Capital gains tax Flashcards
How does the CGT work in regards to the tax payer being assessed
What parts of the ITAA is the CGT assessed under
CGT is not a separate tax and the capital gain or loss in included in the tax payers assessable income and is subject to the tax payers assessable income
Now contained in Parts 3-1 and 3-3 ITAA97
When does a capital gain or loss arise
What is this unit concerned with
Are all capital gains and losses assessed
Capital gains and capital losses can only arise as a result of “CGT EVENT”
There are over 50 CGT events, concerned in doing calculation in A1, need to have knowledge of CI and DI
Some capital gains and Capital losses are disregarded
What do most CGT events happen in regards to what
How many different types of CGT events are there, section
What is the most common CGT event and when does it arise
What happens when there is more than one CGT event
Most CGT events happen in relation to “CGT assets”
Over 50 different kinds of CGT events contained in Div 104 ITAA97
Most common CGT event is CGT event A1—- disposal of CGT asset
Where more than one CGT event applies, the taxpayer must generally apply the CGT event most specific to their situation
What is definition of CGT asset, section
what is the scope of the definition
Give some examples
Definition of CGT assets S 108-5 of ITAA97
Any kind of property
A legal or equitable right that is not property is also and CGT assets
The definition of the CGT is broad
o Land o Shares o Options o Goodwill o Units in a trust o Foreign currency o An interest in a partnership and assets in a partnership is considered a CGT assets
Explain what is meant by separate CGT assets, give some examples
What is the treatment of these assets if they are pre and post CGT assets
Building and structure may be treated as separate CGT assets from land in certain cases.
CGT is payable on buildings if the building were built post CGT on land acquired pre CGT
Land acquired post-CGT that is adjacent to land acquired pre-CGT is treated a separate asset if amalgamated, can’t treat the whole land as one asset
Capital improvement to land treated as a separate CGT assets if certain balancing adjustment provisions apply
Capital improvement to pre-CGT assets treated as a separate asset in certain circumstances
What is meant when CGT asset is referred to as Ordinary asset
What are the two type of specific assets, section, give some examples, how are they treated under legislation
Either than two specific assets, collectables and personal use assets all other type of CGT assets are referred to as Ordinary assets
Collectable s 108-10
a) Artwork, jewellery, an antique, or a coin or medallion; or
b) A rare folio, manuscript or book; or
c) A postage stamp or first day cover; that is used or kept mainly for personal use or enjoyment
Personal use assets S 108-20
o A CGT asset (except a collectable) that is used or kept mainly for personal use or enjoyment.
o Does not include land or buildings: S 108-20(3)
Both the specific assets have special rules applied to them.
What are the special rules for the two type of specific assets
Collectables
o Capital losses from collectables can only be applied against capital gains from collectables
o Capital gains and capital losses are disregarded if collectables acquired for under $500
o A set of collectables is taken to be a single collectable
Dining suite is considered an one asset
Personal use assets
o Capital losses disregarded
o Capital gains disregarded if personal use asset acquired for $10 000 or less
o A set of personal use assets is taken to be a single personal use assets
What are the three main categories of the CGT exemptions, give some examples of exemptions 11 points
- Assets which gains and losses are disregarded
- Exemptions in relations to certain transactions
- Anti overlap provisions
Exemptions include:
• Motor vehicles S 118-5(a)
• Main residence S 118-110
• Depreciating assets (anti overlap) s 118-24
• Trading Stock (anti overlap) S 118-25
• PDF shares
• Registered emissions units
• Eligible venture capital investments
• Gambling winning and losses S 118-37(1)(c)
• Personal Injury compensation S 118-37(1)(b)
What is the treatment of the main residence under CGT, Section
What is the definition of dwelling
What are the special rules in regards to the main residence
Capital gain or capital loss relating to an “ownership” interest in a “dwelling” that is the taxpayer’s “main residence” is disregarded.
Dwelling is defined as: A unit of accommodation that is a building and consists mainly of a residential accommodation and the land under it. Also includes a unit of accommodation that is a caravan, house boat or other mobile accommodation. It also includes 2 hectares of land in association of the dwelling that is used for either private or commercial purposes is also included.
Special rules:
o Moving into a dwelling provides 6 months gap where both dwelling are exempt.
o Separate CGT event for land
o Spouses with separate main residences : both dwelling are exempt
o Overlap when changing main residences
o Absences: 6 years if you rent out the property
o Building or renovating a dwelling
o Partial Exemption
o Dwellings acquired from deceased estates
When does an A1 CGT event arise
At what time is the CGT event deemed to have occurred
What is the formula for the calculation of the capital gain or loss and what is the paradox for the calculation
What is the process of calculating the capital gain or loss from most CGT events (7 points) , section
Arises where taxpayers “disposes” of a “CGT asset”. • Disposal occurs where there is a change of beneficial ownership
• Time of CGT event is when:
A contract for disposal is entered into, or
If no contract, when change of ownership occurs
Capital gain = Capital Proceeds - Asset cost base ,
CP > ACB
Capital loss = Asset’s reduced cost base - Capital Proceeds, ARCG > CP
Section 100.45
- Work out your capital proceeds from the CGT event
- Workout the cost base for the CGT assets
- Subtract the cost base from the capital proceeds
- If the proceeds exceed the cost base, the difference is your capital gain
- If not, work out the reduced cost base for the asset
- If the reduced cost base exceeds the capital proceeds, the difference is your capital loss
- If the capital proceeds are less than the cost base but more than the reduced cost base, you have neither a capital gain not a capital loss
What is the definition of Capital Proceeds:
How can capital proceeds by modified by the Market Value substitution rule
Sums of money and/or market value of property that a taxpayer has received, or is entitled to receive, as a result of CGT event
Does not include any GST charged where the CGT event is also a “taxable supply”
Market value substitution rule:
Where no money or property has been received for the transfer of capital assets you are assessed to have received the market value of the capital asset
What is the cost base used for,
How can the cost base be reduced by
Cost base is used to calculate a capital gain from certain CGT events
Cost base is reduced by the amount of any net input tax credits
Cost Base also reduced by:
o Deductible and recouped expenditure S 110-45
o Specific expenditure
Market value substitution rule also applies to the cost base
What are the 5 element of the cost base, section
S110-25
- 1st element – total of the money paid, or required to be paid, and the market value of any property given, or required to be given, in respect of acquiring the asset
- 2nd element – “incidental costs” incurred to acquire the asset or that relate to the CGT event . Incidental costs to both the acquisition and sale of the asset
- 3rd element – Cost of owning the asset (only applies to assets acquired after 20th August 1991 but not personal use assets or collectables)
e. g. An investment property the cost base is reduced as costs such as interest, rates ect is deductible, if your owning the asset for personal use the cost base does not reduce. i.e if the costs are deductible under other elements of the income tax assessment act the costs cannot be added to the cost base - 4th element – Capital expenditure incurred to increase or preserve the asset’s value except goodwill
- 5th element – Capital expenditure incurred to establish, preserve or defend taxpayer’s title to asset
What is the Reduced cost base used to calculate
How does the reduced cost base differ from the cost base
How does the reduced cost base decrease
Reduced cost base used to calculate a capital loss from certain CGT events
The only difference between cost base and reduced cost base is the third element
Reduced cost base is reduced by the amount of any net input tax credits
What is the implication of indexation on the cost base
What is the implication of indexation on a reduced cost base
When can’t indexation be used on the cost base, section
What is the formula for the indexation factor, how man y decimal places must the indexation factor be to
Element of a cost base other than the 3rd element may be indexed for inflation provided:
o Asset was acquired prior to 11:45 am on 21 September 1999
o Asset was held for more than 12 months
o Choice to index has been made
Elements of a reduced cost base cannot be indexed
Indexation cannot be used where the taxpayer chooses to use the discount capital gains treatment under div 115
Indexation Factor= ( Index number for the quarter of disposal ) / ( Index number for the quarter in which the expenditure was incurred )
Indexation factor must be to 3 decimal places
Cost base* = Cost base x Indexation factor
Explain how the discount capital gains operates
In what circumstance do you use indexation or discount capital gains
What are the rates that discount capital gains is applied
What the requirements to apply the discount capital gains
No indexation compare the capital proceeds and with the cost base and apply the discount to the gain. If there is a capital loss must netted, then the discount can be applied.
You can choose to elect to have the discount capital gains or the indexation method.
Discount capital gains reduced by a discount percentage:
o Individuals and trusts = 50%
o Complying superannuation entities = 33 1/3 %
Requirements:
o Capital gain must be made by individual, complying superannuation entity or trust
o Capital gain must result from CGT event happening after 21 September 1999
o Capital gain must have been calculated without taking into account indexation
o Capital gain must result from CGT event happening to CGT asset acquired at least 12 months before the event. CGT must not be a CGT event listed in s 115-25(3)
Where is net capital gain included in for the calculation of tax S 102-5
What are the steps in calculating the net capital gains if the discount method is used
S 102-5
Net capital gain included in assessable income
Must apply losses before the discount is applied. Choose to elect what capital gains to offset capital loss. Largest benefits arise by applying capital losses against capital gains that can not be discounted.
Step 1∶ Capital gains-Capital losses, Made during the year
Step 2: Remaining capital gains - “net capital losses”, From earlier years
Step 3: Remaining capital gains that are “discounted capital gains” reduced by a discount percentage
Step 4∶ Remaining capital gains that qualify for small business concessions reduced by those concessions
Step 5: Remaining capital gains = Taxpayers net capital gain for the year
How does net capital loss arise, section
What is the treatment of a capital loss
S 102-10
Net capital loss∶Capital loss>Capital Gains ,for a given year
Cannot be claimed as a deduction
Can be carried forward to offset against capital gains in the future years
Explain how a CGT Event C1 arises
At what time is the C1 event deemed to have happened
How can a capital gain or capital loss arise from a C1 event
When is a capital gain disregard
Arises if whole or part of a CGT asset is lost or destroyed
Time of CGT event is when compensation first received, or, if no compensation received, when loss is discovered or destruction occurred
Capital gain if capital proceeds from the loss or destruction are more than the asset’s cost base
Capital loss if capital proceeds are less than the asset’s reduced cost base
Disregard capital gain / loss if pre-CGT asset
Explain how a CGT event D1 arises
At what time is the D1 event deemed to have happened
How can a capital gain or capital loss arise from a D1 event
Arises if a contractual right or some other legal or equitable right is created in another entity
Time of CGT event is when the taxpayer enters into the contract or creates the right
Capital gain arises if the capital proceeds from creating the right exceed the incidental costs incurred that relate to the CGT event
List Specific CGT events ( 12 points )
- Disposals (Subdiv 104-A)
- Use and enjoyment before title passes (Subdiv 104-B)
- End of CGT asset (Subdiv 104-C)
- Bringing into existence of a CGT asset (Subdiv 104-D)
- Trusts (Subdiv 104-E)
- Lease (Subdiv 104-F)
- Shares (Subdiv 104-G)
- Special capital receipts (Subdiv 104-H)
- Australian Residency ends (Subdiv 104-J)
- CGT events relating to roll-overs (Subdiv 104-K)
- Consolidated groups and MEC groups (Subdiv 104-L)
What are the four topics you need to be aware of
FOREIGN RESIDENTS
DECEASED ESTATES
SMALL BUSINESS CONCESSIONS
CGT ROLL-OVERS
