The provisions on Capital Gains Tax were introduced with effect on 20 September 1985. They generally apply to include net capital gains in assessable income for the income year. Net capital losses are carried forward.
The CGT provisions detail the various scenarios when a transaction will result in a capital gain or loss. These are referred to as CGT events. Unless a transaction falls within one of these scenarios, there will not be a CGT liability.
IN THIS ARTICLE
Net capital gain or loss
Personal use assets and collectables
Timing of capital gains
CGT and depreciating assets
CGT concessions for small businesses
Exemptions from CGT
The Income Tax Assessment Act 1997 (the Tax Act) sets out all the CGT events for which a capital gain or loss can be made. The full list of CGT events is summarised in a handy table in sections 104-5 of the Tax Act.
CGT liabilities can arise in respect of any of the following: leasing, inheritance, subdividing land, goodwill, contracts, options, a company liquidation, leaving Australia, marriage breakdown, working from home, shares, a civil court case, trusts, bankruptcy, incorporating a company.
If any of these situations occur, or some other transaction occurs which may have CGT implications, you need to look carefully to determine whether this is caught by one of the CGT events.
The Tax Act states that if a transaction is not caught by one of the CGT events, it will not be subject to CGT.
The most common CGT event is CGT Event A1 – Disposal of a CGT asset. Section 104-10 of the Tax Act states the event occurs if you dispose of a CGT asset. You are told that you dispose of a CGT asset if a change of ownership occurs whether because of some act or event or by operation of law. The concept of “disposal” is limited to where there is a change in ownership of an asset from one person to another. Disposals of pre-CGT assets are disregarded.
The time of the event is specified to be the entering into the contract for the disposal or when ownership of the asset ceases. A contract is normally regarded as entered into on exchange of contracts. Conditions after the making of the contract (for example, a subject to finance clause) will not affect this timing.
WORKING OUT THE NET CAPITAL GAIN OR LOSS
For most CGT events you make a capital gain if your capital proceeds from the CGT event are greater than your cost base.
You make a capital loss if your cost base is greater than the capital proceeds from the event.
There is no separate tax on capital gains. A net capital gain is included in assessable income. A net capital loss can only be offset against capital gains in subsequent income years.
Determining the net capital gain or loss for an income year involves the following steps:
Step 1. Add up the capital gains made during the income year. Also, add up the capital losses made in the year.
Step 2. Subtract the capital losses for the income year from the capital gains. You choose the order in which you reduce your capital gains. This means that where a discount is available on a capital gain and where another capital gain is not discounted, the capital losses can be offset first against the non-discounted capital gain. If the losses exceed the capital gains, there is no net capital gain for the income year). There is a net capital loss if the capital losses exceed the capital gains.
Step 3. If the gains exceed the losses, reduce them by applying any unapplied net capital losses from previous income years. If the result is still more than zero, then this is the net capital gain.
Step 4. Reduce each amount of a discount capital gain by its discount percentage. Apply the small business concessions if applicable.
Step 5. If the capital losses for the income year exceed the capital gains, the difference is the net capital loss. (A net capital loss cannot be deducted from assessable income.) Defer any net capital loss to the next income year for which there are capital gains that exceed the capital losses for that income year.
The capital proceeds from a CGT event are ordinarily the total of:
- the money received or, entitled to receive, in respect of the event happening; and
- the market value of any other property received (or entitled to receive).
Sometimes this general rule is varied. The most common variation is the deeming of market value consideration to have been received where no consideration is received or where the asset was disposed of in a non-arm’s length dealing – (market value substitution rule).
The cost base consists of 5 elements:
- the price paid, or the market value of the property given, to acquire the asset.
- the incidental non-deductible costs of acquiring the asset or of the CGT event:
- remuneration for specified professional services
- transfer costs
- stamp duty or similar duty
- advertising costs
- valuation costs
- costs of ownership such as interest and rates which are not deductible (for assets acquired after 20 August 1991)
- expenditure of a capital nature incurred to increase or preserve the value of the asset
- expenditure of a capital nature incurred to the extent to which it was incurred in establishing, preserving or defending the taxpayer’s title to, or a right over the asset
As with capital proceeds, if no money is paid or no property is given to acquire the asset or the asset is not acquired through an arm’s length dealing, the market value of the CGT asset may be considered in calculating the cost base.
Jane gifts property with a market value of $400,000 to her daughter. Her daughter will have a deemed cost base of $400,000 even though she has paid no consideration. Jane is deemed to have received market value proceeds.
A CGT asset is defined as property or a legal or equitable right that is not property. To avoid any doubt, CGT assets are stated to specifically include:
- a part of a CGT asset (or an interest in one);
- goodwill (or an interest in goodwill);
- an interest in a partnership asset; and
- any other interest in a partnership.
Individuals who own a CGT asset as joint tenants are treated as if they each own a separate asset corresponding to their share in the asset.
PERSONAL USE AND COLLECTABLES
Personal use assets are assets that are owned by the taxpayer and are used or kept primarily for personal use or enjoyment. There is no CGT on the disposal of personal use assets that cost $10,000 or less.
Capital losses from the disposal of personal use assets are disregarded in working out a net capital gain or loss. A similar exemption applies for collectables if their acquisition cost was $500 or less.
Collectables are the following categories of CGT assets (or interests in them) that are used or kept mainly for personal use or enjoyment:
- artwork, jewellery, antiques or a coin or medallion;
- a rare folio, manuscript or book;
- a postage stamp or first-day cover.
Capital losses from collectables can be used only to reduce capital gains from collectables.
The cost base of personal use assets or collectables does not include non-capital costs of ownership (e.g. repairs).
TIMING OF CAPITAL GAINS
Capital gains made on the sale of assets will be assessable income in the year the contract is entered.
A contract is entered into where there is a contract at common law (i.e. there is an offer and an acceptance, certainty of terms, and consideration).
If there is no contract, the timing of the capital gain is when the change of ownership occurs.
For assets held for at least 12 months and then disposed of, individuals and trusts include in their assessable income half the realised nominal gain (i.e. half the capital proceeds less the cost base).
If not held for 12 months, the discount is not available.
The same rules apply to complying superannuation funds, but they are only allowed a 1/3 exemption on any capital gain made in relation to assets.
Companies do not qualify for the CGT discount.
If the taxpayer chooses the CGT discount, capital losses will be applied against capital gains before applying the CGT discount.
Assume an asset that has been held for 2 years is disposed of for $500,000. Its cost base is $300,000. There are capital losses of $20,000.
Discount capital gain = ½ x ($500,000 – $300,000 – $20,000) = $90,000.
CGT AND DEPRECIATING ASSETS
Where there is a capital gain or loss made from a depreciating asset used 100% for income-producing purposes, the gain or loss is completely disregarded for CGT purposes.
However, where the asset was not wholly used for income-producing purposes, a capital gain or loss may arise under CGT event K7. It applies where a balancing adjustment event has happened to a depreciating asset that has been used wholly or partly for non-taxable purposes.
The most common balancing adjustment event for a depreciating asset occurs when the taxpayer stops holding it (for example, it is sold, lost or destroyed).
A capital gain or capital loss from a depreciating asset used for a non-taxable purpose is calculated using the uniform capital allowance concepts of cost and termination value, not the concepts of capital proceeds and cost base found in the CGT provisions.
A capital gain from CGT event K7 happening may qualify for the CGT discount.
A capital gain or loss from CGT event K7 happening to a depreciating asset arises in the same income year as any balancing adjustment calculated under Subdiv 40-D.
CGT concessions for small businesses
Division 152 of the Tax Act contains the CGT concessions for small businesses. They are:
- CGT 15-year asset exemption: a full exemption from CGT on the disposal of an active asset that has been held continuously for 15 years;
- CGT 50% active asset reduction: 50% exemption on the disposal of active assets;
- CGT $500,000 exemption: exemption of up to $500,000 on the disposal of active assets;
- CGT roll-over: deferral of the making of capital gains.
The concessions are available on the disposal of individual assets provided certain conditions are satisfied. More than one concession may apply to the same capital gain if the conditions for each are satisfied. The CGT discount may also be available.
4 basic conditions must be satisfied before any of the CGT small business concessions are available. They are:
- A CGT event happens concerning a CGT asset owned by the taxpayer
- That event results in a capital gain
- The taxpayer is a small business either by satisfying the maximum net asset value test (i.e. the net value of CGT assets that the business and entities connected with it and its affiliates and entities connected with them must not exceed $6m) or otherwise carries on the business and has an aggregated turnover of less than $2m
- The CGT asset disposed of satisfies an active asset test
There are additional conditions that must be satisfied before the concessions are available. See our CGT Small Business Concessions article for further detail.
EXEMPTIONS FROM CGT
The major exclusions from CGT are:
- trading stock
- a plant used 100% for income-producing purposes
- cars, motorcycles and similar vehicles
- assets used to produce exempt income
- main residence: the CGT main residence exemption provides that where an individual sells the main residence, no CGT is payable unless it has been used for income-producing purposes.
compensation for wrong or injury
- life assurance/superannuation policies
- gambling winnings
- pre-CGT property which isn’t deemed to be post-CGT
Records must be in English and contain the detail relevant to working out the capital gain or loss. Generally, records must be retained for five years after the last CGT event to which they relate.
However, if the relevant details (amounts, dates, names etc) are entered on an asset register, the source documents can be discarded five years after certification of the entry. A registered tax agent (or other person approved by the ATO) is required to certify that the information has been properly entered into the asset register.
This article is for general information only. It does not make recommendations nor does it provide advice to address your personal circumstances. To make an informed decision, always contact a registered tax professional.