Capital Gain Tax - Summary Income Tax Law PDF

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Capital gain tax...

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Capital Gain Tax Basic concept Calculate net capital gain, included in assessable income (s 102-5), statutory income (s 6-10) Calculate net capital loss, carried forward to next income year, s102-10 CGT relevant to individuals, companies, partners in a partnership, trusts. Trustees, beneficiaries of trusts Classifying CGT assets A CGT asset is any kind of property | s 108-5  A CGT asset is any type of property, including both tangible property, such as land and buildings, as well as intangible property, such as copyright and patterns  A CGT asset is a legal or equitable right that is not property Examples of CGT assets from s 108-5 include the following:  Land and building  Shares in a company  Units in a unit trust  Options  Debts owed to you  A right to enforce a contractual obligation  Foreign currency  Goodwill  Interest in a partnership  Part of a CGT asset Specifically Excluded Assets:  Motor vehicles (small designed to carry fewer than 9 passengers or loads < 1 tonne ) s 995-1  Trading stock s 118-25  Depreciating assets 3 Step Approach s 100-1

1. Have you made a capital gain or loss? Asset level

2. Work out the amount of capital gain or loss? Asset level

3. Work out the net capital gain or loss for the income year? Aggregate gains and losses

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Step 1 – Have you made a capital gain or loss? Four questions 1 2 3 4

What events attract CGT? What is a CGT asset? Does an exception or exemption apply? Can there be a roll-over?

Question 1: What events attract CGT? LAWS3101 focus: • A1 Disposal of asset • C1 Loss or destruction of an asset • C2 Loss, cancellation, surrender, or similar ending of an intangible asset • C3 Capital gains by companies that issue options to acquire shares • D1 Capital gains bringing a contractual or other right into existence • D2 Capital gain from granting an option • K4 Gain or loss when a capital asset becomes trading stock – Topic 5 • K7 Gain or loss on disposal of asset that first returned a balancing adjustment – Topic 4 A1 – Disposal of an asset

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If a taxpayer disposes of a CGT asset | s 104-10

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Change of ownership occurs from you to another entity Timing:  When the taxpayer enters into the contract  Or if no contract  When the change of ownership occurs Gift assets to others?  A1 event  No cash changes hands  Proceeds step 2, proceeds modifications = marker value

Capital gain capital proceeds > cost base Capital loss  capital proceeds < cost base

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C1 – Loss or destruction of a CGT asset If a CGT asset that the taxpayer owns is lost or destroyed | s 10420

C2 – Loss, cancellation, surrender, or similar ending of an intangible asset

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C3 – Capital gains by companies that issue options to acquire shares D1 – Capital gains bringing a contractual or other right into existence

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Timing  the taxpayer first receives compensation for the loss or destruction  No compensationwhen the loss is discovered or the destruction occurred Part of asset destroyed  Not C1  Receive no compensation  Receive compensation and do nothing  Receive compensation, use the compensation Happens where the taxpayer’s ownership of an intangible asset ends by the asset:  Being redeemed or cancelled; or  Being released, discharged or satisfied; or  Expiring; or  Being abandoned, surrendered or forfeited  If the asset is an option – being exercised; or  If the asset is a convertible interest – being converted Option contract is not exercised  Contractual right ends restrictive covenant period ends  Contractual right ends Restraint of trade period ends Option is exercised  Asset sold or purchased, treat C2 with disposal or purchase of asset Timing  When the taxpayer enters into the contract  No contract  when the asset ends C3 only deals with company issued options. (all other options are deal with as a D2 event) Timing: when the option ends Create a contractual right  Applies to most contracts  Timing, enter into contract  Other party often has event C2  D1, usually a gain  ‘Ignore D1’ if it results in another CGT event  Combine D1 with other event 3

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D2 – Capital gain from granting an option If a taxpayer grants an option to an entity or extends an option already granted | s 104-40

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Examples:  Enter into contract to sell property and then sell the property?  Agree to option terms, received money?  Entering into restraint of trade agreement, receive payment  Entering into a restrictive covenant, receive money  Receiving payment for withdrawing an objection to a proposed development The bringing into existence of an asset which triggers a CGT event D1 often leads to a CGT event C2 when the asset created comes to an end You grant, renew, extend option:  Timing, when that happens Options on personal use assets and collectables  Takes on form of those assets, may be disregarded D2, always a gain:  Receive money for writing (agreeing to) the option  Other party, holder/grantee, then decides what happens next  Option not exercised  D2 for grantor and C2 for grantee  Grantor sells an asset  Call option  Grantor buys an asset  Put option Even D2 does not happen if CGT event C3 applies to the situation, that is, the option is for the acquisition of shares in a company

Time of acquisition of CGT asset 1. An asset acquired before 20 September 1985 is generally exempt from capital gains tax 2. Indexation or the CGT general discount only applies where an asset is held for at lease 12 months

Question 2: what is a CGT asset?

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Pre-CGT Disregard gains and losses if asset was acquired before 20/9/1985 Collectible Collectible is defined in s 108-10 Special rules 1. E1 of the asset’s cost base < = $500  Capital gains  Artwork = painting, sculpture, drawing, and capital losses made from collectables are engraving, photograph, disregarded reproductions 2. When working out the cost base of a collectable, disregard the E3  Jewellery, an antique, or a 3. Capital losses from collectables can only be used to coin or medallion reduce capital gains from collectables  A rare folio, manuscript or book  Any losses from collectables not used in the  A postage stamp or first day current tax year can be carried forward to be cover offset against gains from collectable in future That is used or kept mainly for year; cannot be used to reduce other capital personal use or employment gain  The losses from the sale of ordinary CGT assets Two limbs to this definition can be used to against gains from collectables 4. If you own collectables that are part of a set, then that  The item must be one of the kind listed set of collectables is treats as a single collectable.  The asset must be used or Cannot split set to get E1 ≤ $500 kept mainly for personal use enjoyment

Personal use asset Used or kept mainly for personal use or enjoyment Example:  A television at home  mobile telephone for private use  a bicycle  a yacht owned for personal use and enjoyment

Special rules 1. Capital gains made from personal use assets are disregarded where the E1 of the asset’s cost base is $10,000 or less 2. When working out the cost base of a personal use asset, disregard the E3 3. A capital loss made from a personal use asset is disregarded 4. If you own personal use assets that are part of a set, then that set of personal use assets is treated as a single personal use asset

Question 3: Does an exception or exemption apply to the CGT event? Disregarded capital gains and losses on

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Cars, motor cycles and velour decorations 5

certain assets

Exempt or loss denying transactions

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Collectables and personal use assets Assets used to produce exempt income Shares in PDF Investments made in start-up companies Depreciating assets Trading stock Compensation Wrong or injury suffered in an occupation or personally Gambling and competitions with prizes

Small business relief Basic condition for relief Small business  entity  

Individual, partnership, company, trust Carry on a business, turnover < $2 million, OR Net value of assets in CGT SBE and related entities < $6 million

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Used in carrying on a business Link with Div. 40, 328 Intangible asset inherently connected to business e.g. goodwill Interest in partnership

Active asset

Share or trust interest What if the asset is a share in a CGT SBE company, or an interest in a trust that is a CGT SBE

Requirement 1: A CGT concession stakeholder wants to claim the concessions • A significant individual in the company or trust = Controls at least 20% of the shares or has at least a 20% interest in the trust = their small business participation percentage • OR The spouse of a significant individual, irrespective of their % Requirement 2: CGT concession stakeholders must have a small business participation percentage in the entity of at least 90% before CGT event Requirement 3: market value of the active assets of the company or trust must be more than 80% or more of the market value of all the assets of the company of trust

CGT SBE Concessions 15 years exemption

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Total exemption from any capital gains on disposal of CGT asset owned for at least 15 years Taxpayers 55 years of age or over and retiring 6

50% active asset reduction Retirement exemption

Rollover relief

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Permanently incapacitated 50% general discount?  Apply Then 50% active asset reduction Effect = 25% of original gain left Lifetime limit = $500,000 Under 55 years – paid into complying superannuation fund, approved deposit fund or retirement savings  Over 55 years – automatically available All or part of the capital gain is not included in the taxpayer’s assessable income until circumstances change

Main residence Capital gain or loss is disregarded if: s 118-100 a) CGT is taxpayer’s dwelling or you have an ownership interest in dwelling b) Taxpayer is an individual c) Dwelling was taxpayer’s main residence through ownership period d) Interest did not pass to taxpayer as a beneficiary, trustee, deceased person Dwelling:  Unit of accommodation: building; consists wholly or mainly of residential accommodation  Caravan, houseboat or other mobile home and  Any land immediately under the unit of accommodation Changing Main Residence Absent From Home

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Build, Repair or Renovate

 Still main residence Conditions – become main residence as soon as practicable after work is finished and live in it for at least 3 months – 4 year max. period from when acquired interest to when it was main residence – no other residence can be main residence

Claimed Occupancy

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Can treat both as main residence for 6 month

 Still main residence Produce assessable income – May be treated as main residence for max 6 years Not used to produce income – Treated as main residence indefinitely

Will have capital gain or capital loss Income producing % of a capital gain/loss 7

Costs Anti-Overlap Provision s 118-20 If an amount is considered ordinary or statutory income under another provision – amount will not be included in capital gain Asset sold is a share in CGT SBE Company or interest in a trust that is CGT SBE Hurdle 1 CGT concession stakeholder wants to claim the concessions Hurdle 2 There must be CGT concession stakeholder just before the CGT event  Significant individual in the company or trust  Controls at least 20% of the shares or has at least a 20% interest in the trust = their small business participation percentage  Spouse of a significant individual is also a CGT concessional stakeholder, irrespective of % Hurdle 3 CGT concession stakeholders must have a small business participation percentage in the entity of at least 90% before CGT event Hurdle 4 Market value of the active assets of the company or trust must be more than 80% or more of the market value of all the assets of the company of trust Cost Base of Asset from Deceased Estates Pre CGT Asset CGT Asset Cost base deceased Market value at date of death

Main Residence Market value at date of death

Question 4: Can there be Rollover Same Asset Rollover s 112-150 Transfer of asset from one taxpayer to another – CGT event does not generate CGT liability for transferor – CGT attributes of asset acquired by transferee – Example: asset transfer on breakdown of marriage – Replacement Asset Rollover s 112-115 Replacing one asset with another – CGT event does not generate CGT liability – CGT attributes of original asset applies to the new asset

Step 2 – Work out amount of capital gain or loss The main factors are the capital proceeds, cost base and reduced cost base.

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Calculation 1

Calculation 2

Calculation 3

Calculation 4

Calculation 5

Calculation 6

Calcul ation 6

Capital Gain

Work out your capital proceeds from the CGT event

Work ou the cost base for the CGT event Subtract the cost base from the capital proceeds

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

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

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

Capital Proceeds

Cost Base

Capital Loss

Reduced Cost Base

Capital Proceeds

Capital Proceeds Capital Proceeds = the total amount of money + Market value of any other property Six modifications to capital proceeds 1. The market value substitution rule → the capital proceeds are market value determined at the time of the CGT event | s 116-30  No capital proceeds from a CGT event  Unable to value proceeds  Not dealing at arm’s length, connection with other party  C2 event 2. Apportionment rule → the capital proceeds from each event are so much of the payment as is reasonably attributable to that event | s 116-40 3. Non-receipt rule → the capital proceeds are reduced by the amount not received 4. Repaid rule → the capital proceeds are reduced by the amount repaid | s 116-50 5. Assumption of liability rule → the capital proceeds are increased by the amount of the liability 6. Misappropriation rule, relevant to employees and agents → the capital proceeds will be reduced by the amount misappropriated | s 116-60 Cost base For most CGT assets, the cost base is the total of the costs associated with the GST asset. The cost base of a GCT asset has five elements: 9

Element 1: Acquisition cost | s 110-25 The money paid by the taxpayer, or required to be paid +market value of other property given to acquire the asset -compensation for part of asset -capital allowance claimed Element 2: Incidental costs incurred by the taxpayer A definitive list of incidental costs | s 110-35  Remuneration  Cost of transfer  Stamp duty or similar duty (transfer duties)  The costs of advertising to find a seller, or to find a buyer  Costs for any valuation or apportionment  Search fees relating to a CGT asset  Cost of conveyancing kit  Borrowing expenses Element 3: Non capital costs of ownership The item listed in s 110-25(4):  Interest on money borrowed to acquire the asset  Costs of maintaining, repairing or insuring it  Rates or land tax, if the asset is land  Interest on money borrowed to refinance the money borrowed to acquire the asset  Interest on money borrowed to finance the capital expenditure incurred to increase the asset’s value  Noted: Only applies if the asset was acquired after 20 August 1991 No E3 for collectables or personal use assets Cannot index third element Can’t include if already claimed under s 8-1 Element 4: Capital costs of enhancement Expenditure incurred to increase or preserve the assets value or expenditure incurred to install or move the asset | s 110-25(5) Costs to increase value of asset but reduce by value of capital allowance claimed Example include:  Extensions or major renovations to a property  Non-deductible initial repairs  Landscaping works  Swimming pools  Driveways 10

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Solar panels Air-conditioning – ducted

Element 5: Costs of defending title Costs to establish, preserve or defend the taxpayer's title to the asset | s 110-25(6)  Example: legal and court costs associated with contesting a land resumption order by a government agency or department What is not included in the cost base • E1 and E4: Expenditure claimed as capital allowances: Div. 40, Div. 43, Div. 328 • E2, E3, E5: Expenditure claimed as deduction • Expenditure that has been recouped, unless the recoupment has been included in assessable income • Cannot include any amounts prevented from being a deduction under Division 26, e.g.  s 26-54 Cost of illegal activities  s 26-5 Penalties Reduced Cost Base  Indexation not relevant  All elements except E3  Less: capital work deductions claimed for capital expenditure Example: holiday home – family used only Indexation of Cost Base If asset acquired before 21 September 1999 and cost element incurred before 21 September 1999  Must be held for at least 12 months  Index each individual element  Indexation factor = 68.7 ÷ index number for quarter  Indexed element = expenditure of element * indexation factor (3 D.C.) Rules  Cannot index E3  Cannot index to create a capital loss so best case = $0

Step 3 – work out your net capital gain or loss for the income year

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Calucation 1

Reduce the capital gains for the income year, in the order you choose, by your capital losses for the income year from tiyr assessable income

Calculation 2

Reduce any remaining capital gains, in the order you choose, by any unapplied net capital losses for previous income year

Calculation 3

Calculation 4

Calculation 5

Reduce any remaining discount capital gains by the discount percentage if you carry on a small business, apply the small business concessions in futher reduction of you capital gains

Add up: Any remaining capital gains that are not discount capital gains Any remaining discount capital gains: s 100-50

Basic CGT differences between taxpayers Individual Gets the 50% general discount, unless asset was owned for less than year, or C or D event Pay tax on net capital gain at marginal tax rates Has personal use assets Assets may have business and personal use

Has collectables

Company Never gets 50% general discount Pay tax on net capital gain at 30% or 27.5% Only uses assets 100% for business purposes Sale of assets often results in no CGT if the asset attracted Div. 40, Div. 328 capital allowances ‘Collectables’ used only for business purposes, therefore not collectable as defined

Effect of Options CALL Option | Grantee BUYS Asset Grantee

Does Not Exercise Option Does Exercise Option

(Wants to Buy Asset) COST C2 – Loss

(Holds Asset) GAIN D2 – Gain

A1 Cost Base = $ Option + $ Purchase Price

A1 Capital Proceeds = $ Option + $ Sale Price

PUT Option | Grantee SELLS Asset Grantee

Does Not Exercise Option

Grantor

(Holds Asset) COST C2 – loss

Grantor (Wants to BUY Asset) GAIN D2 – Gain

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Does Exercise Option

A1 Cost Base = $ Option + ...