Tax Law Improvement Act (No. 1) 1998 (46 of 1998)

Schedule 1   Amendment of the Income Tax Assessment Act 1997

1   Part 3-1 Division 100

Division 100 - A Guide to capital gains and losses

General overview

100-1 What this Division is about

This Division is a simplified outline of the capital gains and capital losses provisions, commonly referred to as capital gains tax ( CGT ). It will help you to understand your current liabilities, and to factor CGT into your on-going financial affairs.

Table of sections

100-5 Effect of this Division

100-10 Fundamentals of CGT

100-15 Overview of Steps 1 and 2

Step 1 - Have you made a capital gain or a capital loss?

100-20 What events attract CGT?

100-25 What are CGT assets?

100-30 Does an exception or exemption apply?

100-33 Can there be a roll-over?

Step 2 - Work out the amount of the capital gain or loss

100-35 What is a capital gain or loss?

100-40 What factors come into calculating a capital gain or loss?

100-45 How to calculate the capital gain or loss for most CGT events

Step 3 - Work out your net capital gain or loss for the income year

100-50 How to work out your net capital gain or loss

100-55 How do you comply with CGT?

Keeping records for CGT purposes

100-60 Why keep records?

100-65 What records?

100-70 How long you need to keep records

100-5 Effect of this Division

This Division is a *Guide.

Note: In interpreting an operative provision, a Guide may be considered only for limited purposes: see section 950-150.

100-10 Fundamentals of CGT

(1) CGT affects your income tax liability because your assessable income includes your net capital gain for the income year. Your net capital gain is the total of your capital gains for the income year, reduced by certain capital losses you have made.

See later in this Guide (section 100-50) for more detail.

(2) When you prepare your income tax return, you need to check whether you have made any capital gains for the income year.

You also need to check whether you have made any capital losses. You cannot deduct a capital loss from your assessable income, but it will reduce your capital gain in the current income year or later income years.

(3) You will also need to consider the impact of CGT when doing your financial planning. In particular, you will need adequate record-keeping to deal most effectively with any immediate or future CGT liability.

To give you a sense of the range of things affected by CGT, if you are involved with any of the following, you may have a CGT liability now or at some time in the future:

100-15 Overview of Steps 1 and 2

Step 1 - Have you made a capital gain or a capital loss?

100-20 What events attract CGT?

(1) You can make a capital gain or loss only if a CGT event happens.

(2) There are a wide range of CGT events. Some happen often and affect many different taxpayers. Others are rare and affect only a few.

A summary of all the CGT events is in section 104-5.

Identifying the time of a CGT event

(3) The specific time when a CGT event happens is important for various reasons: in particular, for working out whether a capital gain or loss from the event affects your income tax for the current or another income year.

If a CGT event involves a contract, the time of the event will often be when the contract is made, not when it is completed.

The time of each CGT event is explained early in
the relevant section in Division 104.

100-25 What are CGT assets?

(1) Most CGT events involve a CGT asset. (For many, there is an exception if the CGT asset was acquired before 20 September 1985.) However, many CGT events are concerned directly with capital receipts and do not involve a CGT asset.

See the summary of the CGT events in section 104-5.

(2) Some CGT assets are reasonably well-known:

• land and buildings, for example, a weekender;

• shares;

• units in a unit trust;

• collectables which cost over $500, for example, jewellery or an artwork;

• personal use assets which cost over $10,000, for example, a boat.

(3) Other CGT assets are not so well-known. For example:

• your home;

• contractual rights;

• goodwill;

• foreign currency.

For a full explanation of what things are CGT assets: see Division 108.

100-30 Does an exception or exemption apply?

(1) Once you identify a CGT event which applies to you, you need to know if there is an exception or exemption that would reduce the capital gain or loss or allow you to disregard it.

(2) There are 4 categories of exemptions:

1. exempt assets: for example, cars;

2. exempt receipts: for example, compensation for personal injury;

3. exempt transactions: for example, your tenancy comes to an end;

4. anti-overlap provisions (that reduce your capital gain by the amount that is otherwise assessable).

Note: Most of the exceptions are in Division 104. You will find a full explanation of the possible exemptions in Division 118.

Some exemptions are limited

(3) Take the family home for example. Generally, you are exempt from CGT when you make a capital gain on disposing of your main residence.

But this can change depending on how you came to own the house and what you have done with it. For example, if you rent it out, you may be liable to CGT when you sell it.

For the limits on the general exemption of your main residence:
see Subdivision 118-B.

100-33 Can there be a roll-over?

(1) Roll-overs allow you to defer or disregard a capital gain or loss from a CGT event. They apply in specific situations. Some require a choice (for example, where an asset is compulsorily acquired: see Subdivision 124-B) and some are automatic (for example, where an asset is transferred because of marriage breakdown: see Subdivision 126-A).

(2) There are 2 types of roll-over:

1. a replacement-asset roll-over allows you to defer a capital gain or loss from one CGT event until a later CGT event happens where a CGT asset is replaced with another one;

2. a same-asset roll-over allows you to disregard a capital gain or loss from a CGT event where the same CGT asset is involved.

Note: The replacement-asset roll-overs are listed in section 112-115, and the same-asset roll-overs are listed in section 112-150.

Step 2 - Work out the amount of the capital gain or loss

100-35 What is a capital gain or loss?

For most CGT events:

• You make a capital gain if you receive (or are entitled to receive) capital amounts from the CGT event which exceed your total costs associated with that event.

• You make a capital loss if your total costs associated with the CGT event exceed the capital amounts you receive (or are entitled to receive) from the event.

100-40 What factors come into calculating a capital gain or loss?

Capital proceeds

(1) For most CGT events, the capital amounts you receive (or are entitled to receive) from the event are called the capital proceeds .

To work out the capital proceeds: see Division 116.

Cost base and reduced cost base

(2) For most CGT events, your total costs associated with the event are worked out in 2 different ways:

• For the purpose of working out a capital gain, those costs are called the cost base of the CGT asset.

• For the purpose of working out a capital loss, those costs are called the reduced cost base of the asset.

One of the main differences is that the costs are indexed for inflation in working out a capital gain (which reduces the size of the gain), but not in working out a capital loss.

To work out the cost base and reduced cost base: see Division 110.

100-45 How to calculate the capital gain or loss for most CGT events

1. Work out your capital proceeds from the CGT event.

2. Work out the cost base for the CGT asset.

3. Subtract the cost base from the capital proceeds.

4. If the proceeds exceed the cost base, the difference is your capital gain.

5. If not, work out the reduced cost base for the asset.

6. If the reduced cost base exceeds the capital proceeds, the difference is your capital loss.

7. If the capital proceeds are less than the cost base but more than the reduced cost base, you have neither a capital gain nor a capital loss.

Step 3 - Work out your net capital gain or loss for the income year

100-50 How to work out your net capital gain or loss

1. Add up your capital gains for the income year. Then add up your capital losses for the income year.

2. Subtract the total losses from the total gains.

3. If the gains exceed the losses, then also subtract any unapplied net capital losses for previous income years. If the result is still more than zero, then this is your net capital gain.

4. If the capital losses for the income year exceed the capital gains, the difference is your net capital loss. (You cannot deduct a net capital loss from your assessable income.)

For the rules on working out your net capital gain or loss:
see Division 102.

100-55 How do you comply with CGT?

Declare any net capital gain as assessable income in your income tax return.

Defer any net capital loss to the next income year for which you have capital gains that exceed the capital losses for that income year.

Keeping records for CGT purposes

100-60 Why keep records?

1. To ensure you do not disadvantage yourself.

2. To comply as easily as possible.

3. To plan for your CGT position in future income years.

4. The law requires you to: see Division 121.

100-65 What records?

Keeping full records will make it easier for you to comply. For example, keep records of:

• receipts of purchase or transfer;

• interest on money you borrowed;

• costs of agents, accountants, legal, advertising etc.;

• insurance costs and land rates or taxes;

• any market valuations;

• costs of maintenance, repairs or modifications;

• brokerage on shares;

• legal costs.

100-70 How long you need to keep records

The law requires you to keep records for 5 years after a CGT event has happened.