A capital gains tax (CGT) is a tax on capital gains, the profit realized on the sale of a non-inventory asset that was purchased at a cost amount that was lower than the amount realized on the sale. http://www.helpwithassignment.com/

1. Topic 4 – Capital Gains Tax
CGT events, CGT assets, Calculation of
capital gain, cost base elements, and CGT
exemptions
Chapter 9

2. Overview
• Capital gains taxed as assessable income on
assets or events from 20 September 1985 –
statutory income – s 6-10
• Assets acquired prior to that date exempt
when later disposed of with a capital gain
• Division 100, ITAA 97 provides the
legislative provisions covering CGT

3. CGT Flow Chart
• The following diagram is found in s 100-15,
ITAA 97
• Two step process:
– 1. Have you made a capital gain or a capital
loss
– 2. Work out the amount of capital gain or loss
Step 3. Work out your net capital gain or loss for
the income year

4. Did a CGT event
happen in the
income year?
You do not have a
Capital gain
Does an exemption
apply ?
Disregard (or
reduce) a capital
gain or loss
from the event
Do the capital
proceeds exceed
the cost base?
The excess is your
capital gain from
the event
The excess is your capital
loss from the event
Does the reduced cost base
exceed the capital proceeds?
No
No
Yes
Yes
Yes
Yes
No

5. IMPORTANCE OF CGT EVENTS
• You can only make a capital gain or loss if a CGT event
happens - s 100-20
• Most CGT events involve a CGT asset – s 100-25
• HOWEVER, THE CONCEPT OF A CGT EVENT IS
WIDER THAN THE CONCEPT OF A CGT ASSET
• Many CGT events are concerned with capital receipts and
do not involve a CGT asset e.g you sell a business, but
agree with the purchaser not to operate a similar business
in the area for a payment of $25,000 – CGT event but no
asset involved

6. CGT Events - Division 104
• A Capital Gain or Loss can only arise if a CGT event
occurs
• SUMMARY OF EVENTS - S.104-5
• EVENTS A1- through to - L8 (total 52)
• Example: Event A1 – Disposal of a CGT asset
– Time of event is: when disposal contract is entered into
or, if none, when entity stops being asset’s owner – see
case of FCT v Sara Lee Household
– Capital Gain: capital proceeds from disposal less
asset’s cost base
– Capital loss: asset’s reduced cost base less capital
proceeds

7. FCT v Sara Lee Household
• What is the date of the sale of a business, the date
of the contract or the date of settlement?
• Date of the contract, s 104-10(3), not settlement.
This is the case even if the terms of the contract
are altered.
• Note: what happens if the proceeds are not paid
until settlement and settlement is in the next
financial year?

8. CGT Events (cont)
• SOME CGT EVENTS DO NOT
INVOLVE A CGT ASSET -
• Relate only to an event which gives rise to a
capital receipt -
• E.g. – Event - H1- Forfeiture of a deposit or
when an individual or a company stops
being a resident. See the case of Brooks v
FCT

9. Brooks v FCT
• Deposit on the sale of real property was forfeited.
Was the deposit a capital gain.
• Federal Court held that it was where the seller
keeps the deposit and looks for a new buyer. If
they sue for specific performance then no deposit
paid, no capital gain. In this case an actual contract
for the sale of land and not a ‘prospective
purchaser’.

10. CGT Events (cont)
• CGT EVENT C1 - END OF A CGT
ASSET - S.104-20
• CGT event C1 happens when a CGT asset
owned by a taxpayer is lost or destroyed
and receives compensation - if no
compensation received happens at time of
loss or destruction

11. CGT Events (cont)
• CGT EVENT D1 - BRINGING AN ASSET INTO
EXISTENCE
• CGT event D1 happens when a taxpayer creates a
contractual right or other legal or equitable right in another
entity such as a restrictive covenant, eg,
• (1) a person agrees not to compete with another person for
a specified period for a specified time
• (2) a person agrees to play sport only with a particular club
• (3) a person agrees to enter into an exclusive trade tie
agreement with another person.

12. CGT Events (cont)
• CGT EVENT D1 - BRINGING AN ASSET
INTO EXISTENCE (cont)
• knowledge is neither a right nor property and therefore not
a CGT asset. However, a right to require the supply of
knowledge is a CGT asset.
• a taxpayer makes a capital gain from CGT event D1 if the
capital proceeds from creating the right are more than the
incidental costs incurred in creating it (losses - vice versa)

13. CGT Events (cont)
• CGT EVENT D2 - GRANTING AN OPTION -
S.104-40
• CGT event D2 happens when a taxpayer grants an option
to an entity, or renews or extends a previously granted
option.
• A taxpayer makes a capital gain from CGT event D2 if the
capital proceeds from granting, renewing or extending the
option are more than the expenditure incurred in making
the grant, renewal or extension (losses - vice versa)

14. CGT ASSETS: s 100-25(2)
• Land AND Buildings, e.g a weekend holiday home
• Shares in a Company
• Units in a Unit Trust
• collectables which cost over $500
• Personal use assets which cost over $10,000, e.g boat
• Other assets not so well known:
• Family Home-main residence (Usually exempt from CGT)
• Contractual Rights e.g restraint of trade
• Goodwill associated with a business
• Foreign Currency

15. DOES AN EXCEPTION OR EXEMPTION
APPLY? - s100-30
• EXEMPT ASSETS, e.g, Motor Cars
• EXEMPT TRANSACTIONS, e.g, Personal injury
compensation
• ANTI-OVERLAP PROVISIONS – ( same income could
be taxed twice) s. 118-20,
• SMALL BUSINESS PROVISIONS – CGT
concessions. See case of FCT v Murry – ‘goodwill’
• ROLL-OVER RELIEF, s 100-33 (takeover of company
and shares given as consideration)
• LIMITED EXEMPTIONS – Family Home (main
residence), TRADING STOCK, S. 118-25

16. FCT v Murry
• Case concerns the sale of a taxi licence.
Was part of the proceeds ‘goodwill’ and
subject to ‘small business CGT
concessions’?
• Answer, no goodwill in the case of the sale
of a taxi licence. Case gives a good analysis
of what constitutes goodwill. Goodwill a
CGT asset – customer attraction, reputation.

17. Collectables – Subdivision 108-B
• Read definition s 108-10(2) – artwork, jewellery, antique,
coin collection, rare folio or manuscript, stamps
• Note: s 118-10 exemption if acquired for $500 or less
• Sets of collectables - treat as a single collectable s.108-15
• Treatment of capital losses from collectables – s 108-10(1)
& s 108-10(4) - Capital losses from collectables used only
to reduce capital gains from collectables s 108-10(1)
• Cost base of collectables - Disregard 3rd cost element -
non- capital costs of ownership –s 108-17

18. Personal Use Assets – Subdivision 108-C
• Read definition s108-20(2) – “kept for your
personal use and enjoyment
• Note: s118-10 exemption if acquired for $10,000
or less
• Note: s 108-20(3) a personal use asset does not
include land, a stratum unit or a building or
structure that is considered a separate CGT asset
because of subdivision 108-d.

19. Personal Use Assets – Subdivision 108-C
• Sets of personal use assets - treat as a single
personal use asset- s.108-25
• Cost base of personal use assets - disregard 3rd
cost element - non-capital costs of ownership - s
108-30
• Capital losses from personal use assets - disregard
s.108-20(1)

20. SEPARATE CGT ASSETS- SUBDIVISION
108-D
• Building separate asset from land s108-55(1) &
(2)
• A building or structure on land acquired post 19
September 1985 is treated as a separate CGT asset
from the land if balancing adjustment provisions
apply to the building or structure under the
uniform capital allowances system
• Pre 20 September 1985 land, post CGT
construction contract or post CGT construction if
no contract - s 108.55(2)

21. SEPARATE CGT ASSETS- SUBDIVISION 108-D
• Plant that is part of a building is a separate asset from the
building - s 108-60
• Post-CGT land adjacent to pre-CGT land treated as
separate CGT asset from the pre-CGT land if amalgamated
into one title – s 108-65
• Capital improvements s 108-70 - A capital improvement to
a pre-CGT asset is treated as a separate asset from the pre-
CGT asset if its indexed cost base, when a CGT event
happens to the pre-CGT asset, is:
– (1) More than the improvement threshold for the income year in
which the event happens; and
– (2) More than 5% of the capital proceeds for the event.

22. Unrelated Improvements
• See for examples: s108-70(2) Pre CGT assets – you own a
boat that was purchased in 1983. In 1999 you install a new
mast (capital improvement) for $30,000. You sell the boat
for $150,000 on 30 January 2008. The cost base for the
improvement is $41,000 and the threshold is $109,447.
The mast will not be treated as a separate asset.
• The improvement threshold is indexed annually. The
Commissioner publishes the threshold before the
beginning of each financial year.
• Capital improvement may include a non-tangible
improvement - council approval to rezone, subdivide

23. COST BASE RULES -DIVISION 110
• General rules on cost base – s 110-25 - Cost base includes
five elements – s 110-25(1)-(6)
– (1) acquisition costs – s 110-25(2)
– (2) incidental costs incurred in acquiring a CGT asset
or in relation to a CGT event – s 110-25(3), s 110-35 –
includes - costs of surveyor, valuer, auctioneer, legal
adviser, etc, transfer costs, stamp duty, advertising
costs.
– (3) non-capital costs in respect of ownership of asset
acquired after 20 august 1991 – s 110-25(4) – includes
interest, repairs, insurance, rates - this element does not
apply to collectables or personal use assets.

24. COST BASE RULES -DIVISION 110
• (4) Capital enhancement costs incurred to increase the
value of the CGT asset – must be reflected in the state of
the asset at the time of the CGT event. Includes non-
deductible initial repairs.
• (5) title costs – capital expenditure incurred to establish,
preserve, defend taxpayer’s title to the asset.
• Expenditure not included as part of cost base of an
asset to the extent that;
– (1) the expenditure is deductible , eg interest;
– (2) the expenditure is an input tax credit for GST purposes;
– (3) a non-assessable recoupment is received in respect of it.

25. REDUCED COST BASE RULES -
SUBDIVISION 110-B
• General rule –s 110-55
• Read s 110-55(1) to (6)
• Reduced cost base is relevant to determining if a
capital loss has been made.
• All of the elements (except the 3rd) of the reduced
cost base are the same as the cost base.
• The 3rd element is instead any amount that is
assessable because of a balancing adjustment for
the asset.

26. REDUCED COST BASE RULES
• Amounts not included in the reduced cost base:
• Expense is not included in any element of the
reduced cost base if:
– (1) it is deductible; or
– (2) if it a non-assessable recoupment is receivable in
respect of the asset.
• Deductible amounts excluded from the reduced
cost base include amounts that are deductible
because of available balancing adjustments

27. MODIFICATION OF COST BASE RULES &
REDUCED COST BASE RULES DIVISION 112
• S112-20 - use market value for 1st element of cost
base & reduced cost base if you did not incur any
expenditure to acquire it - eg. a gift, or it was a
non- arm's length transaction. See the case of
Granby v FCT for ‘arms length’.
• S112-30 - apportionment rule – if only part of the
expenditure incurred in relation to a CGT asset
relates to the asset, the relevant element of the cost
base and reduced cost base of the asset only
includes that part of the expenditure reasonably
attributable to the acquisition of the asset.

28. Granby v FCT
• The case concerned the sale of an interest in a partnership
and equipment such as vehicles and plant. Those items had
been bought from the finance company for their residual
value under a finance lease. The price paid as the residual
value was well below the market value. The Commissioner
assessed the capital gain at a higher figure because the
price paid was below the market value.
• Federal Court held that if the parties are at ‘arm’s length,
then it does not matter that the price was not ‘market
value’. For CGT purposes the price paid can be less than
market value provided the parties are at arm’s length.

29. AMOUNT OF CAPITAL GAIN OR LOSS - s102
• A net capital gain is included in taxpayer’s
assessable income.
• A net capital loss cannot be deducted from
taxpayer’s assessable income.
• For most capital gain events, the amount of a
capital gain or capital loss is the difference
between the two amounts referred to in the section
dealing with the relevant capital gain event.

30. AMOUNT OF CAPITAL GAIN OR LOSS
• THE GENERAL RULE IS THAT:
– (1) CAPITAL GAIN = CAPITAL
PROCEEDS LESS COST BASE
– (2) CAPITAL LOSS = REDUCED COST
BASE LESS CAPITAL PROCEEDS

31. STEPS IN CALCULATING NET CAPITAL
GAIN - s102-5
• Step 1: reduce the capital gains made during the income
year by the capital losses made during the income year.
• Taxpayer can choose the order in which any capital gains
are reduced.
• Step 2: if the capital gains are more than the capital loss
apply any previously deducted net capital losses from
earlier income years to reduce any remaining capital gains
under step 1.
– Taxpayer can choose the order in which any capital gains are
reduced.
– Net capital losses from previous income years applied in order in
which they were made – s102-15.

32. STEPS IN CALCULATING NET CAPITAL GAIN
• Step 3: to calculate the net capital gain - each amount of a
discount capital gain remaining after step 2 is reduced by
the discount percentage provided taxpayer held the asset
for 12 months -
– 50% - if capital gain is made by an individual or a individual
beneficiary in a trust;
– 33.3/3% by a complying superannuation fund
• Step 4: if the capital gain (including discount capital
gains) qualify, the small business concessions to the capital
gain
• Step 5: add up the amounts of capital gains remaining
after step 4. The sum is the net capital gain for the income
year.

33. STEPS IN CALCULATING NET CAPITAL LOSS
- S.102-10
• Step 1: add up the capital losses made during the income
year. Also add up the capital gains made.
• Step 2: subtract capital gains from capital losses.
• Step 3. If capital losses exceed capital gains - it is the net
capital loss for the income year.
• Net capital losses can be carried forward indefinitely – S
102-15(3)
• S102-5 -current year losses are applied in any order and
then apply prior year. Net capital losses in order they were
made - see s102-15

34. Calculation of Capital Gain
• Choice of indexation or discount - read
s.110-25
• CGT asset acquired before - 11.45 am EST
21 September 1999 and disposed of after -
11.45am EST 21 September 1999 – choice:
– (1) index up to September 1999 quarter (except
3rd element); or
– (2) apply CGT discount to the capital gain
instead of indexation

35. Discount Method
• Acquisition and disposal after 11.45am EST 21
• September 1999 – - discount method only
provided taxpayer acquired the asset at least 12
months before a CGT event in relation to the asset.
• Discount method is not available to companies -
only indexing up to 30 September 1999
• Individual – 50%, Superannuation fund – 33%,
Companies – nil (Trust beneficiary ?)

36. INDEXATION OF COST BASE ELEMENTS –
Division 114
• General rule s114-1 and s 960-260
• CGT asset acquired and disposed of before -
11.45am Eastern standard time 21
September 1999 – Index factor frozen
• generally index for inflation (except 3rd
element) if taxpayer acquired the asset at
least 12 months before a CGT event in
relation to the asset - s.114-10

37. EXCEPTIONS AND MODIFICATIONS S.102-30
• You can only subtract collectable capital losses from
collectable capital gains
• Net capital gains from collectables are added to any other
net capital gain.
• Disregard capital losses you make from personal use
assets.
• Net capital gains from personal use assets are added to any
other net capital gains
• Companies can only offset a net capital loss against a
capital gain if they pass either the continuity of ownership
test or the same business test in relation to capital loss
year, capital gain year and any intervening years.

38. EXEMPTIONS - DIVISION 118
• Cars, motor cycles, valour decorations & cultural bequests
- s118-5
• gains or losses from collectables you acquired for less than
$500 provided the market value of the collectable is $500
or less at the time you acquired it - s118-10
• Capital gain from a personal use asset is disregarded if you
acquired it for $10000 or less- s118-10
• Note : a capital loss from a personal use asset is
disregarded - see s.108-20
– certain compensation receipts, prizes and gambling winnings and
losses - s118-15
– trading stock - s118-25

39. MAIN RESIDENCE - BASIC EXEMPTION
S.118-110
• Meaning of dwelling -s.118-115
• Extends to adjacent land up to 2 hectares – s118-20
• Rules extending exemption -
• Moving in s.118-135 – if a dwelling became a taxpayer’s
main residence by the time it was first practicable for the
taxpayer to move in after it was acquired, the dwelling is
treated as the taxpayer’s main residence from when it was
acquired until it was actually became the taxpayer’s main
residence.

40. MAIN RESIDENCE - BASIC EXEMPTION
• Changing residence -both exempt for 6 months -s118-140
• If a taxpayer acquires a dwelling that is to become the
taxpayer’s main residence and the taxpayer still owns an
existing main residence, both dwellings are treated as the
taxpayer’s main residence for up to 6 months – s118-140.
• This rule only applies if the taxpayer’s main existing
residence was the taxpayer’s main residence for a
continuous period of at least 3 months in the 12 months
before it was disposed of and was not used for income-
producing purposes in the 12 months it was not the
taxpayer’s main residence.

41. ABSENCE -TREAT IT AS MAIN
RESIDENCE FOR 6 YEARS - S.118-145
• If a dwelling that was a taxpayer’s main residence stops
being his/her main residence the taxpayer may choose to
continue to treat it as a main residence – s118-145
• If the dwelling is used for income-producing purposes
while the taxpayer is absent the maximum period that the
dwelling can be treated as a main residence is 6 years.
• The 6 year limitation for income-producing uses need not
be continuous – the intermittent periods may be
aggregated.

42. BUILDING, RENOVATING OR
REPAIRING MAIN RESIDENCE
• Main residence exemption on land owned by the
taxpayer can be extended for an additional period
of up to 4 years from the time the land was
acquired if the taxpayer builds a dwelling on land
or repairs or renovates on the land – s118-150
• If the land was acquired more than 4 years before
the dwelling became the taxpayer’s main
residence, the exemption period starts 4 years
before the dwelling became the taxpayer’s main
residence.

43. MAIN RESIDENCE - BASIC EXEMPTION
• For the exemption to apply the dwelling on the
land that is constructed must become the
taxpayer’s main residence as soon as practicable
after the work is finished and must continue to be
so for at least 3 months.
• A taxpayer who makes use of the additional 4 year
exemption cannot claim a main residence
exemption for any other dwelling during that
period except for the 6 month double exemption
allowed when changing main residences.

44. MAIN RESIDENCE ACCIDENTALLY
DESTROYED
• If a dwelling that is the taxpayer’s main residence
is accidentally destroyed and another dwelling is
not built on the land, the taxpayer 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 taxpayer’s main residence
– s118-160
• However, no other dwelling can be treated as the
taxpayer’s main residence during this period.

45. CGT and Death
• Death is not a CGT event and no
recognition of a capital gain unless:
. Gift to a tax exempt entity
. A non-resident of Australia
. A trustee of a superannuation fund
If to these entities, the executor will have to
pay income tax on any capital gain.

46. CGT and Death
• Cost base of asset determined at the date of death
if a pre-CGT asset – market value.
• If post-CGT then cost base of asset rolled over to
the beneficiary and income tax on the capital gain
when asset sold is calculated using the deceased's
cost base.
• If assets sold and money distributed under the will
then executor pays income tax on behalf of
deceased.

47. CGT and Death
• Main residence exempt and maintains
exemption if beneficiary lives in house as a
main residence
• Joint tenancy and tenants in common –
implications for CGT
• If a beneficiary, would you prefer pre or
post CGT assets to be gifted to you?

48. Thank You
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