Week3 Capital Gain Tax PDF

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[Capital Gain Tax] Net Capital Gain included in Assessable Income under s102-5(1) ITAA 97  Statutory Income

Step 1: whether the TP made a capital gain or capital loss? (1) Is there a CGT Event? (Div 104)  Capital gains or losses arise only if a CGT event happens: s100-20(1)  CGT Will be taken into account when the event happens: s102-20 CGT Events Summary (s104-5)  Event A1 occurs when the TP disposals of a CGT asset, which requires a change in ownership because of some act or event or by operation of law: s10410(1)  Gain: Capital proceeds > cost base Loss: Capital proceeds< reduced cost base: s10410(4) Disposal of a CGT asset: s 104-10

A1

 The time CG eventA1happens is when TP enter into the contract of disposal, if there is no contract, when the ownerships change occurs. - Oral contract,口头 whether enforceable or not, will determine the date of acquisition ：McDonald’s case. - If the contract is preliminary and not the actual contract for acquisition, the latter contract will determine the date: Elmsile’s case. 如果合同是初步 的而不是实际的收购合同，后者合同将确定日期

Use and enjoyment before title passes: s104-15

B1

CGT event B1 happens if a taxpayer enters into an agreement with another entity under which the right to the use and enjoyment of a CGT asset owned by the taxpayer passes to the other entity and title will or may

pass to the other entity at or before the end of the agreement – eg, a hire purchase agreement, a terms contract for the sale of land. 如果纳税人与另一个实体签订协议，根据该协议，纳税人拥有的 CGT 资产的使用和享有权转移给另一个实体并且所有权将在或之 前传递给另一实体，则发生 CGT 事件 B1。 协议的终结 - 例如， 租购协议，土地出售的条款合同。 CGT event B1 happens at the time the first entity obtains the use and enjoyment of the asset. End of a CGT asset  Event C1 happens if CGT asset that TP own is lost or C1

destroyed(a fire): s104-20(1) (eg: a fire)  s 104-20(2) The Time of CGT event C1 happens is:  when first receives compensation; or  if no compensation, when the loss is discovered or the destruction occurred.

End of a CGT asset: ss104-20; 104-25

End of a CGT intangible asset  Event C 2 covers cancellation, surrender and similar endings of the TP’s ownership of an INTANGIBLE asset: C2

s 104-25(1) (eg: an option is cancelled;)  The Time of CGT event C1 happens is : s 104-25(2) when enters into contracts that results in the asset ending or when asset ends if there is no contract.  Event D1 occurs where a taxpayer creates a contractual or other legal right in another entity. s104-35(eg: restrictive covenant-payments received

D1 Creating contractual or other rights: s104-35

D2

forfeiture of a

H1

to not do something)  D1 happens when contract made  capital gain Higgs v Oliver C2 happens at the end of contract  capital loss  No discount  CGT event D2 happens when a taxpayer grants an option to an entity or renews or extends a previously granted option – s104-40(1).  No discount  CGT event H1 happens when a deposit paid to a

taxpayer is forfeited because a prospective sale or other transactions does not proceed – s104-150(1)  The time of CGT event H1 is when the deposit is

deposit – Subdivision 104 -H

forfeited – s. 104-150(2).  I1 happens when TP stop being an Au resident;  Capital gain = Australian-sourced if ‘Taxable Australian Property’: s855-15  An Australian resident individual may choose to

Stop being an Australian Resident:

I1

disregard making a capital gain or loss, in which case the assets will be deemed to be taxable Australian

s104-160

property until a CGT event happens to those assets or the Taxpayer becomes an Australian resident again.

(2)Is there a CGT Asset? (SubDiv 108-A) ‘Any kind of property or a legal or equitable right that is not property’: s108-5(1) General CGT asset

Specific inclusion in s108-5(2) Land and buildings; share and options in a company; Debts owed to you; right to enforce a contractual obligation; foreign currency; Bitcoin; The definitions of Collectables asset : s108-10(2) of ITAA97

Collectables



Artworks, jewellery, an antique or a coin or medallion; or



A rare folio, manuscript or book;



A postage stamp or first day cover

 that is used or kept for personal use or enjoyment (not collectables if for business use).  TD 1999/40: determines an antique is an ‘object or artistic or historical significance that is of an age exceeding 100 years’.  Artwork that is purchased as an investment rather than to enjoy will not be considered as a collectable.

Personal use

 A CGT asset that is used or kept mainly for personal use or

assets

enjoyment, but not Collectables: s108-20(2)  E.g. a television at home; mobile telephone for private use; a bicycle; a yacht owned for personal use and enjoyment.  Land or a building is not a personal use assets: s108-20(3)

*Capital gain made from a personal use asset acquired for $10,000 or less is disregarded.

Time of acquisition: TP acquires an asset when he/ she becomes its owner: s 109-5(1) If acquires an CGT asset through CGT event: s109-5(2) Eg: an entity disposes of a CGT asset to TP, when enter into the disposal contract or when the entity stops being the asset owner if there is no contract. (3)Do any exceptions, special rues or exemptions apply? Categorie s

Items General exemptions (Subdivision 118-A) Asset acquired

CGT assets that acquired before 20 Sep 1985 

before

generally No CGT liability.

20/09/1985 Exempt

Cars,

motor

assets

cycles,

or

similar vehicles; valour decoration 奖励 之类: s118-5;

 Car: motor vehicles designed to carry a load of < 1 tonne and < 9 passengers: s995-1  Capital gain/loss from these items disregarded  Any capital

gain

made

on

are

disposal of

a

decoration award for valour or brave conduct is  as TP not pay money or give ignored property for it.

Collectable and

personal

use asset

Collectables: (1) The first element of Cost base

≤

$500 

Capital gain/loss disregarded: s 118-10(1) (2) *Note: anti-avoidance rule in s108-15, Set of Collectables are treated as a single collectible. (3) Any capital loss made from collectables with a CB >$500, can only be used to reduce capital gain from collectables: s108-10(1) (4) Cost base disregard 3rd element (non-capital

asset)s108-17. (5) Quarantining

rule:

capital

losses

from

collectables can only be used to reduce capital gains from collectables- s108-10(1) . Personal use assets: 

Personal use assets can be disregard CGT if The first element of CB

≤

$10,000: s 118-



10(3) Capital loss is always disregarded: s108-



20(1) Set of PUA are treated as a single collectible s108-25.xx

Investments

From 1 July 2016, investment made in a start-up

made in start-

company where they are held for > 12 months

up companies

and < 10 years is exempted: Subdiv 360-A

Depreciating

 Capital gain or loss made from a CGT event that

assets

involves disposal of a depreciating asset is disregarded as it is also a balancing adjustment event where the asset was used wholly for a taxable purpose and decline in value was worked out under Div 40: s118-24  If not used wholly for tax purpose, any disposal may give rise to capital gain/ loss and also a balancing adjustment.

Trading Stock

 Any capital gain / loss is disregarded: s 118-25  As the treatment of it is dealt with in Division 70

Exempt of loss

 Compensation: a capital gain or loss is

denying

disregarded if it made of compensation or

transactions

damages for wrong, injury, illness suffered: s 118-37(1)(a) and (b).  Capital gain/ loss made from the CGT event relating to gambling, a game or a competition with prizes is disregarded: s118-37(1)

Main residence exemptions

 Capital gain/ loss as a result of a CGT event happening to a TP’s main residence is generally ignored. s118-100 of Pt 3-1 of ITAA97 Full exemptions/ base case will apply if the residence

owned by an individual TP, the residence was the main residence of TP during the whole of the ownership period, was not used to generate Assessable Income, TP must move in as soon as practicable under s118-110 ITAA1997. MOREOVER, the exemptions also need to be Satisfy the land that is adjacent to the dwelling, the size up to 2 Hectares(5 acres), and provided is used for domestic or private purposes. s118-120 . Special rules: -

Absences: s118-145(what happened when you are

-

Go overseas for 2Y and rent out, earning AI from rental

absence from your main residence) while asbsent: s118-145(2) _Can still to treat it as main residence up to 6 years _The 6 years can be restart ~ come back & stay for a few days. -

No time limit if you don’t use it to earn assessable income(没有出租就可以一直当做 没有出租就可以一直当做 MR)

Partial exemption rules o Main residence for part of ownership period: s118185(that it will only treated for that part) o Use of main residence to produce assessable income: s118-190 You live in it, and it’s your MR, but say you use part of your house to assess income via way of running your business or renting out a room. Therefore, only the part of your main property is your MR. -

Building residence, renovating or repairing( s. 118.150(1)), treat as main residence for up to 4 years and move in as soon as practical and provided no other dwelling is treated as main residence: see s 118-150. But if you do it too often, ATO will say that you are in Business-not MR.

-

Main residence accidentally destroyed; s118160, If TP’s main residence is accidentally destroyed and another dwelling is not built, TP can choose to

apply the main residence exemption to the land, as if, from the time of the destruction until the time of disposal, the dwelling had not been destroyed and continued to be the TP’s main residence. -

when TP has existing MR, then TP acquires other home and become your new MR(s118-140)； the two house both can be treated as MR for 6 month (the existing MR must not have been use for income producing purpose in the preceding 12 months)

学校附加的笔记上的 Special rule in relation to absences. In order to obtain the benefit of the 6 year absence exemption the taxpayer must first use the dwelling as a main residence immediately prior to the period when the dwelling is first used for income-producing purposes. - if a full main residence exemption would have been available if a CGT event happened just before the first time the dwelling was used for income-producing purposes - a partial main residence exemption becomes available where main residence is first used for income-producing purposes: - (See s. 118-192) (1) before 7.30pm EST 20 August 1996 The capital gain is determined on the basis of the original cost base and will be calculated on a proportionate basis in respect of the period of income production that exceeds six year over a period of actual ownership commencing at the time the dwelling is acquired and used as a main residence. Example - dwelling acquired 19 August 1995 for $100,000 and used as a main residence for one year when its market value is $200,000. The dwelling is rented out for 9 years on 19 August 1996 (s. 118-145, 6 year exemption applies) and then becomes owners main residence again in 2005. It is sold after 2 years in 2007 for $580,000. Capital gain is determined on the basis of original cost = $580,000 less original cost $100,000.

Capital gain = $480,000. Taxable capital gain = $480,000 x 3/12 = $120,000. (2) After 7.30pm EST on 20 A ugust 1996 –  if a full exemption would have been available if a CGT event happened just before the first time it was used for income producing purposes (income time),  the dwelling is treated as if it had been acquired at the income time at its market value. If the taxpayer rents the dwelling for longer than six years the capital gain will be calculated in respect of the excess of the capital proceeds above the market value at the time the dwelling was first used for income producing purposes. Capital gain will be calculated on a proportionate basis in respect of the period of income production that exceeds six year over a period of deemed ownership commencing at the time the dwelling is first used for income producing purposes. Example - dwelling acquired 21 August 1995 for $100,000 and used main residence for two years when its market value is $200,000. After two years the dwelling is rented out for 9 years on 21 August 1997 (s. 118-145, 6 year exemption applies) and then becomes owners main residence again in 2006. It is sold after one year in 2007 for $600,000. Capital gain is determined on the basis of market value = $400,000.(600,000 – 200,000) Taxable capital gain = $400,000 x 3/10 = $120,000.

S118-185 买了房子后，只要在 ownership 期间一直没有将他视为 MR ， 同 时 可 以 排 除 是 s118-192 ， 那 么 适 用 于 部 分 减 免 partial exemption(

没

有

6

年

exemption)

days/ownerships days.

Step 2: Calculated the gain or loss from the transaction Calculate the gain or loss from the transaction: s102-22 -

Capital gain capital proceeds – cost base > 0

CG*non-resident

-

-

Capital loss  capital proceeds – cost base < 0 o Amount of capital loss = Reduced Cost base – Capital proceeds o If CB > CP > RCB  no capital gain or loss

(1)Capital proceeds (Div 116) For the purpose of determining the proceeds of a CGT event, any GST on supply is disregarded: s116-20(5)

General Rule -

Total amount of money and the Market Value of any other property that TP has received or is entitled to receive in respect of the event happening: s116-20(1)

6 Modifications to General Rules [example 在 p.337] 1) Market Value Substitution Rule: s116-30 Relevant if TP receive no capita proceeds from a CGT event, or some or all of the capital proceeds cannot be valued, or the TP did not deal at arm’s length with another entity. Especially when there is a connection between the parties( e.g. good friends) . 7

Capital Proceeds = market value of the (CGT assets)

1.

Apportionment Rule: s116-40 If you get one amount for 2 or more separate CGT asset, you need apportion that amount per each separate CGT asset. 当一个 transaction 有多个 CGT event 时，所收的 payment 应 apportioned 到各个 event 中 Capital proceeds of one CGT event = % of the payment

2)

Non-receipt Rule: s116-45 Relevant if TP does not receive, or is not likely to receive, some or all of the capital proceeds from a CGT event. [有收钱，但另一方不给所以收 不到] Capital proceeds are reduced by amount not received/ reduced to amount received.

3) Repayment Rule: s116-50 Relevant if TP is required to repay some or all of the capital proceeds from a CGT event. Capital proceeds are reduced by amount repaid. 4) Assumption of Liability Rule: s116-55 Relevant if another entity assumes a liability in connection with a CGT event. Capital proceeds are increased by the amount of the liability.

5) Misappropriation Rule: s116-60 If any or all of your proceeds have been stolen, you don’t include in your Capital proceeds. If you late recoup amount, proceeds increase by the amount received.

(2)Cost based (s110-25) * If TP is registered for GST purpose  Cost base will be net of any GST credits available * If TP is not registered for GST  Any GST paid is included in the Cost Base Subdivision 110-A set out 5 elements: s110-252(1) 1st

Money paid or required to be paid or market value of the

element

property given: s110-25(2)

2nd

Incidental cost: s110-35

element

9 categories of incidental costs listed in s110-35 -remuneration for service; legal adviser; cost of transfer; stamp duty; cost of advertising or marketing to find a buyer or seller; cost for any valuation or apportionment; search fees relating

to

CGT

asset;

cost

for

any

valuation

on

apportionment; search fee relating to CGT asset; cost of a conveyancing kit borrow expense; 3rd

Non-capital cost of owning the CGT asset (only if acquired

element

after 20 Aug 1991): s110-25(4) -interest on money borrowed to acquire the asset; cost of maintain, 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’s value.

4th

Capital expenditure to increase or preserve the assets’ value

element

or install or move the assets: s110-25(5) Expenditure incurred to increase or preserve the asset’s value to install or more the asset.

5th

Capital expenditure to establish, preserve or defend the title

element

in relation to the asset: s110-25(6)

**Exclusion: [applies to asset acquired after 7:30pm on 13 May 1997]

-

The expenditure that do not form part of 2 nd and 3rd element of cost base to the extent that you have deducted or can deduct it: s110-45(1B)

-

Expenditure that not form ANY part of the cost base to the extent that it has been recouped unless the amount is included in your AI: s110-45(3)

4 Modifications to General Rules 1.

Market Value Substitution Rule: s112-20 If there is no cost base or transaction is not at arm’s length, deemed at market value: s112-20(1) *** Not applies to D1  when D1 happens and TP did not pay anything for it The 1st ELEMENT  replaced by the market value

2.

Split, changed or merged assets: s112-25 If a CGT asset is split into two or more assets or a CGT asset changes into an asset of a different nature, the splitting or changing is not a new CGT asset. Cost base of each asset is a reasonable apportionment of the cost base of the original asset. E.g. if 2 or more assets are merged, cost base of new asset = sum of the elements of each original asset

3.

Apportionment Rules: s112-30

4.

Assumption of Liability Rule: s112-35 If a TP acquires a CGT asset from another TP and that asset is subject to a liability. The FIRST ELEMENT of cost base includes the amount of the liability

Indexed Cost base Only Applies to the CGT asset acquired before 11:45am on 21 Sep -

1999 Asset must be held for 12 months before CGT event happens.

-

All elements except for the 3rd element, may be indexed. TP’s choice to use Indexed Cost base or use CGT General discount.

-

Indexation Factors always rounded to 3 decimal places

-

Indexed cost base = Cost i.

×

Index number for quater when event occurred Index number for quater when expenseincurred

Index number for quarter Sep 1999 are used if sell after 21 Sep 1999

-

Cannot be used to create capital loss!!! o If Proceeds – indexed CB...