Week 4 Flashcards
Statutory income is broken up into
Capital and non capital
Liability to CGT is determined by following the process:
Have you made a capital gain or loss?
Work out the amount of capital gain or loss
Work out the net capital gain or loss for the income year
To determine whether the taxpayer has made a capital gain or capital loss, the following issues are considered:
Has a CGT event happened to the taxpayer?
Is the asset a CGT asset?
Does an exception or exemption apply?
Can there be a roll-over?
Capital gain or loss can only arise if a
a1 disposal of a CGT asset
b1 use and enjoyment before title passes
c1 loss or destruction of a CGT asset
C2 End of intangible asset
D1 creating contractual rights – Bringing a CGT asset into existence
d2 granting an option
H1 forfeiture of a deposit
CGT Process
- Was it purchased before 20 september 1985
- What type of asset is it
- What CGT event occured and when
- What are the proceeds
- What is the asset base
- Discounts/concessions
- Calculate gain/loss
- Exemptions
What type of CGT asset is it
A. Collectible (>$500)
B. Personal Asset (>$10K)
C. Other (Property)
Discounts/concessions
A. Held for 12 months (50%)
B. Indexation of cost base is brought between 20 sep 85 & 21 sep 99
Was it purchased before 20 september 1985
If so no tax
This was the date CGT was introduced.
Collectible
Artwork, jewellery, an antique or a coin or medallion; or A rare folio, manuscript or book; or A postage stamp or first day cover; That is used or kept mainly for personal use or enjoyment. Note : 100 year rule for Antiques. Capital asset is not a collectable merely because it is an asset that somebody may collect (e.g. football cards)
Value of it when it came into possession must be greater than $500
Personal asset
Defined as an asset (other than a collectible) that is used or kept mainly for personal use or enjoyment, excluding land or buildings.
Examples include: Television at home, Mobile telephone for private use
A bicycle, A yacht owned for personal use and enjoyment.
Does not include land or building,
Must be greater than $10K
Exempt Assets
Cars Bikes Collectibles less than $500 Personal assets less than $10K Principal place of residence
CGT Events
a1 disposal of a CGT asset
b1 use and enjoyment before title passes
c1 loss or destruction of a CGT asset
C2 End of intangible asset
D1 creating contractual rights – Bringing a CGT asset into existence
d2 granting an option
H1 forfeiture of a deposit
Only real important ones are a1 and b1
a1 disposal of a CGT asset
Selling a CGT asset
b1 use and enjoyment before title passes
Leasing
c1 loss or destruction of a CGT asset
Insurance payout
Compensation
CGT event occurs when
Receives item
Contract signed
Buys it on spot
CGT is paid at the eofy when event occurs
- What are the proceeds
Sale price
Cost base
Cost base are the total costs associated with the CGT asset.
Cost of acquisition
Incidental costs in relation to the acquisition or event, eg, stamp duty, lawyer fees, transfer fees, commission. See s110-35
Non-capital costs of ownership for assets acquired after 20 August 1991, eg, interest, rates, repairs, land tax
Capital enhancement costs to increase the value of the CGT asset
Capital expenditure incurred to establish, preserve or defend the taxpayer’s title to the asset
Certain expenditure is not included in the cost base, including:
Expenditure that has been deducted (or eligible for a deduction): ss 110-40(2) – 110-45(1B)
Non-assessable recoupments: ss 110-40(3) and 110-45(3)
Depreciation deduction under Div 43
Bribes to a public official: s 110-38(2)
Entertainment expenses: s 110-38(3)
Cost base is subject to modification rules, which include:
Market value substitution rule (s 112-20)
Apportionment rule for split, changed or merged assets (s 112-25
Apportionment rule for expenditure (s 112-30
Assumption of liability rule (s 112-35)
‘Reduced cost base’ for capital losses (s 110-55)
Reduced cost base is used for the purpose of working out a capital loss. Largely the same as cost base, except for two notable differences: 3rd element is any amount that is included in the taxpayer’s assessable income because of balancing adjustments. All other elements are the same.Reduced cost base cannot be indexed.
An expense isn’t included in the reduced cost base if it is deductible
If asset held for more than 12 months
Discount gain by 50%
Indexation of cost base if asset bought between 20 sep 85 and 21 sep 99
Divide sale date indexation factor by purchase/acquisition date
multiply this result by the cost base
make sure you are rounding index factor to 3 decimal points
if both discount methods are used what do you do
Just use the one that benefits taxpayer most (lower gain)
CGT Event A1 – Disposal (s 104-10(1))
Occurs when the taxpayer disposes of a CGT asset.
Time of the CGT event: When the taxpayer enters into the contract (e.g. a sale of land requires a contract), or If no contract, when ownership change occurs (e.g. usually a gift of a collectable or personal use asset).
CGT Event B1 - use and enjoyment before title passes (s.104-15)
Occurs if a taxpayer enters into an agreement with another entity under which the right to the use and enjoyment of an asset owned by the taxpayer passes to the other entity and title will or may pass to the other entity at or before the end of the agreement – eg, a hire purchase agreement, a terms contract for the sale of land. The event occurs at the time the first entity obtains the use and enjoyment of the asset.
CGT event C1 – End of a CGT asset (s 104-20(1))
Occurs if a CGT asset that the taxpayer owns is lost or destroyed.
Time of the CGT event: when the taxpayer first receives compensation for the loss or destruction, or if no compensation, when the loss is discovered or the destruction occurred.
CGT event C2 – End of an intangible asset (s 104-25(1))
Occurs if, broadly, ownership of the taxpayer’s intangible asset ends by, among other things, cancellation or expiration. E.g. Compensation for termination of a contract
Time of the CGT event: when the taxpayer enters into the contract that results in the asset ending.
CGT event H1 - forfeiture of a deposit (s104-150)
Occurs when a deposit paid to a taxpayer is forfeited because a prospective sale or other transactions does not proceed. The time of the event is when the deposit is forfeited. A taxpayer makes a capital gain if the deposit is more than the expenditure incurred in connection with the prospective sale or other transaction.
Broad definition of a CGT asset
Any kind or property; or Legal or equitable right that is not property.
Examples include:
Land and buildings
Shares in a company / units in a unit trust
Collectibles costing over $500 (eg, stamp collection)
Personal use assets costing over $10,000 (eg, boat)
Contractual rights (eg, restraint of trade)
Business goodwill.
Commissioner has suggested bitcoin is a CGT asset.
property
property – generally regarded as something capable of:
assignment (disposal by sale, gift); or
transmission (upon death or bankruptcy transmitted to executor.
Quarantining rule
Capital losses from collectibles can only be used to reduce capital gains from collectibles. Note – a capital loss from an ordinary capital asset (e.g, shares) may be written off against a gain from a collectable provided that the cost base of the collectable was more than $500.
Set of collectibles
Treated as a single collectible
The timing of the acquisition a CGT asset is important because:
(1) An asset acquired before 20 September 1985 – generally no CGT liability;
(2) The acquisition date which determines whether the CGT discount is available only applies in respect of certain CGT assets which have been held for at least twelve months;
(3) The acquisition date determines whether the cost base of the asset is indexed up to 30 September 1999;
Categories of exemptions
Exempt gains and losses on certain assets
Exempt or loss denying transactions
Anti-overlap provisions
Small business relief
Disregarded capital gains and losses on certain assets
Cars, motorcycles and valour decorations (s118-5
Collectibles < $500; personal use assets < $1,000 (s118-10)
Assets used to produce exempt income (s118-12(1))
Shares in a pooled development fund (s118-13)
Investments made in start-up companies (Subdiv 360-A)
Depreciating assets (s118-24(1))
Trading stock (s 118-25)
Main residence exemption – Subdivision 118-B
Allows a capital gain or loss arising from a CGT event where the CGT asset is a dwelling and the Taxpayer is an individual; and The dwelling was the taxpayer’s main residence throughout the whole of ownership period. Basic case can be extended, limited, or a partial exemption may apply.
Main residence exemption – key points:
Must be owned by an individual
Can only have one family home between spouses
Land size is maximum of 2 hectares (5 acres)
Dwelling was taxpayer’s main residence throughout ownership period
Did not acquire the house as the beneficiary of a deceased estate
Must move in as soon as practicable
Dwelling can be a home, flat unit, caravan, houseboat or other mobile home
Factors to look at How long he has lived there Where his family lives Are his personal belongings in the house, Where is his mail delivered, His address for electoral roll, Connection of utilities
Taxpayer makes a capital gain if:
Capital gain = capital proceeds - cost base
Taxpayer makes a capital loss if:
Capital loss = reduced cost base - capital proceeds
Taxpayer makes neither a capital gain nor capital loss if the capital proceeds are less than the cost base but more than the reduced cost base.
Capital proceeds
Capital proceeds are the amount the taxpayer receives or is entitled to receive in relation to the CGT event: s 116-20.
GST on the supply is disregarded: s 116-20(5).
Six modifications to capital proceeds:
Market value substitution rule
Apportionment rule
Non-receipt rule
Repaid rule
Assumption of liability rule
Misappropriation rule
Market value substitution rule
Applies when the taxpayer:
Receives no capital proceeds;
Some or all capital proceeds cannot be valued; or
Did not deal at arm’s length with the another entity.
Capital proceeds are deemed to be the market value.
Apportionment rule
Capital proceeds (“CP”) are received in connection with a transaction that relates in part to a CGT event.
CP are reasonably apportioned to each CGT event.
Illustration: capital proceeds are for land and buildings; but need to be apportioned to the building (land is pre-CGT).
Non-receipt rule
Capital proceeds are reduced if the taxpayer does not receive, or is not likely to receive, some or all of the capital proceeds.
Repaid rule
Capital proceeds are reduced to the extent the taxpayer has to repay capital proceeds already received.
Assumption of liability rule
Capital proceeds are increased if another entity assumes liability in connection with the CGT event.
Misappropriation rule
Capital proceeds are reduced by the amount misappropriated by an employee of agent in connection with the CGT event.
Five-step process to calculate the net capital gain (ie gains and losses for all events in the income year) s102-5
Current year capital gains less current year capital losses (in the order the taxpayer chooses)
Remaining capital gains are reduced by any unapplied net capital losses from previous years (in the order the taxpayer chooses, however applied in the order they were made)
Reducing any remaining discount capital gains by the discount percentage
Apply small business concessions (if available)
Add up: any remaining capital gains that are not discount capital gains + any remaining discount capital gains
Discount method (step 3 of working out a net capital gain)
Eligibility:
CGT asset must have been held for more than 12 months.
CGT event must have occurred after 11.45 am on 21 September 1999.
Certain CGT events are ineligible, eg, D category events.
50% for individuals. 33.3% for superannuation funds. 0% for companies
Step 3: Work out net capital gain or loss for the income year
Capital losses
A capital loss cannot be deducted from the taxpayer’s assessable income:
Capital losses are carried forward to a later income year
A1
disposal of a CGT asset
B1
use and enjoyment before title passes
C1
loss or destruction of a CGT asset
C2
End of intangible asset
D1
creating contractual rights – Bringing a CGT asset into existence
D2
granting an option
H1
forfeiture of a deposit
In working out the * cost base of a * collectable, disregard
the third element (about costs of ownership).
Expenditure does not form part of the second or third element of the cost base to the extent that
you have deducted or can deduct it.
if after 13 may 1997
All capital losses you make on personal use assets are
disregarded
As a general rule, a dwelling ceases being your main residence once you stop living in it. However, you can choose to continue treating a dwelling as your main residence for capital gains tax (CGT) purposes even though you no longer live in it.
Generally, you:
can treat the dwelling as your main residence for:
up to six years if it is used to produce income
indefinitely if it is not used to produce income
can’t treat any other dwelling as your main residence for that period (except for a limited time if you’re moving house).
Companies do not have access to the
CGT 50% discount.
Indexation cannot create or add to a
loss; therefore the gain is taken to be zero under this method.
Third element: costs of owning the CGT asset
You don’t include these costs if
you acquired the asset before 21 August 1991.
The costs of owning an asset include rates, land taxes, repairs and insurance premiums. You also include any non-deductible interest on loans used to finance
the acquisition of a CGT asset
capital expenditure to increase an asset’s value.
Third element: costs of owning the CGT asset
You can’t:
include these costs in the cost base of collectables or personal use assets
index these costs
use them to work out a capital loss.
