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Week 6 Capital Gain Tax Diagram 1: How Capi

No Step 1: Did a CGT event occur?

Yes

No Step 2: Does the CGT event involve a CGT asset?

Yes Yes Step 3: Does an exemption apply?

No Yes CGT liability is deferred

Step 4: Do the rollover provisions apply?

No Yes You have derived a capital gain

Step 5: Do the capital proceeds exceed the cost base?

No No Does the reduced cost base exceed the capital proceeds?

Yes

You have derived a capital loss Net capital gain (Sec 102-5)

You do not have a cap gain or a capital los

Table 1: CGT Events CGT Event

Description

Event A1 Event B1 Events C1 to C3 Events D1 to D4 Events E1 to E9 Events F1 to F5 Events G1 and G3 Events H1 and H2 Events I1 and I2 Events J1, J2, J4 to J6 Events K1 to K12 Events L1 to L8

Disposal of a CGT asset (occurs when contract is signed not take place) Hire purchase and similar arrangements CGT assets lost, destroyed, cancelled or finalized (receives compensation or destruction of asset) insured or not Creating of contractual or other rights, granting options, granting a right to income from mining Creating a trust over a CGT asset, transferring a CGT asset to a trust, converting to a unit trust, capital payments, beneficiaries becoming entitled, creating a trust over future property. Granting or discharging a lease. A non-assessable amount paid to a shareholder, a shift in share values and a declaration by a liquidator that shares in a company are worthless. Forfeiture of a deposit and a capital receipt relating to a CGT asset. When an individual, company or trust stops being an Australian resident. Changes in the relationships following rollovers. Miscellaneous events including partial realisation of intellectual property, CGT asset starts being trading stock, venture capital investments, payments from a bankrupt etc. Consolidated groups

Table 2: List of CGT Exemptions

Section

118-5(a) 118-5(b) 118-10(1) 118-10(3) 118-12 118-20 118-22 118-24 118-25 118-30 118-35 118-37(1)(a) 118-37(1)(b) 118-37(1)(c) 118-37(3) Subdiv 118-B

Exemption

a car, motorcycle or similar vehicle designed to carry less than one tonne or fewer than nine passengers ** a decoration awarded for valour or brave conduct, unless purchased by the taxpayer a collectable acquired for a market value of $500 or less, exclusive of GST ** a personal-use asset acquired for $10,000 or less, exclusive of GST ** a CGT asset used solely to produce exempt income a capital gain is reduced by the extent to which under another provision an amount is included in assessable or exempt income an eligible termination payment a depreciable asset disposed of after 21 September 1999 ** trading stock (inventory) ** film copyright research and development projects compensation or damages received by the taxpayer for any occupational wrong or injury compensation or damages for wrong, injury or illness suffered personally by the taxpayer or a relative gambling winnings or prizes ** compensation received under the firearms surrender arrangements an individual's main residence usually to the extent that it has not been used for incomeproducing activities other than rental income where the main residence is rented for up to six years **

Diagram 2: Determining the Cost Base of an Asset

Element 1: Purchase Price

+ Element 2: Incidental Costs of acquisition and disposal

+ Total Cost Base

=

Element 3: Ownership Costs

+ Element 4: Enhancement Costs (Capital improvements)

+ Element 5: Title Costs

In the case of an income-producing building (eg. rental property) acquired on or after 13 May 1997, the accumulated 2.5% Division 43 allowance must be taken off if the amount was claimed as an allowable deduction each year

The indexed cost base is determined by the following formula: Sold: CPI for the relevant quarter in which the asset is disposed of Bought :CPI for the relevant quarter in which the cost was incurred Answer around in 3 decimal places

Table 3: CPI Index Numbers Quarterly CPI Number Year

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Jan - March

April - June

July - Sept

41.4 45.3 48.4 51.7 56.2 58.9 59.9 60.6 61.5 63.8 66.2 67.1 67.0 67.8

42.1 46.0 49.3 53.0 57.1 59.0 59.7 60.8 61.9 64.7 66.7 66.9 67.4 68.1

39.7 43.2 46.8 50.2 54.2 57.5 59.3 59.8 61.1 62.3 65.5 66.9 66.6 67.5 68.7

Oct - Dec

40.5 44.4 47.6 51.2 55.2 59.0 59.9 60.1 61.2 62.8 66.0 67.0 66.8 67.8 -

Capital Loss = (Capital Proceeds - Reduced Cost Base) Reduced Cost Base = (Elements 1 + 2 + 4 + 5 – Accumulated Division 43 Allowance Claimed) The CGT Discount Method (i)

If a CGT asset has been held for less than 12 months before disposal, the capital gain is calculated under the CGT discount method as: Capital Gain = (Capital Proceeds – Cost Base) (ii) If a CGT asset has been held for more than 12 months before disposal, the capital gain is calculated under the CGT discount method as: Capital Gain = (Capital Proceeds – Cost Base) x (100% - Discount Percentage)

Table 4: CGT Methods Available to Eligible Taxpayers

Date the CGT Asset was acquired and disposed of

Methods Available to be used by Eligible Taxpayers Indexation Method

Asset acquired and disposed of before 21 September 1999



Asset acquired before 21 September 1999 and disposed of after 21 September 1999



Asset acquired and disposed of after 21 September 1999

CGT Discount Method





Week 8 2.0

CALCULATING TAX PAYABLE

2.1

Steps in Calculating Tax Payable For resident individual taxpayers, the following steps should be followed in calculating the estimated tax payable/(tax refund) for the relevant income year. Please note that these six steps are an expansion of the four general steps outlined in the method statement contained in Section 4-10(3).

Step 1: Calculate the taxpayer’s taxable income. Taxable income equals assessable income minus allowable deductions. Step 2: Calculate the tax on taxable income in accordance with Table 1 (in the case of residents) or Table 2 (in the case of non-residents). Step 3: Deduct the non-refundable tax offsets or rebates that a taxpayer may be entitled to. A tax offset directly reduces the amount of income tax payable. Section 13-1 of the ITAA (1997) contains a list of the tax offsets available to taxpayers. According to Section 63-10 (1), a nonrefundable tax offset cannot exceed the taxpayer’s basic tax payable to below $Nil. In other words, whilst a tax offset can reduce a taxpayer's tax payable to $Nil, it cannot result in a taxpayer receiving a refund. Step 4: Add the 2% Medicare levy in the case of resident individual taxpayers to the sub-total of Steps 1 and 2. This gives net tax payable. The Medicare levy is calculated as 2% of the taxpayer’s taxable income. If applicable, a resident individual taxpayer may also be subject to an additional Medicare levy surcharge which is either 1%, 1.25% or 1.5% of the taxpayer’s taxable income (refer Section 4.0).

Step 5: Deduct the refundable tax-offsets or credits that the taxpayer is entitled to. Tax credits include tax withheld on salaries and wages (termed PAYG withholding tax), franking credits, private health insurance credits, TFN withholding tax and PAYG instalments. Unlike tax offsets described in Step 3, where a taxpayer has a refundable tax credit, Division 67 of the ITAA (1997) provides that a refundable tax credit can result in a taxpayer receiving a tax refund. In other words, if the total amount of refundable credit exceeds the taxpayer’s net tax payable, the excess credits will result in the taxpayer receiving a tax refund.

Step 6: Deduct Step 5 away from the net tax payable calculated after Step 4. The difference is either the estimated tax payable owing to the ATO (a positive amount) or the estimated tax refund owing by the ATO (a negative amount).

2.2

Format for Calculating Tax Payable for a Resident Individual Taxpayer Students are requested to use the following format in calculating the tax payable for a resident individual taxpayer:

Format for Calculating Tax Payable for a Resident Individual Taxpayer $

$

1

Taxable Income (AI – AD) – round to the nearest whole dollar

$ 100,000

2

Tax on taxable income -include cents

24,947.00

3

Less: Non-Refundable Tax Offsets and Rebates (ignore cents) Dependant (invalid and carer) tax offset Low income rebate Zone rebate (1,530.00)

(1,530.00) 23,417.00

Sub-total (cannot be negative)

4

5

Add: Medicare Levy (2% of taxable income) – include cents Add: Medicare Levy Surcharge (if applicable) – include cents

2,000.00 1,000.00

Net Tax Payable

26,417.00

Less: Refundable Tax Offsets and Credits (include cents) TFN withholding Franking credits PAYG withholding tax PAYG instalments paid (27,022.30)

6

Estimated Tax Refund (include cents)

Note:

(57.75) (276.55) (24,113.00) (2,575.00)

($605.30)

The above is only an estimate. The Australian Taxation Office will issue a formal notice of assessment after the income tax return is lodged.

Table 1: Resident Individual Tax Rates for 30 June 2016 Taxable Income

Tax Payable

$0 - $18,200

$Nil

$18,201 - $37,000

$Nil + 19% of excess over $18,200

$37,001 - $80,000

$3,572 + 32.5% of excess over $37,000

$80,001 - $180,000

$17,547 + 37% of excess over $80,000

$180,001 +

$54,547 + 45% of excess over $180,000

Table 2: Non-Resident Individual Tax Rates for 30 June 2016 Taxable Income

Tax Payable

$0 - $80,000

32.5%

$80,001 - $180,000

$26,000 + 37% of excess over $80,000

$180,001 +

$63,000 + 45% of excess over $180,000

Table 3: 2016 Medicare Levy - Single Thresholds Medicare Levy Reduction Type of Taxpayer

Single resident individual

Taxable Income

Medicare Levy Payable

$21,335 or less

$Nil

$21,336 to $26,668

10% of amount in excess of $21,335

$26,669 or more

Flat rate of 2% of taxable income

Table 4: 2016 Medicare Levy - Family Thresholds Medicare Levy Reduction Type of Taxpayer Family (consisting of the taxpayer, their spouse and their dependant children)

Taxable Income

Medicare Levy Payable

$36,001 or less

$Nil

$36,002 to $45,001

10% of amount in excess of $36,001

$45,002 or more

Flat rate of 2% of taxable income

Table 6: 2016 Medicare Levy Surcharge Thresholds and Rates

for Couples and Families Total Combined Income Thresholds

Couples and families

Base Tier

Tier 1

Tier 2

$180,000 or less

$180,001 to $210,000

$210,001 to $280,000

0.0%

1.0%

1.25%

Tier 3 $280,001 + 1.5%

Table 5: 2016 Medicare Levy Surcharge Thresholds and Rates for a Single Taxpayer

Income Thresholds Base Tier

Tier 1

Tier 2

Tier 3

$90,000 or less

$90,001 to $105,000

$105,001 to $140,000

$140,001 +

0.0%

1.0%

1.25%

1.5%

Singles

Diagram 1: The Two Types of Tax Offsets

Tax Offsets

Non-Refundable (Step 3)

Can reduce a taxpayer’s tax payable to $Nil, but can’t result in a taxpayer receiving a tax refund.

Table 7: 2016 Zone Rebates

Refundable (Step 5)

The excess credits can result in a taxpayer receiving a tax refund.

Zone Category

Fixed Amount

Ordinary Zone A Special Area Zone A

$338

+

50%

$1,173

+

50%

$57

+

20%

$1,173

+

50%

Ordinary Zone B Special Area Zone B

Percentage of the “Relevant Rebate Amount”

Table 8: Summary of Dependant Children and how much They add to the “Relevant Rebate Amount”

First Child

Subsequent Children

Under the age of 21

$376

$282

$376

$376

Diagram 2:

Eligible Taxable Income (Section 102AD)

Between 21 and 25 years of age and studying full-time at a college or Un

Taxing the Income of Minors

Yes

+

No Division 6AA does not apply. Taxed at normal tax rates

Excepted Assessable Income (Section 102AE(2))

Regarded as the minor’s income. Income taxed at normal tax rates

Is the person a “prescribed person” (ie. a minor) as defined in Section 102AC(1)?

Not regarded as the minor’s income. Income taxed at special rates contained in Division 6AA of the 1936 Act.

Age of Child

Table 9: Eligible Taxable Income Tax Rates for Resident Minors

Eligible Taxable Income

Tax Rate

$416 or less

0% – ETI taxed under ordinary tax rates

$417 to $1,307

Greater of: (i) 68% ** of the excess over $416, or (ii) the amount of tax payable (at ordinary tax rates) on the minor’s entire taxable income minus the tax payable (at ordinary tax rates) on the excepted assessable income

$1,308 or more

47% ** of the entire amount...