Taxation OF Capital - great note helpul PDF

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TAXATION OF CAPITAL (CAPITAL GAINS TAX) Introduction  Chapter 3 Specialist Liability Rules Parts 3-1 to 3-3 ITAA 97  Once receipt is deemed capital may be subject to CGT provisions  Assessable income includes net capital gain  Unable to deduct net capital loss from assessable income but it can be carried forward and offset against future years gains CGT Applicability  CGT applied to assets acquired/deemed to have been acquired after 20 September 1985: s 104-10(5)  CGT only applied to realised gains or losses  CGT events  s 118-20 = anti-overlap provision o CGT does not apply if another income provision applies such as s 6-5 ordinary income s 100-15 ITAA 97  Did CGT event happen in income year to CGT asset? o No = no CGT consequence (s 100-20 ITAA 97) o Yes = do any exemptions apply?  Yes = apply exemption  No = do capital proceeds exceed cost base?  Yes = excess = capital gain  No = deficit = capital loss Tax consequences: gain  s 102-5 ITAA 97 net capital gains = assessable income s 6-10 ITAA 97 = statutory income  Australian residents subject to CGT on CGT assets located anywhere in world  Non-residents only affected by CGT for certain Australian connected assets  ITAA Div 136 Tax consequences: loss  s 102-10(2) ITAA 97 = capital losses are quarantined against capital gains (future or current)  CG losses are not deductions against other income  Never indexed or discounted  May be carried forward indefinitely for offset  Certain classes of assets have special rules for losses CGT Events – Div 104  12 categories of CGT events = s 104-5 ITAA 97  Div 104 specifies o Cause of event o Timing of event o Amount of any capital gain/loss resulting from event

Event A1 – Disposal of CGT asset  Occurs when there is a disposal of CGT asset  s 108-5 ITAA 97 = CGT asset o Any kind of property or o A legal or equitable right that is not property o Examples  Part of or an interest in asset  Goodwill or an interest in asset  Interest in an asset of a partnership  Land and buildings  Shares in company and units in unit trust  Debts owed to you  Right to enforce contractual obligation  Foreign currency  Disposal occurs if there is a change in ownership of the CGT asset  Time of the CGT event A1 = when the contract for disposal is entered into or in absence of a contract the time when the change of ownership took place Event B1 – Use and enjoyment before title passes  s 104-15(1) ITAA 97: occurs when the right to the use and enjoyment of a CGT asset passes to another entity and title in the asset will or may pass to the other entity at or before the end of the agreement  s 104-15(2) ITAA 97: time of the event is when the other entity first obtains the use and enjoyment of the asset  A B1 event may bring forward time of disposal  Example: giving lease the right to purchase the property at any time during a 2-year lease. The B1 event is triggered when landlord begins to rent the property Event C1 – End of a CGT asset  s 104-20(1) ITAA 97: loss or destruction of a CGT asset  s 104-20(2) ITAA 97: time of event is when you first received compensation for the loss or destruction, or if no compensation is received the time of event is when the loss is discovered, or destruction occurred Event C2 – End of a CGT asset  s 104-25(1) ITAA 97: cancellation, surrender, release, discharge of forfeiture of intangible asset. It ends by the asset: o Being redeemed/cancelled o Released, discharged, satisfied o Expiring o Abandoned, surrendered, forfeited o If the asset is an option being exercised o If the asset is a convertible interest being converted  s 104-25(2) ITAA 97: time of event is when you enter into contract that results in ending of the asset or when there is no contract the time when the asset ends Event C3 – End of a CGT asset

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s 104-30(1) ITAA 97: the end of an option to acquire shares s 104-30 (2) ITAA 97: time of event is when option ends

Event D1 – Bringing into existence a CGT asset  s 104-35(1) ITAA 97: creation of contractual or other legal rights in an entity  Will trigger a C2 event when the asset created comes to an end  Time: when contract is entered into or right is created Event D2 – Brining into existence a CGT asset  s 104-40(1) ITAA 97: creation of an option  Granting an option to an entity or extends an option already granted  Will not be triggered if C3 event applied  Timing: when contract is entered into or right is created Event D3 – Brining into existence a CGT asset  s 104-45(1) ITAA 97: granting a right to income from mining  Timing: when contract is entered into or right is created Event D4 – Brining into existence a CGT asset  s 104-47(1) ITAA 97: entering into conservation covenant over land  Timing: when contract is entered into or right is created CGT Assets  s 108-5(1) ITAA 97: any kind of property or a legal or equitable right that is not property  Classify CGT asset into relevant categories o CGT asset (if not collectable or personal use asset) o Collectables o Personal use assets  s 100-25(2) ITAA 97: lists common CGT assets o Land and buildings  holiday home o Shares o Units in unit trust  Other CGT assets include o Home o Contractual rights o Goodwill o Foreign currency Div 108  s 108-5 ITAA 97: CGT assets = land, goodwill, options, debt owed  s 108-10(2) ITAA 97: collectable assets = artworks, jeweller, antiques  s 108-20(2) ITAA 97: personal use assets = boat, furniture

Collectable assets  s 108-10(2) ITAA 97:

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o Artwork, jewellery antique or coin or medallion o Rare folio, manuscript or book o Postage stamp or first day cover 2 limbs of test o Item must be one of the kinds listed o Asset must be used or kept mainly for personal use or enjoyment (e.g. purchased as an investment will not make it a collectable) 4 specific rules that apply o Capital gains/capital losses made from collectables are disregarded where the first element of the asset’s cost base is $500 or less o When working out cost base of a collectable disregard the third element (non-capital costs of ownership) o Capital losses from collectables can only be used to reduce capital gains from collectables (quarantining rule) o Collectables that are part of a set  set of collectables treated as a single collectable

Personal use assets  Personal use assets which cost over $10,000 to acquire kept for personal (or associates) use and enjoyment but are not collectables  s 108-20(2) ITAA 97: all personal use losses are disregarded  Land can never be a personal asset  Cost base = disregard 3rd element (non-capital costs of ownership) Exemptions: s100-30(1) ITAA 97  Categories o Exempt gains and losses on certain assets o Exempt or loss denying transactions o Anti-overlap provisions o Small business relief Exceptions and exemptions: Assets  Pre CGT assets  assets acquired before 20 September 1985 = s 104-10(5) ITAA 97  s 118-5 ITAA 97: disregard capital gains/losses from o Cars, motorcycles and valour decorations (unless you paid for decoration)  s 118-10 ITAA 97 o Collectables less than $500 o Personal use assets less than $10,000  s 118-12(1) ITAA 97 o Assets used to produce exempt income  s 118-13 ITAA 97 o Shares in a pooled development fund  Subdiv 360-A o Investments made in start-up companies  s 118-24(1) ITAA 97 o Depreciating assets

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s 118-25 ITAA 97 o Trading stock

Exempt or loss denying transactions: Subdiv-A  Compensation o s 118-37(1)(a) and (b) o Capital gain/loss disregarded if it made of compensation or damages for wrong, injury, illness suffered  Gambling and competitions with prizes o s 118-37(1)(c) o Capital gain/loss made from a GCT event related to gambling, a game or competition with prizes = disregarded Anti-overlap provision  s 118-20(1) ITAA 97  Capital gain made from CGT event is reduced if the event includes an amount in taxpayer’s assessable income or exempt income  When ordinary income is greater than capital gain, gain reduced to zero Main residence exemption  Gain/loss arising from CGT event to main residence generally ignored when the: o Taxpayer is an individual o The dwelling was the taxpayer’s main residence throughout the whole ownership period: s 118-110(1) ITAA 97  Exemption can be pro rata  Foreign residents not entitled to main residence exemption which effect from 9 May 2017 (grandfathered to 30 June 2020) Small business concession – Div 152  Basic conditions to access: s152-A ITAA 97 o Entity must be small business  aggregated turnover in current or previous year...