CGT Obligations

 

 

Capital gains tax (CGT) is the tax you pay on any capital gain you make and include on your annual income tax return. There is no separate tax on capital gains, it is merely a component of your income tax. You are taxed on your net capital gain at your marginal tax rate but generally, you can disregard any capital gain or capital loss you make on an asset you acquired before 20 September 1985 (pre-CGT). You make a capital gain or capital loss if a CGT event happens. You can also make a capital gain if a managed fund or other trust distributes a capital gain to you. For most CGT events, your capital gain is the difference between your capital proceeds and the cost base of your CGT asset – for example, if you received more for an asset than you paid for it. You make a capital loss if your reduced cost base is greater than your capital proceeds..

 

If your total capital losses for the year are more than your total capital gains, the difference is your net capital loss for the year. It can be carried forward to later income years to be deducted from future capital gains. You cannot deduct capital losses or a net capital loss against your income. There is no time limit on how long you can carry forward a net capital loss. You apply your net capital losses in the order that you make them. There are special rules that apply when working out gains and losses from depreciating assets. To the extent that a depreciating asset is used for a taxable purpose (for example, in a business) any gain is treated as ordinary income and losses as deductions. A capital gain or capital loss may arise only to the extent that a depreciating asset has been used for a non-taxable purpose (for example, used privately).

 

 

To work out whether you have to pay tax on your capital gains, you need to know:

 

1. whether a CGT event has happened

 

Capital gains tax (CGT) events are the different types of transactions or events that may result in a capital gain or loss. CGT events generally involve a CGT asset but may also relate to capital receipts. The type of CGT event affects how you calculate your capital gain or loss and when you include it in your net capital gain or net capital loss. There is a wide range of CGT events with the more common event being a disposal of an asset. Refer to the ATO table of CGT events A1 to L8 in Summary of capital gains tax events. Note: If you are registered for GST, or required to be registered for GST, a GST liability may also arise when you dispose of a business asset.

 

A CGT event also happens when:

  • an asset you own is lost or destroyed (the destruction may be voluntary or involuntary)

     

  • shares you own are cancelled, surrendered or redeemed

     

  • you enter into an agreement not to work in a particular industry for a set period of time

     

  • a trustee makes a non-assessable payment to you from a managed fund or other unit trust

     

  • a company makes a payment (not a dividend) to you as a shareholder

     

  • a liquidator or administrator declares that shares or financial instruments you own are worthless

     

  • you receive an amount from a local council for disruption to your business assets by roadworks

     

  • you stop being an Australian resident

     

  • you enter into a conservation covenant, or

     

  • you dispose of a depreciating asset that you used for private purposes.

Australian residents make a capital gain or capital loss if a CGT event happens to any of their assets anywhere in the world. As a general rule, foreign residents make a capital gain or capital loss only if a CGT event happens to a CGT asset that is ‘taxable Australian property’

 

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2. the timing of the CGT event

 

If more than one CGT event can happen, you use the one most specific to your situation. The timing of a CGT event determines in which income year you report your capital gain or capital loss. If you dispose of a CGT asset to someone else, the CGT event happens when you enter into the contract for disposal not when settlement occurs. If there is no contract, the CGT event generally happens when you stop being the asset's owner. If a CGT asset you own is lost or destroyed, the CGT event happens when you first receive compensation for the loss or destruction. If you do not receive any compensation, the CGT event happens when the loss is discovered or the destruction occurred.

 

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3. how to calculate the capital gain or capital loss

 

Your net capital gain is your total capital gains for the year minus your total capital losses (including any net capital losses from previous years) minus any CGT discount and CGT small business concessions to which you are entitled. For most CGT events, you have made a capital gain if the amount of money and value of any property you received - or were entitled to receive - from the CGT event is more than the cost base of the asset. You may have to pay tax on your capital gain. The cost base of a CGT asset is generally the cost of the asset when you bought it. However, it also includes certain other costs associated with acquiring, holding and disposing of the asset.

 

For most CGT events, you have made a capital loss if the amount of money and value of any property you received from a CGT event is less than the reduced cost base of your asset. When a CGT event happens to a CGT asset and you haven't made a capital gain, you need the asset's reduced cost base to work out whether you have made a capital loss. Capital losses can only be used to reduce any capital gain you made in the same financial year, with the balance carried forward to reduce any capital gains you make in future years. You can only use capital losses from collectables to reduce capital gains from collectables. You must disregard capital losses from personal use assets.

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4. whether there is any exemption or rollover that allows you to reduce or disregard the capital gain or capital loss

 

There are exemptions or rollovers that may allow you to reduce, defer or disregard your capital gain or capital loss. There is no rollover or exemption for a capital gain you make when you sell an asset and put the proceeds into a superannuation fund, use the proceeds to purchase an identical or similar asset, or you transfer an asset into a superannuation fund. For example, if you sell a rental property and put the proceeds into a superannuation fund or use the proceeds to purchase another rental property, a rollover is not available. However, an asset, or the capital proceeds from the sale of an asset, may be transferred into a superannuation fund in order to satisfy certain conditions under the small business retirement exemption.

 

Common rollovers include:

 

  • Marriage breakdown Loss (CGT is automatically deferred until a later CGT event happens).

     

  • Destruction or compulsory acquisition of an asset. (a CGT asset has been lost or destroyed or is compulsorily acquired).

     

  • Scrip-for-scrip (you dispose of your shares in a company or interest in a trust as a result of a takeover)

     

  • Demergers (a CGT event happens to your shares in a company or interest in a trust as a result of a demerger).

     

  • Other replacement asset rollovers (E.g. an individual or trustee disposes of assets to, or creates assets in, a wholly-owned company or partners dispose of assets to, or create assets in, a wholly owned company or a CGT event happens to small business assets and you acquire replacement assets or you exchange shares in the same company or units in the same unit trust or you acquire a depreciating asset).

     

  • Other same asset rollovers (E.g. an individual or trustee transfers a CGT asset to a wholly-owned company or a partner transfers their interest in a CGT asset to a wholly-owned company or a CGT asset is transferred between related companies or a trust disposes of a CGT asset to a company under a trust restructure or a transfer of a CGT asset from one small superannuation fund to another complying superannuation fund because of a marriage breakdown).

 

Common exemptions include:

 

  • your family home (but there may be some exceptions as the exemption depends on how you came to own the dwelling and what you have done with it)

     

  • your car (that is, a motor vehicle designed to carry a load of less than one tonne and fewer than nine passengers), motorcycle or similar vehicle

     

  • pre-CGT assets (acquired before 20 September 1985) with the exception of some pre-CGT shares in private companies, or pre-CGT interests in private trusts, where a combination of factors can occasionally trigger a CGT event giving rise to a taxable capital gain.

     

  • some collectables and other personal use items mainly for the personal use or enjoyment of you or your associates, or if <$500 (collectables) or <$10,000 (personal use assets). Land and buildings are not considered to be personal use assets.

     

  • a decoration awarded for valour or brave conduct, unless you paid money or gave any other property for it

     

  • CGT assets used solely to produce exempt income or some types of non-assessable non-exempt income

     

  • shares in a pooled development fund

     

  • compensation or damages you receive for any wrong or injury you suffered in your occupation or wrong, injury or illness you or your relatives suffered

     

  • gambling, a game or a competition with prizes

     

  • reimbursement or payment of your expenses under the following: Unlawful Termination Assistance Scheme or Alternative Dispute Resolution Assistance Scheme or M4/M5 Cashback Scheme

     

  • a scheme established by an Australian government agency, a local government body or foreign government agency under an Act or other legislative instrument (for example, regulations or local government by-laws) – ‘expenses’ in this context does not include a payment for the loss, destruction or transfer of an asset

     

  • a payment or grant under prescribed industry re-establishment or exit grants (for example, the dairy, sugar and tobacco industry exit programs)

     

  • some things you inherit

     

  • your rights in relation to a superannuation agreement (as defined in the Family Law Act 1975), being created or ended

     

  • the transfer of a superannuation interest in one small superannuation fund to another small superannuation fund on the breakdown of a marriage, but not a de facto marriage

     

  • a CGT event happening to the segregated current pension asset of a complying superannuation fund

     

  • some payouts under a general insurance policy, life insurance policy or annuity instrument.
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5. how to apply any capital losses

 

Generally, you make a capital loss if your reduced cost base is greater than your capital proceeds. The excess is your capital loss. However, the reduced cost base is not relevant for some types of CGT events and note that you cannot index a reduced cost base.

 

You must disregard any capital loss you make:

 

  • rom a personal use asset

     

  • from a lease unless it is used solely or mainly for producing assessable income

     

  • from paying personal services income if the income is included in an individual's

 

assessable income under the alienation of personal services income provisions, or any other amount attributable to that income

 

  • as an exempt (from income tax) entity – this rule ensures that if the status of an exempt entity changes and it becomes taxable, its losses are not carried forward to become deductible from assessable capital gains.

 

whether the CGT discount applies, and

 

There are three ways to work out your capital gain or capital loss. They are the:

 

  • indexation method (For assets held for 12 months or more before the relevant CGT event.) Allows you to discount your capital gain (by 50% for individuals and trusts, and 33 1/3% for complying superannuation funds). Not available to companies. Subtract the cost base from the capital proceeds, deduct any capital losses, then reduce by the relevant discount percentage

     

  • discount method, For assets acquired before 21 September 1999 (and held for 12 months or more before the relevant CGT event). Allows you to increase the cost base by applying an indexation factor based on CPI up to September 1999. Apply the relevant indexation factor, then subtract the indexed cost base from the capital proceeds

     

  • other' method (for all CGT events where the asset has been owned for less than 12 months). Basic method of subtracting the cost base from the capital proceeds i.e. subtract the cost base (or the amount specified by the relevant CGT event) from the capital proceeds
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6. whether you are entitled to any of the CGT concessions for small business.

 

To qualify for any of the small business CGT concessions, there are certain basic conditions that must be satisfied.

 

Step 1

 

  • You must first satisfy at least one of the following conditions:

     

  • you are a small business entity, or

     

  • you do not carry on business (other than as a partner) but your asset is used in a business carried on by a small business entity that is your affiliate or an entity connected with you (passively-held assets), or

     

  • you are a partner in a partnership that is a small business entity and the asset is one of the following:

     

  • oan interest in an asset of the partnership (partnership assets)

     

  • oan asset you own (that is not an interest in a partnership asset) that is used in the business of the

     

  • partnership (partner’s assets), or

     

  • oyou satisfy the maximum net asset value test.

     

Step 2

 

In addition to satisfying one of the conditions outlined at step 1, the asset must satisfy the active asset test.

 

Step 3

 

This step only applies if the CGT asset is a share in a company or an interest in a trust. Where this is the case, one of these additional basic conditions must be satisfied just before the CGT event:

 

  • you must be a CGT concession stakeholder in the company or trust, or

     

  • the entity that owns the share or interest must satisfy the 90% test.

     

Small business concessions
In addition to the exemptions and rollovers available, the following concessions may allow you to disregard or defer some or all of a capital gain from an active asset that you use in your small business

 

15-year exemption

If your business has owned an asset for 15 years and you are aged 55 years or over and are retiring, or are permanently incapacitated, you won’t have an assessable capital gain when you sell the active asset (see 15-year exemption - capital gains tax concession for small business).

 

50% active asset reduction

You can reduce the capital gain on an active asset by 50% (see 50% active asset reduction - capital gains tax concession for small business).

 

Retirement exemption

Capital gains from the sale of active assets are exempt up to a lifetime limit of $500,000. If you are under 55 years of age, the exempt amount must be paid into a complying superannuation fund or a retirement savings account (see Retirement exemption - capital gains tax concession for small business).

 

Rollover

If you sell an active asset, you can defer your capital gain until another CGT event happens that crystallises the gain. For example, you don’t acquire a replacement asset within the required period (two years), or you sell the replacement asset or stop using it in your business. When a CGT event crystallises a previously deferred gain, all or part of the gain becomes assessable (see Roll over - capital gains tax concession for small business).

 

Using the concessions

To use the concessions you must first satisfy the basic conditions that apply to all four concessions, and then satisfy any conditions that apply specifically to a particular concession. You can apply as many concessions as you are entitled to until the capital gain is reduced to nil, enabling you to achieve the best tax result for your circumstances.

 

There are rules about the order you apply the CGT small business concessions, any current year or prior year capital losses and the CGT discount

 

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