which reference should be made. For example, where an item is listed in the Exemptions Sub Index, the relevant section will indicate whether a full or partial exemption is available, and whether the exemption is subject to any conditions.
A person's principal residence is an asset to which the general scheme of Part IIIA would apply. However, a person's principal residence is generally exempt from CGT. The Exemptions Sub Index indicates that section 160ZZQ is the provision which deals with the principal residence exemption. That section sets out the conditions under which a full or partial exemption is available. Where a full exemption is available, no capital gain or capital loss is taken to result from the disposal of the residence. Where a partial exemption is available, the section provides for the way in which the amount of the capital gain or capital loss is to be calculated.