FocusOn - Capital Gains Tax

What is Capital Gains Tax (CGT)?

CGT is a system applying taxation to capital gains arising from the sale of assets. Simplistically a capital gain or capital loss is the difference between the sale proceeds you receive from an asset and its purchase price. This gain or loss is then included in your income tax return in the financial year in which the CGT event occurs. The CGT rules are complex and special rules apply to particular transactions. If you have sold or are planning to sell a capital asset during this financial year, we suggest you contact us to discuss possible tax planning opportunities.

CGT is not a separate tax as apart from income tax. Your assessable capital gain forms part of your income and is subject to income tax at your marginal tax rate.

What is a CGT event?

The most common CGT event occurs when you dispose of an asset to another person or entity, for example you sell shares in a company. There are, however, a wide range of CGT events, including the loss or destruction of an asset, a liquidator declaring shares worthless, or becoming a non-resident of Australia for tax purposes.

Timing of the CGT event

The timing of a CGT event determines the year in which you include the capital gain or loss in your tax return. In most instances the CGT event occurs when you enter into the sale contract, not at the time of settlement. Similarly the contract date, rather than settlement date, is used to determine the purchase date.

Exemptions from CGT

There are assets and capital gains that are specifically exempt from CGT. Assets acquired prior to 20 September 1985 are exempt from CGT.

The most common exemptions from CGT include:

Main residence
A capital gain or loss from the sale of a dwelling is generally ignored for CGT purposes if the taxpayer is an individual and the dwelling was the taxpayer’s main residence throughout the entire period of ownership. However, if the main residence was used for an income producing purpose, for example running a business from home, part of the capital gain on sale of the property may be assessable.

Cars and motor cycles
A capital gain or loss is exempt if it is made in relation to a car or motor cycle. A car is defined for this purpose as a motor vehicle designed to carry a load of less than one tonne and with a carrying capacity of less than nine passengers.

Personal use assets & collectables
If a personal use asset is purchased for less than $10,000 it is exempt from CGT. Collectables are also exempt from CGT if they cost $500 or less.

Small Business Concessions
The Tax Act contains various exemptions and concessions for small businesses that can offer substantial CGT savings. Careful planning is required to ensure that the sale of your business or its related assets will be eligible for these concessions. If you are unsure of your entitlement, please contact us to discuss your position.

CGT rollovers

In some instances, you can defer the taxing of a capital gain by utilising a CGT rollover. Commonly used rollovers include the scrip for scrip rollover (occurs when you acquire shares in a new company as a result of a takeover), demerger relief (shares acquired in a new company as a result of the spin-off of a company’s subsidiary) and transfer of assets following a marriage breakdown.

How to work out your capital gain or capital loss

The capital gain or loss is firstly calculated as the difference between the capital proceeds and the asset’s cost. However, if the asset was owned for more than 12 months, you can apply one of the following methods to reduce a capital gain:

	Indexation method – for assets acquired prior to 21 September 1999, you can increase the cost base by applying an indexation factor based on CPI from the date of purchase to September 1999, or
	Discount method - reduce your capital gain by 50%

Capital losses are firstly offset against the full capital gain before applying the 50% discount. Capital losses can only be offset against capital gains, not against your other income. Any unused capital losses are carried forward indefinitely until they can be offset by a future capital gain.

What records do you need to keep?

You need to keep records for every asset purchased and sold to account for the CGT gain on disposal for five years after the disposal of the asset. The following are examples of records to keep:

	receipts of purchase and transfer or sale
	if the asset has not been used to generate income, interest on borrowings, rates, insurance, repairs, etc incurred during the period the asset was owned
	records of agent, legal and advertising costs relating to the purchase and sale
	any market valuations

For CGT losses, these records must be maintained for five years after the loss is claimed.

Published : 6 July 2007