What is CGT?

Capital Gains Tax is the tax applicable to the net gains made on disposal of capital assets, where the amount receivable is greater than the costs, and reduced by any capital losses.

 Capital Gains Events – Capital Gains Rollovers – Capital Gains Tax Rate

CGT gains are different in character to ordinary income such as wages and business profits, and would not ordinarily be taxed if it were not for the CGT rules.

When a net gain is determined according to the CGT rules, an amount is included in taxable income, to be taxed along with ordinary income. The effect is that the capital gains are taxed at the marginal tax rate of the taxpayer; however there are a number of concessions, exclusions and discounts which operate to dilute the tax effect – which is why the Tax Office is on the lookout for arrangements which try to characterise income as a capital gain  – for example see Taxpayer Alert TA 2014/1 – Trusts mischaracterising property development receipts as capital gains

A CGT exemption which touches many of us personally, is the exclusion of the family home: the main residence exemption. Another is the general discount of the taxable gain amount which broadly applies to individuals and trusts at 50%, or super funds at the rate of 331/3%.

Essential Elements of a taxable capital gain are:

A CGT event

A capital gain is in most cases intuitively understood as the gain made from the purchase and sale of an asset. The CGT rules specify a number of “CGT events”, which include common transactions such as the sale of property or shares, as well as less obvious occurrences such as an alteration of legal rights, a change in residency or a change in the way assets are treated.

The CGT rules set forth over 50 specific descriptions of events which trigger the application of the CGT rules.

A CGT asset is involved

Most CGT events require the involvement of a “CGT asset”, the meaning of which is in general terms, any part or interest in “any kind of property, or a legal or equitable right that is not property”. There are some specifically named inclusions in this definition.

CGT Exemptions and exclusions

When working out whether capital gains tax applies, it is necessary to determine whether the asset or transaction falls within one of the specific exclusions referred to in the rules. (This list is not exhaustive – there’s a longer list here)

  • assets acquired pre-20 September 1985 (unless some event has brought them into the post-1985 net)
  • Overlapping: In general terms, capital gains are not taxed if they are taxed under some other taxation rule – not necessarily on an equivalent amount.
  • a motor vehicle designed to carry less than one tonne or fewer than 9 passengers, a motorcycle or similar vehicle
  • a decoration for valour or brave conduct (unless purchased)
  • a collectable costing the taxpayer $500 or less including gst (or from 16 December 1995, the entire collectable valued at $500 or less
  • personal use assets costing $10,000 or less including gst
  • CGT assets used to produce exempt income or non-assessable non-exempt income (subject to a number of exceptions listed in section 118-12 ITAA 1997)
  • shares in a pooled development fund
  • main residence exemption
  • rollovers – not an exemption, but there are circumstances in which CGT is put off, or attached to assets which have not yet been disposed of. This results in CGT being deferred, possibly indefinitely. There’s a summary here.
  • Small Businesses have access to concessions and rollovers

The capital gain or loss

Listed CGT events each contain rules for the calculation of a capital gain or loss, which typically and in simplistic terms is the calculated difference between an asset’s cost base and the proceeds of disposal.

  • the cost base includes a number of elements:
    • first element: the amount of money payable, or market value in some circumstances such as a non-arms-length transaction
    • second element: incidental costs associated with the acquisition – such as valuation fees and stamp duty
    • third element: certain costs of ownership, such as interest, insurance and repairs (after 21 August 1991)
    • fourth element: capital expenses designed to increase the value or preserve the asset (goodwill excluded)
    • fifth element: capital expenditure associated with getting or keeping ownership rights
      • note: this summary is not exhaustive: numerous amendments over the years have impacted the detail of cost base calculations within time periods
      • indexation is (still) available on pre 21 September 1999 assets held for at least 12 months, with some exceptions. The index is frozen at 30 September 1999. Indexation is an alternative to the CGT discount.
  • return of capital payments to company shareholders or unit holders of a fixed trust reduce the cost base, with a potential capital gain if the cost base is exceeded
  • a ‘reduced cost base’ is used in the calculation of capital losses; similar to the cost base, but neither indexation nor the costs of ownership can be included.
  • the ‘capital proceeds’ is intuitively understood as the money or value receivable (if any) for the disposal of the CGT asset. However, as with the concept of cost base, there are a number of possible modifications to capital proceeds, depending on the type of CGT event and the circumstances of asset disposal.

Capital Losses

The general principle is that capital losses are only available as a deduction from net capital gains. The remainder of net capital gain (if any) is added to taxable income.

The order of deduction is important, because of the interaction with other elements of the calculation, such as the discount (see method statement below).

If capital gains are fully absorbed by capital losses, the net capital loss is not deductible against ordinary taxable income, but may be carried forward indefinitely to be offset against a future capital gain.

CGT Calculation statement

Section 100-5 ITAA 1997 provides a method statement which is reproduced here:

 Current year capital gains
 less current year capital losses
 less previous year capital losses
 equals notional net capital gain
 less discount percentage
 equals discount capital gain
less Small Business concessions
(if applicable) under Division 152
equals Net Capital gain

 

Differing Types of CGT Taxpaying entities

There are differences in CGT treatment or calculation depending on whether the taxpayer is an individual, company, super fund or trust.

These are the main differences (not exhaustive):

Individuals

  • Discount of 50% of the notional net capital gains (subject to 12 month holding rule) or
  • optional indexation on pre-September 1999 assets (indexed to 30 Sept 1999)
  • net capital gain is taxed at taxpayer’s marginal rate

Companies

  • no discount
  • indexation on pre-September 1999 assets (indexed to 30 Sept 1999)
  • claiming of losses is subject to tests: continuing ownership, current year loss and same business
  • net capital gain is taxed at the company tax rate

Superannuation Funds

  • Discount of 331/3% of the notional net capital gains (subject to 12 month holding rule) or
  • optional indexation on pre-September 1999 assets (indexed to 30 Sept 1999)
  • net capital gain is taxed at super fund tax rate (15% for a complying fund)

Trusts

The calculation of a capital gain in a trust is similar to individuals. However the beneficiary must gross up distributions by any discount, before then applying any discount if eligible in the required sequence (see calculation statement above) for their own tax position. Trusts are also subject to concentration of ownership rules.

See also:

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This page was last modified 2018-12-11