Capital gains tax
Capital gains tax (CGT) is the tax a person or organisation pays on any capital gain it makes and includes in its annual income tax return. There is no separate tax on capital gains - it is just a component of income tax. An organisation is taxed on its net capital gain at the company tax rate.
An organisation's net capital gain
Total capital gains for the year
Total capital losses, including any net capital losses from previous years
Any CGT small business concessions
Some of the particular CGT issues that can affect a NFP organisation include:
- the sale of assets used in carrying on its activities
- changes to the form of an organisation's incorporation
- the amalgamation of organisations
- the availability of CGT concessions such as the small business concessions.
- For detailed information on how to work out your organisation's net capital gain or net capital loss, see Guide to capital gains tax.
Making a capital gain or capital loss
Generally, a capital gain or capital loss is made if a CGT event happens. Many CGT events are transactions that involve a CGT asset while other CGT events relate directly to capital receipts.
The most common CGT event (known as CGT event A1) happens if an organisation disposes of an asset to someone else - for example, it sells or gives away an asset. Examples of other CGT events are:
- the loss or destruction of an asset (the destruction may be voluntary or involuntary)
- the cancellation, surrender or redemption of shares
- the receipt of a payment for creating a right in another entity
- the receipt of a lease premium.
There is a summary of CGT events in the Guide to capital gains tax.
There are special rules that apply when working out gains and losses from depreciating assets.
If you use a depreciating asset wholly for a taxable purpose, any gain you make on its disposal is treated as ordinary income and any loss as a deduction.
If a depreciating asset is used both for a taxable purpose and for a non-taxable purpose, a capital gain or capital loss may also arise on disposal. The amount of the capital gain or capital loss is the difference between the asset's cost and its termination value that is attributable to the use for a non-taxable purpose.
Example: Non-taxable member percentage applies
A NFP society sells a computer for $600. The computer's cost is $1,000. It has been used 40% of the time for non-taxable member purposes. At the time of its sale, the computer's adjustable value is $700.
A capital loss of $160 arises. This is 40% (the non-taxable member proportion) of the difference between the computer's termination value and its cost.
In addition, the organisation can claim a deduction of $60. This is 60% (the taxable or non-member proportion of use) of the balancing adjustment amount (the difference between the computer's termination value and its adjustable value at the time of its sale).
End of example
For depreciating assets that are used wholly for a non-taxable purpose, the difference between the asset's termination value and its cost can be a capital gain or capital loss.
For some depreciating assets, any capital gain or capital loss arising will be disregarded even though the asset is used for a non-taxable purpose.
If your organisation has disposed of an asset that has been depreciated, see Guide to depreciating assets.
Calculating a capital gain or loss
For a CGT event involving an asset, a capital gain or loss is broadly the difference between the amount paid for the asset and the amount received for it. In some cases, the amount paid or received for an asset is taken to be its market value. Incidental costs involved in acquiring and disposing of the asset, such as legal fees and commissions, can also be taken into account.
For other CGT events, a capital gain or loss is generally the difference between the amount received and the costs involved with the transaction.
If your organisation's total capital losses for the income year are more than its total capital gains, the difference is a net capital loss for the year. The net capital loss can be carried forward to later income years to be deducted from future capital gains.
Generally, any capital gain or loss from an asset that was acquired before 20 September 1985 (pre-CGT assets) is disregarded.
CGT asset purchased with funds contributed by members
Although an organisation's mutual receipts are not treated as assessable income, this does not mean that an asset purchased with those receipts is exempt from CGT.
Example: Not exempt from CGT
An incorporated NFP association owned a property purchased with contributions made by the members. The property was used and maintained as an administration centre to collect member subscriptions and to administer activities for the benefit of members.
A capital gain arising on sale of the property is not exempt from CGT.
End of example
The CGT discount (which enables some capital gains to be reduced by up to 50%) is not available to companies. As a NFP club, society or association is treated as a company for tax purposes, the CGT discount cannot reduce any capital gain it may make. However, the small business 50% active asset reduction may apply - see below for more information.
CGT small business concessions
The CGT concessions a NFP organisation may be entitled to are:
- the small business 50% active asset reduction - which reduces a capital gain by 50%
- the small business roll-over - which defers a capital gain for a minimum of two years if a replacement asset is acquired or expenditure is incurred in making improvements to existing assets.
To qualify, your organisation must first satisfy at least one of the following basic conditions:
- it is a small business entity
- it does not carry on business (other than as a partner) but its asset is used in a business carried on by a small business entity that is an affiliate or is connected with it (passively-held assets)
- it is a partner in a partnership that is a small business entity, and the CGT asset is either:
- its interest in a partnership asset (partnership assets)
- an asset it owns that is not an interest in a partnership asset (partner's assets)
- it satisfies the maximum net asset value test - the total net market value of the assets of your organisation and certain other entities are $6 million or less just before the CGT event that results in the capital gain.
In addition, the asset must satisfy the active asset test.
Other CGT exemptions and roll-overs
There are a range of exemptions and roll-overs that can reduce the amount of a capital gain or loss, or defer the capital gain or loss. Examples are:
- an exemption for cars and motor cycles
- roll-over if a statutory licence is renewed or extended
- roll-over if an asset is compulsorily acquired.
Exemptions and roll-overs may apply to your organisation if it meets the relevant conditions.
CGT consequences when an organisation changes status
An organisation may be unincorporated, incorporated under the Corporations Act 2001 or an equivalent foreign law, or incorporated under a law other than a company law - for example, the Associations Incorporation Act 1981 (Qld).
If an unincorporated association incorporates, a CGT event may happen to each of the CGT assets that it owns because incorporation results in a change of ownership.
Example: CGT event - changing from unincorporated to incorporated
An unincorporated club bought a property in Brisbane in 1996. In February 2015, it incorporated under the Associations Incorporation Act 1981 (Qld).
CGT event A1 happens to the property.
The unincorporated club will have made a capital gain if the market value of the property at the time exceeds the cost base of the property. The club will make a capital loss if the market value of the property is less than its reduced cost base.
If the unincorporated club owned assets that it acquired before 20 September 1985 (pre-CGT assets), the incorporated club will have acquired the assets for market value at the time of incorporation.
End of example
If an incorporated organisation changes the form of its incorporation, there may also be CGT consequences, depending on the relevant legislation. For example, incorporation under the Corporations Act 2001 in certain circumstances does not create a new legal entity.
If your organisation changes status and you are unsure about the CGT consequences, you should seek advice from a professional adviser or contact us.
Amalgamations and dissolutions
There can be CGT consequences if organisations amalgamate.
For example, capital gains and losses may arise where two organisations merge to form a new organisation, or where one organisation is absorbed into another.
The CGT consequences resulting from amalgamations may differ depending on the state or territory in which the organisations are incorporated.
Similarly, the winding up of an organisation can result in capital gains and losses.