In dealing with major assets, such as real estate or stock market shares, doing it the ‘right’ way can have a significant impact due to Capital Gains Tax (CGT).
The AAG, Tax Consultants work together with our Property Team and Investment Team, to ensure that CGT considerations are included in all relevant transactions.
Overview of the capital gains tax provisions
A comprehensive capital gains tax (CGT) regime generally applies to CGT events that happen to CGT assets acquired by a taxpayer after 19 September 1985.
The CGT provisions are found in ITAA97 Pts 3-1 and 3-3. This chapter outlines the general CGT rules under Pt 3-1. It also outlines certain rules applying to companies only (under ITAA97 Pt 3-5). There are special CGT rules under Pt 3-3 of the Act and there are also anti-avoidance rules to prevent value shifting.
There are also special CGT concessions for small businesses.
The CGT provisions are catch-all provisions. They apply to all gains that arise as a result of a CGT event happening (whether or not the gains are of a capital nature), subject to certain exemptions and exceptions, and to territorial and temporal limitations. However, where a capital gain arises from a CGT event and an amount is also assessable under some other (non-CGT) provision, double taxation is avoided by reducing or eliminating the amount of the capital gain.
The characterisation of a gain or loss on capital or revenue account is determined based on all surrounding circumstances.
Assessable income includes net capital gain
The CGT rules affect a taxpayer’s income tax liability because assessable income includes a net capital gain for the income year. A net capital gain is the total of a taxpayer’s capital gains for an income year, reduced by the taxpayer’s certain capital losses. A capital loss cannot be deducted from a taxpayer’s assessable income, but it can reduce a capital gain in the current income year or a later income year.
The amount of a capital gain is generally discounted by 50% for a resident individual or trust, or 33⅓% for certain superannuation funds, and for life insurance companies from CGT assets that are complying superannuation assets.
The general 50% discount percentage available for an individual taxpayer is reduced for any periods in which the taxpayer is either a foreign resident or a temporary resident during the period of ownership from 9 May 2012. No discount is allowed if the capital gain is made by a company generally or by a life insurance company from its non-complying superannuation assets.
A company can only offset a net capital loss against a capital gain if it passes either the continuity of ownership test or the same business test concerning both the capital loss year, the capital gain year and any intervening years. If it fails both the continuity of ownership test and the same business test in an income year, the company must work out net capital gains and losses in a special way.
A net capital loss of any taxpayer may be reduced if it has a commercial debt forgiven.
Capital gain or loss only if CGT event happens
A taxpayer can only make a capital gain or loss if a CGT event happens. The specific time when a CGT event happens is important for various reasons. In particular, the timing is relevant for working out whether a capital gain or loss from the event affects the taxpayer’s income tax for the current income year or the CGT discount applies. If a CGT event involves a contract, the time of the event is usually when the contract is executed.
Most CGT events involve a CGT asset. However, some CGT events are concerned directly with capital receipts and do not involve a CGT asset. Many CGT assets are easily recognisable, e.g. land and buildings, shares, units in a unit trust, collectables and personal use assets. Other CGT assets are not so well recognised, e.g. the family home (which is usually exempt from CGT), contractual rights and goodwill.
Working out capital gains and losses
For most CGT events, a capital gain arises if a taxpayer receives amounts from the CGT event, which exceed the taxpayer’s costs associated with that event. Conversely, a capital loss arises if the taxpayer’s costs associated with the CGT event exceed the amounts received from it.
The amounts received from a CGT event are generally called the capital proceeds. The taxpayer’s total costs associated with a CGT event are usually worked out in 2 different ways. For the purpose of working out a capital gain, those costs are called the cost base of the CGT asset. To work out a capital loss, those costs are called the reduced cost base of the CGT asset.
Where the taxpayer is an individual, a superannuation fund, a trust or a life insurance company (in respect of its complying superannuation assets), the capital gain may be discounted if the asset has been owned for at least 12 months.
To work out a capital gain, the cost base for the CGT asset is subtracted from the capital proceeds. If the capital proceeds exceed the cost base, the difference is a capital gain. If there is no capital gain, the capital proceeds are subtracted from the asset’s reduced cost base. If the reduced cost base exceeds the capital proceeds, the difference is a capital loss. If the capital proceeds are less than the cost base but more than the reduced cost base, there is neither a capital gain nor a capital loss.
If a taxpayer’s total capital gains for an income year are more than the sum of the taxpayer’s total capital losses for the income year and unapplied net capital losses from previous years, the taxpayer has a net capital gain for the income year equal to the difference.
Alternatively, if the taxpayer’s total capital losses for the income year are more than the taxpayer’s total capital gains for the income year, the taxpayer has a net capital loss for the income year equal to the difference.
Exceptions, exemptions and roll-overs
Where a capital gain or loss arises from a CGT event, an exception or exemption could apply to reduce or eliminate that gain or loss.
If a roll-over is available, a capital gain or loss from a CGT event can be deferred or disregarded. Taxpayers must choose to apply some roll-overs while some apply automatically.
Keeping CGT records
Taxpayers are required to keep records of all matters that could result in them making a capital gain or loss. Those records must be kept for 5 years after the relevant CGT event has happened (s 100-70).
In Conclusion
As you can see, CGT is a complex area, and care needs to be taken where you are planning for the right outcomes for your Capital Gains that are made.
Moving house and renting out your home has a CGT effect.
AAG consultants are always here to provide advice and guidance. Contact us for a no-obligation discussion of your specific situation.
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Important information and disclaimer
This publication has been prepared by AustAsia Group including AustAsia Accounting Services Pty Ltd (Registered Tax Agent No 7587 3005).
AustAsia Accounting Services Pty Ltd – Liability limited by a scheme approved under Professional Standards Legislation.
Any advice in this publication is general only and has not been tailored to your circumstances. Accordingly, reliance should not be placed on the information contained in this document as the basis for making any financial investment, insurance, or other decision. Please seek personal advice before acting on this information.
Information in this publication is accurate as at the date of writing, 25 January 2021. Some of the information may have been provided to us by third parties. While it is believed the information is accurate and reliable, the accuracy of that information is not guaranteed in any way.
Opinions constitute our judgement at the time of issue and are subject to change. Neither the Licensee nor any member of AustAsia Group, nor their employees or directors give any warranty of accuracy, nor accept any responsibility, for any errors or omissions in this document.
Any general tax information provided in this publication is intended as a guide only and is based on our general understanding of taxation laws. It is not intended to be a substitute for specialised taxation advice or an assessment of your liabilities, obligations or claim entitlements that arise, or could arise, under taxation law, and we recommend you consult with a registered tax agent.