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Taxation > Week 4 > Flashcards

Week 4 Flashcards

1
Q

Statutory income is broken up into

A

Capital and non capital

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2
Q

Liability to CGT is determined by following the process:

A

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

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3
Q

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

A

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?

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4
Q

Capital gain or loss can only arise if a

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

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5
Q

CGT Process

A
  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
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6
Q

What type of CGT asset is it

A

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

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7
Q

Discounts/concessions

A

A. Held for 12 months (50%)

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

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8
Q

Was it purchased before 20 september 1985

A

If so no tax

This was the date CGT was introduced.

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9
Q

Collectible

A

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

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10
Q

Personal asset

A

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

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11
Q

Exempt Assets

A 
Cars
Bikes
Collectibles less than $500
Personal assets less than $10K
Principal place of residence
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12
Q

CGT Events

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

Only real important ones are a1 and b1

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13
Q

a1 disposal of a CGT asset

A

Selling a CGT asset

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14
Q

b1 use and enjoyment before title passes

A

Leasing

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15
Q

c1 loss or destruction of a CGT asset

A

Insurance payout

Compensation

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16
Q

CGT event occurs when

A

Receives item
Contract signed
Buys it on spot

CGT is paid at the eofy when event occurs

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17
Q
  1. What are the proceeds
A

Sale price

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18
Q

Cost base

A

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

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19
Q

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

A

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)

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20
Q

Cost base is subject to modification rules, which include:

A

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)

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21
Q

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

A

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

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22
Q

If asset held for more than 12 months

A

Discount gain by 50%

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23
Q

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

A

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

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24
Q

if both discount methods are used what do you do

A

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

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25
Q

CGT Event A1 – Disposal (s 104-10(1))

A

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).

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26
Q

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

A

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.

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27
Q

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

A

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.

28
Q

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

A

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.

29
Q

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

A

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.

30
Q

Broad definition of a CGT asset

A

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.

31
Q

property

A

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

32
Q

Quarantining rule

A

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.

33
Q

Set of collectibles

A

Treated as a single collectible

34
Q

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

A

(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;

35
Q

Categories of exemptions

A

Exempt gains and losses on certain assets

Exempt or loss denying transactions

Anti-overlap provisions

Small business relief

36
Q

Disregarded capital gains and losses on certain assets

A

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)

37
Q

Main residence exemption – Subdivision 118-B

A

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.

38
Q

Main residence exemption – key points:

A

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
39
Q

Taxpayer makes a capital gain if:

A

Capital gain = capital proceeds - cost base

40
Q

Taxpayer makes a capital loss if:

A

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.

41
Q

Capital proceeds

A

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).

42
Q

Six modifications to capital proceeds:

A

Market value substitution rule

Apportionment rule

Non-receipt rule

Repaid rule

Assumption of liability rule

Misappropriation rule

43
Q

Market value substitution rule

A

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.

44
Q

Apportionment rule

A

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).

45
Q

Non-receipt rule

A

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

46
Q

Repaid rule

A

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

47
Q

Assumption of liability rule

A

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

48
Q

Misappropriation rule

A

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

49
Q

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

A

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

50
Q

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

A

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

51
Q

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

Capital losses

A

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

52
Q

A1

A

disposal of a CGT asset

53
Q

B1

A

use and enjoyment before title passes

54
Q

C1

A

loss or destruction of a CGT asset

55
Q

C2

A

End of intangible asset

56
Q

D1

A

creating contractual rights – Bringing a CGT asset into existence

57
Q

D2

A

granting an option

58
Q

H1

A

forfeiture of a deposit

59
Q

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

A

the third element (about costs of ownership).

60
Q

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

A

you have deducted or can deduct it.

if after 13 may 1997

61
Q

All capital losses you make on personal use assets are

A

disregarded

62
Q

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:

A

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).

63
Q

Companies do not have access to the

A

CGT 50% discount.

64
Q

Indexation cannot create or add to a

A

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

65
Q

Third element: costs of owning the CGT asset

You don’t include these costs if

A

you acquired the asset before 21 August 1991.

66
Q

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

A

the acquisition of a CGT asset

capital expenditure to increase an asset’s value.

67
Q

Third element: costs of owning the CGT asset

You can’t:

A

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

Taxation (7 decks)

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