MLC301 - Topic 3 PDF

Preview

Summary

Topic 3 Notes...

Description

Topic 3: CGT Step 1: Is there a Capital Gain/Loss

a) Overview a) Section 102-5 Assessable income includes net capital gain b) Taxed on Gain: Net Concept = Proceeds – Costs c) Section 102-10 Losses only allowed against capital gains. d) Only applies to assets acquired pre 19/9/1985 e) 50% discount for some taxpayers b) Has a CGT Event Occurred Division 104: Cover all CGT events – each event describes  What causes the event  When the event occurs  Calculate of gain or loss  Some specific exemptions Section 102-25 – One event applicable make the decision in the following order 1) 2) 3) 4) 5)

Ignore D1 and H2 Select most appropriate of remainder If no other event applies try D1 If not D1 - try H2 If not H2 - no CGT

Main CGT Events Covered













A1: Section 104-10 o Section 104-10(1): Applies where: Disposal of a CGT Asset o Section 104-10(2): Disposal is a change in ownership o Section 104-10(3): Time - when entering the contract of disposal or stop owning. o Section 104-10(4): Capital Gain = Capital proceeds - Cost Base o Section 104-10(5): Exceptions - Acquired before 20 Sept 1985 C1: Section 104-20 – Loss or Destruction of Tangible Assets o Timing – date compensation or date lost o Gain or loss o Market Value Deemed (Section 116-25) C2: Section 104-25 – Intangible Assets Ends o Timing – date of contract or when ends o Gain or loss – as for event A1 o Market value deeming partly excluded (Section 116-30 (3) & (3A)) o Ending of private leases excluded (Section 118-40) D1: Section 104-35 – Contractual Right o last resort except for H2 o Timing – time of contract o Gain or loss – only incidental costs allowed as cost base o Market value on cost base or proceeds not deemed o 50% Discount not allowed F1: Section 104-110 – Granting of a Lease o Capital proceeds is any premium paid to enter the lease o Cost base is only incidental costs of granting the lease. o 50% discount not allowed (Section 115-25) o Market value not deemed (Section 116-25) H2: Section 104-155 – Receipts Relating to CGT Asset o Amount received from an act or transition in relation to an asset o Limited Application

C) Is the Asset a CGT Asset  



Section 108-5(1): Defines a CGT asset as Property or a legal or equable right that is not property. Section 108-5(1)(b): Legal and Equitable rights even if not property o Non-proprietary rights - Not transferable (eg accident insurance) o Compensation payments - Look through approach o Knowledge - Only when asset created - eg patent Section 108-5(2): …Specifically included Definition of Property

o Jones v Skinner – Anything you hold to the exclusion of others transferred to others o Hepples (1991)  Asset is real or intangible property  Right to that property  Not personal right  Not civil right

Collectables: Section 101-10(2) – Listed and for personal use and enjoyment (Event A1) 50% discount still applies 

Section 118-10(1): Cost $500 or less gain/loss disregarded



Section 108-10(1): Losses only available against other gains realized on collectables



Section 108-15: Sets of collectables are a single asset

Personal Use Asset: Section 108-20(1) 

 

Section 108-20(2)(3): held for personal use and enjoyment o Not a collectible o Not land or buildings Section 118-10(3): Cost $10,000 or less gain/loss is disregarded Section 108-20(1): No loss allowed

D) Timing of Event and Asset Acquisition     



Section 104-10(3): Date of contract or change in ownership Section 104-10(5)(a): Pre 19/9/1985 not CGT Section 109-5(1): General rule – become its owner Section 109-5(2): Acquired as a result of a CGT event Section 109-10: Acquisition with no CGT event o Taxpayer or agent constructs an asset o Issue of shares or units Section 109-55 & 60: Special rules E.G. deceased estates

Step 2: Amount of Capital Gains/Loss Section 104-10(4) – Event A1 Cap. Gain = Cap. Proceeds greater than Cost base Cap. Loss = Cap. Proceeds less than Reduced Cost base A) Capital Proceeds: Section 116-20 General Rule o Cash or Value of goods Received o Received or entitled to Receive o Does not include GST 

Section 116-25: Modifications of general rule Section 116-30: Deems market value if, No consideration, or Excludes events C2 (in part) and D1- s 116-30(3) (3A) consideration cannot be valued, or non-arm's length transaction  Section 116-40: Apportionment to separate assets  Section 116-45: Reduced if not likely to be paid  Section 116-55: Includes value of debt disposed of with Asset B) Cost Base: Section 110-25 Element 1 – Money or value of property given for acquisition  section 112-20: deemed market value of Element 1 only  Nil consideration (except D1 event); or  Cannot be valued or not at arm’s length Element 2 – Incidental costs Related to Acquisition and CGT Event (Disposal)  Section 110-35: Incidental Cost Defined: Must be in one of the nine categories otherwise not allowed Element 3 – Cost of Ownership (Asset Purchased After 30 Aug 1991)  Includes: interest, maintenance, taxes  not indexed (s 110-36(1))  Deductible amounts not included  Not allowed for collectibles and PUAs Element 4 – Capital Expenses to:  increase or preserve asset’s value  install or move the asset  Does not include costs related to goodwill  

Element 5 – Capital Expenses related to title Section 110-38: Excludes penalties, bribes, entertainment, illegal activities  Section 110-45: CGT assets acquired after 13/5/97, All deductible amounts not included  Section 103-30: CGT events after 19/2/2004 not GST  If a lost is applied then only use element 1,2,4,5. You don’t need to included element 3  Section 112-25: splitting assets - not a CGT event  Section 112-30: Apportionment  Section 112-35: Assumptions of liabilities Debt taken over is part of cost base  If the asset was purchased pre 21/09/1999 the asset can be indexed  Section 114-1(1): Applies to cost base only – Not Loses. C) Calculation Example 

An asset subject to CGT was purchased through a contract signed on 20/6/2000 for $180,000. Possession was taken on 4/7/2000.

Legal cost of acquisition were $3,000 – 20/7/2000 On 8/10/2000 additions were made to the asset that cost $30,000 ($5,000 had been claimed as a deduction). During the time $12,000 interest costs were incurred but only $7,000 was eligible for a tax deductions. The asset was sold for $230,000 on 25 Nov of the current tax year and $10,000 worth of selling expenses were incurred at the time of sale. $ Capital Proceeds: CGT Event A1: Consideration – s 116-30 (25 Nov ) Cost Base (s 110-25) Element 1: Purchase (20/6/00) Element 2: legal costs (20/7/00) Incidental cost of disposal (25 Nov) Element 3: Interest not deducted (12,000 – 7,000) Element 4: Capital addition (8/10/00) $30,000 - Deduction not included (s 110-45): -5,000 Cost base Capital gain

$ 230,000

180,000 3,000 10,000 5,000 25,000 223,000 7,000

Step 3: Calculate Net Capital Gain/Loss  Section 102-5 Net Gain is taxable and net loss is Roll over A) General Exclusions 50% of the Net Capital gain assessable if:  Section 115-10: Only individuals (Households) o Asset must be owned for at least 12 months  Section 115-25(3): Only applies to certain events – Not: o D1, D2, D3, E9, F1, F2, F5, H2, J2, J5, J6, or K10  Section 102-5: Only applies after CG losses taken into account (see later) Special Exclusion      

Section F-5 - Motor vehicles Section 118-10 - Collectables & PU assets Section 118-20 - Otherwise assessable o CGT is a last resort tax Section 118-24 - Depreciable assets o Cover by Div 40 balancing adjustment Section 118-25 - Trading stock o Covered by s 6-5 and s 8-1 Section 118-37(1)(a) & (b) - Personal compensation o Personal wrong, injury or illness

 Section 118-40 – Private Lease Ends B) Main Residence – Subdivide 118-B Section 118-110 – Gain/Loss Disregarded if  Owned by an Individual  Dwelling in main Residence Includes caravans, etc - Section118-115 and house plus 2 ha - Section 118-120 Section 118-135 - Move into in a reasonable time Section 118-140 - Two residence for 6 months Section 118-170 – Spouse has different main residence o Concession split between 2 dwellings  Section 118-145 - Absences o Retain as main residence if no new main residence for 6 years  Section 118-150/155 - Build/renovate etc o Vacant land included for 4 years previous to completion and moving in.  Section 118-160 - Accidentally destroyed o Exemption continues provided no new main residence  Section 118-185 – Apportion on days as Main Residence  Section 118-190 – Partial Income  Section 118-192- Change from main residence to income earning but market value calculated at transfer. C) Disposal of Death Division 128  Section 128-10 - No gain or loss on death o pass to legal personal representative; or o beneficiary  Asset acquired on date of death by recipient - cost base is:  pre CGT asset of deceased - MV at date of death  post CGT assets - Cost base at date of death  Section 118-195 - Main residence - Exempt 2 yrs  Section 128-15 - Post CGT main residence - Cost base is MV if sold after 2 yrs D) Rollover - Division 122-126 Postpone the CGT Event  Loss or destruction : Subdiv 124-B  Break down of marriage : Subdiv 126-A  Transfer of assets to a company : Div 122  Genuine restructure by SBE: Subdiv 328-G  Small business relief : Div 152   

Section 102-5 – All losses Must be Applied before general Discount and other Concession Division 121 – Record Keeping





Section 121-20: What records o all transactions effecting CGT events o date acquisition and disposal o each cost base element o Proceeds on disposal o parties to the transaction Section 121-25: Retain records for 5 years...