Capital Gains Advice

Exemptions

A capital gain or capital loss you make from any of the following is disregarded:

• a car (that is, a motor vehicle designed to carry a load of less than one tonne and fewer than nine passengers) or motor cycle or similar vehicle;

• a decoration awarded for valour or brave conduct, unless you paid money or gave any other property for it;

• collectables acquired for $500 or less;

• a capital gain from a personal use asset acquired for $10,000 or less;

• any capital loss from a personal use asset;

• CGT assets used solely to produce exempt income or some amounts of non-assessable non-exempt income;

• a CGT asset that is your trading stock at the time of a CGT event;

• shares in a pooled development fund;

• compensation or damages you receive for any:
• wrong or injury you suffer in your occupation
• wrong, injury or illness you or your relatives suffer

• compensation you receive under the firearms surrender arrangements;

• winnings or losses from gambling, a game or a competition with prizes

• a reimbursement or payment of your expenses (but not for the loss, destruction or transfer of an asset) under a scheme established by an Australian government agency, a local government body or foreign government agency. The scheme needs to be established under an Act or legislative instrument (for example, regulations or local government by-laws

• some types of testamentary gifts;

• any capital gain or capital loss you make from the ending of rights that directly relate to the breakdown of your marriage or de facto marriage, including if you receive cash as part of a marriage breakdown settlement;

• any capital gain or capital loss that a complying superannuation entity makes from a CGT event happening in relation to a segregated current pension asset;

• in certain circumstances, a general insurance policy, a life insurance policy or an annuity instrument

Other Exemptions

You may reduce your capital gain if, because of a CGT event, you have included an amount in your assessable income other than as a capital gain. For example, if you make a profit on the sale of land that is included in your assessable income as ordinary income, you don’t also include that profit as a capital gain.

Several concessions allow you to disregard part or all of a capital gain made from an active asset you use in your small business.

CGT Asset

Many capital gains tax (CGT) assets are easily recognisable – for example, land, shares in a company and units in a unit trust. Other CGT assets are not so well understood – for example, contractual rights, options, foreign currency and goodwill. CGT assets fall into three categories: collectibles, personal use assets and other assets.

Disposal of a CGT Asset

You dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership doesn’t occur:

• if you stop being the legal owner of the asset but continue to be its beneficial owner; or

• merely because of a change of trustee.

Time of the event:

• when you enter into the contract for the disposal; or

• if there is no contract – when the change of ownership occurs.

A capital gain or capital loss you make is disregarded if:

• if you acquired the asset before 20 September 1985; or

• for a lease that you granted:
  • it was granted before that day; or
  • if it has been renewed or extended – the start of the last renewal or extension occurred before that day.

In general you acquire property when you become its owner. This usually happens at the time the contract is entered into.

The most common way of acquiring property is by buying it. Although there are other ways of acquiring it, such as, inheriting it, receiving it as a gift, or winning it as a prize. The money you pay to acquire a property, or in some cases its market value, together with other related expenses becomes its cost base.

A capital gains tax (CGT) event happens when you dispose of property.

The most common way of disposing of property is by selling it. Although there are other ways, such as giving it away, or by it being compulsorily acquired – for example, to provide land for a proposed freeway.

At the time a CGT event happens, you may make a capital gain or a capital loss.

If you were to make a capital gain, that would be subject to capital gains tax. However, if instead you make a capital loss, it may be offset against capital gains you make on other assets – thereby reducing the overall amount of tax you must pay.

Significance of Contract Dates

• Properties you acquired before 20 September 1985 are generally exempt from Capital Gains Tax.

• The length of time you hold a property can affect the way you calculate your capital gain.

• The date of disposal determines in which income tax return you show any capital gain or capital loss you make

Our dedicated team can assist you with queries relating to how Capital Gains Tax can affect buying or selling a property.

Call now to discuss how we can help on (08) 9300 3240

How Capital Gains Tax (CGT) affects shares and units

For CGT purposes, shares in a company or units in a unit trust are treated in the same way as any other CGT assets.

As a general rule, if you acquire any shares or units on or after 20 September 1985, you may have to pay tax on any capital gain you make when a CGT event happens to them. This would usually be when you sell or otherwise dispose of them. It also includes where you redeem units in a managed fund by switching them from one fund to another.

Profits on the sale of shares held in carrying on a business of share trading are included as ordinary income rather than as capital gains.

A CGT event might happen to shares even if a change in their ownership is involuntary – for example, if the company in which you hold shares is taken over or merges with another company, this may result in a capital gain or capital loss.

A CGT event also occurs if you:

• Receive non-assessable payments from a company;

• Receive non-assessable payments from a trust;

• Own shares in a company that has been placed in liquidation or administration and the liquidator or administrator has declared the shares (or other financial instruments) worthless.

There are a number of special CGT rules if you receive from a company or trust such things as:

• Bonus shares;

• Bonus units;

• Rights or options to acquire shares or units; or

• Non-assessable payments.

Special rules also apply if you buy convertible notes or participate in an employee share scheme or a dividend reinvestment plan.

Small Business Capital Gain Tax Concessions

The following four CGT concessions are available only for small business.

1. The small business 15-year exemption provides a total exemption for a capital gain on a CGT asset if you have continuously owned the asset for at least 15 years and the relevant individual is 55 or over and retiring, or is permanently incapacitated.

2. The small business 50% active asset reduction provides a 50% reduction of a capital gain.

3. The small business retirement exemption provides an exemption for capital gains up to a lifetime limit of $500,000. If the individual is under 55 just before they make the choice, the amount must be paid into a superannuation (or similar) fund.

4. The small business rollover provides a deferral of all or part of a capital gain if a replacement asset is acquired, or an improvement is made to an existing asset by the end of two years after the capital gain was made. However, you may make a capital gain equal to the deferred gain if the replacement or improved asset is disposed of or its use changes in particular ways. In this case, the deferred capital gain is in addition to any capital gain made when the replacement or improved asset is disposed of.

Note that to qualify for any of the small business CGT concessions, you must first satisfy several basic conditions:

• The maximum net asset value test;

• The active asset test; and

• If the CGT asset is a share in a company or an interest in a trust, one of these additional basic conditions must be satisfied just before the CGT event:

• The entity claiming the concession must be a CGT concession stakeholder in the company or trust; or

• The 90 per cent test.

To calculate the capital gain or capital loss when disposing of only part of an investment in shares or units, you need to be able to identify which ones you have disposed of.

This can be very important because shares or units bought at different times may have different amounts included in their cost and can alter the amount of tax you may need to pay.

You may own shares or units that you acquired at different times, which happens if you increase your investment in a particular company or unit trust and these may need to be treated in different ways. For example, when you dispose of any shares or units you acquired before 20 September 1985, any capital gain or capital loss you make is generally disregarded.

A common question people ask when they dispose of only part of their investment is – How do I identify the particular shares or units I have disposed of?

If you have the relevant records, for example share certificates, you may be able to identify which particular shares or units you have disposed of. In other cases, The Commissioner of Taxation will accept your selection of the identity of shares disposed of.

Alternatively, you may wish to use a “first in, first out” basis where you treat the first shares or units you bought as being the first you disposed of.