Week 4

Question 1

Statutory income is broken up into

Answer 1

Capital and non capital

Question 2

Liability to CGT is determined by following the process:

Answer 2

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

Question 3

To determine whether the taxpayer has made a capital gain or capital loss, the following issues are considered:

Answer 3

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?

Question 4

Capital gain or loss can only arise if a

Answer 4

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

Question 5

CGT Process

Answer 5

1. Was it purchased before 20 september 1985
2. What type of asset is it
3. What CGT event occured and when
4. What are the proceeds
5. What is the asset base
6. Discounts/concessions
7. Calculate gain/loss
8. Exemptions

Question 6

What type of CGT asset is it

Answer 6

A. Collectible (>$500)
B. Personal Asset (>$10K)
C. Other (Property)

Question 7

Discounts/concessions

Answer 7

A. Held for 12 months (50%)

B. Indexation of cost base is brought between 20 sep 85 & 21 sep 99

Question 8

Was it purchased before 20 september 1985

Answer 8

If so no tax

This was the date CGT was introduced.

Question 9

Collectible

Answer 9

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

Question 10

Personal asset

Answer 10

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

Question 11

Exempt Assets

Answer 11

Cars
Bikes
Collectibles less than $500
Personal assets less than $10K
Principal place of residence

Question 12

CGT Events

Answer 12

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

Question 13

a1 disposal of a CGT asset

Answer 13

Selling a CGT asset

Question 14

b1 use and enjoyment before title passes

Answer 14

Leasing

Question 15

c1 loss or destruction of a CGT asset

Answer 15

Insurance payout

Compensation

Question 16

CGT event occurs when

Answer 16

Receives item
Contract signed
Buys it on spot

CGT is paid at the eofy when event occurs

Question 17

4. What are the proceeds

Answer 17

Sale price

Question 18

Cost base

Answer 18

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

Question 19

Certain expenditure is not included in the cost base, including:

Answer 19

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)

Question 20

Cost base is subject to modification rules, which include:

Answer 20

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)

Question 21

‘Reduced cost base’ for capital losses (s 110-55)

Answer 21

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

Question 22

If asset held for more than 12 months

Answer 22

Discount gain by 50%

Question 23

Indexation of cost base if asset bought between 20 sep 85 and 21 sep 99

Answer 23

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

Question 24

if both discount methods are used what do you do

Answer 24

Just use the one that benefits taxpayer most (lower gain)

Question 25

CGT Event A1 – Disposal (s 104-10(1))

Answer 25

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).

Question 26

CGT Event B1 - use and enjoyment before title passes (s.104-15)

Answer 26

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.

Question 27

CGT event C1 – End of a CGT asset (s 104-20(1))

Answer 27

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.

Question 28

CGT event C2 – End of an intangible asset (s 104-25(1))

Answer 28

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.

Question 29

CGT event H1 - forfeiture of a deposit (s104-150)

Answer 29

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.

Question 30

Broad definition of a CGT asset

Answer 30

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.

Question 31

property

Answer 31

property – generally regarded as something capable of: assignment (disposal by sale, gift); or transmission (upon death or bankruptcy transmitted to executor.

Question 32

Quarantining rule

Answer 32

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.

Question 33

Set of collectibles

Answer 33

Treated as a single collectible

Question 34

The timing of the acquisition a CGT asset is important because:

Answer 34

(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;

Question 35

Categories of exemptions

Answer 35

Exempt gains and losses on certain assets Exempt or loss denying transactions Anti-overlap provisions Small business relief

Question 36

Disregarded capital gains and losses on certain assets

Answer 36

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)

Question 37

Main residence exemption – Subdivision 118-B

Answer 37

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.

Question 38

Main residence exemption – key points:

Answer 38

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 ```

Question 39

Taxpayer makes a capital gain if:

Answer 39

Capital gain = capital proceeds - cost base

Question 40

Taxpayer makes a capital loss if:

Answer 40

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.

Question 41

Capital proceeds

Answer 41

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).

Question 42

Six modifications to capital proceeds:

Answer 42

Market value substitution rule Apportionment rule Non-receipt rule Repaid rule Assumption of liability rule Misappropriation rule

Question 43

Market value substitution rule

Answer 43

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.

Question 44

Apportionment rule

Answer 44

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).

Question 45

Non-receipt rule

Answer 45

Capital proceeds are reduced if the taxpayer does not receive, or is not likely to receive, some or all of the capital proceeds.

Question 46

Repaid rule

Answer 46

Capital proceeds are reduced to the extent the taxpayer has to repay capital proceeds already received.

Question 47

Assumption of liability rule

Answer 47

Capital proceeds are increased if another entity assumes liability in connection with the CGT event.

Question 48

Misappropriation rule

Answer 48

Capital proceeds are reduced by the amount misappropriated by an employee of agent in connection with the CGT event.

Question 49

Five-step process to calculate the net capital gain (ie gains and losses for all events in the income year) s102-5

Answer 49

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

Question 50

Discount method (step 3 of working out a net capital gain)

Answer 50

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

Question 51

Step 3: Work out net capital gain or loss for the income year Capital losses

Answer 51

A capital loss cannot be deducted from the taxpayer’s assessable income: Capital losses are carried forward to a later income year

Question 52

A1

Answer 52

disposal of a CGT asset

Question 53

B1

Answer 53

use and enjoyment before title passes

Question 54

C1

Answer 54

loss or destruction of a CGT asset

Question 55

C2

Answer 55

End of intangible asset

Question 56

D1

Answer 56

creating contractual rights – Bringing a CGT asset into existence

Question 57

D2

Answer 57

granting an option

Question 58

H1

Answer 58

forfeiture of a deposit

Question 59

In working out the * cost base of a * collectable, disregard

Answer 59

the third element (about costs of ownership).

Question 60

Expenditure does not form part of the second or third element of the cost base to the extent that

Answer 60

you have deducted or can deduct it. if after 13 may 1997

Question 61

All capital losses you make on personal use assets are

Answer 61

disregarded

Question 62

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:

Answer 62

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).

Question 63

Companies do not have access to the

Answer 63

CGT 50% discount.

Question 64

Indexation cannot create or add to a

Answer 64

loss; therefore the gain is taken to be zero under this method.

Question 65

Third element: costs of owning the CGT asset | You don't include these costs if

Answer 65

you acquired the asset before 21 August 1991.

Question 66

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

Answer 66

the acquisition of a CGT asset | capital expenditure to increase an asset’s value.

Question 67

Third element: costs of owning the CGT asset | You can't:

Answer 67

include these costs in the cost base of collectables or personal use assets index these costs use them to work out a capital loss.