Capital gains tax (CGT), in the context of Australia's tax system, is the tax applied to capital gains made at disposal of any asset, with a number of special exceptions, which are most significant of being family homes. Rollover provisions apply to some releases, one of which is most significant is transfer to beneficiaries of death, so CGT is not a quasi-dead duty.
CGT operates by treating the acquisition of net capital as taxable income in the tax year in which the asset is sold or disposed of. If an asset is held for at least 1 year then any profit is first discounted by 50% for individual taxpayers, or 33.3% for pension funds. Capital losses can be offset by capital gains. Net capital loss in one tax year can not be offset against normal income, but it can continue indefinitely.
Personal use assets and collectible items are treated as separate categories and losses, which are quarantined so that they can only be applied to profits in the same category, not other benefits. This serves to stop taxpayers subsidizing the hobby of their investment income.
Video Capital gains tax in Australia
Histori
Capital gains tax (CGT) was introduced in Australia on September 20, 1985, one of a number of tax reforms by the Hawke/Keating government. CGT applies only to assets acquired on or after that date, with a gain (or loss) on assets held on that date, called pre-CGT assets, not subject to CGT. In calculating capital gains, the cost of assets held for 1 year or more is indexed by the consumer price index (CPI), which means that part of the profit caused by inflation is not taxable. Indexation is not used if the asset is held for less than 12 months or proceeds of sale in a capital loss. Also, the average process is used to calculate CGT. 20% of the net taxpayer's net income is included in income to calculate the tax rate of the average taxpayer, and the average rate is then applied to all gross taxpayer's income (ie, including full capital gain). Thus, if large capital gains push taxpayers into higher taxes in the sales tax year, the brackets are stretched, allowing taxpayers to be taxed at their average tax rate.
From September 20, 1999, the Howard Government stopped indexation of the cost base and (depending on transitional arrangements) introduced a 50% discount on capital gains for individual taxpayers. Assets acquired before September 21, 1985 remain CGT free. For assets acquired between September 20, 1985 and September 20, 1999, taxpayers have the option of using indexation (up to CPI as of September 30, 1999) or using a 50% discount method. Also from 21 September 1999, small business CGT concessions were introduced (below), reduced taxes on retired small business owners, and on actively sold assets, and allowed rollover when selling one active asset to buy another asset. 50% discount CGT is not available for companies and pension funds, which are eligible for 33% CGT discount.
Maps Capital gains tax in Australia
Exceptions
The law is framed so that it applies to all assets, except those specifically excluded. This applies both to assets held directly or partially to an asset, and to tangible and intangible assets. The current exceptions, in the order of estimated significance are:
- Any assets acquired before September 20, 1985, known as pre-CGT assets. But assets lose pre-CGT status if major changes are made (eg major additions to buildings), or to the original owner's death.
- Houses, units, etc., which are the primary residence of taxpayers, and up to the first 2 hectares of adjacent land used for domestic purposes.
- Personal use assets, earned up to $ 10,000, including boats, furniture, electrical appliances, etc., which are for personal use. Items that are usually sold as a set should be treated together for the $ 10,000 limit.
- Capital losses made from personal use assets. (S108-20 (1) ITAA1997... any capital losses made from personal use assets are ignored)
- Collections earned up to $ 500, including art, jewelry, stamps, etc., are held for personal enjoyment. Items that are usually sold as a set should be treated as a set for the $ 500 limit. If the collection sometimes increases in value, then these exceptions can be an advantage for taxpayers who collect small items.
- Cars and other small motor vehicles such as motorcycles ("small" to carrying capacity of less than 1 ton and less than 9 passengers). Since the car usually decreases in value, this release is actually detrimental. But the exception applies even to antique or collectible vehicles, if they rise in value then the exception is profit.
- Compensation for work injury, or for personal injury or personal illness of a person or relative. (However, compensation for breach of contract is subject to CGT.)
- Life insurance policies are handed over or sold by original holders. Such profits are taxed as ordinary income (when held for less than 10 years). Third parties who purchase the policy will be charged CGT as a regular investment.
- Victory or loss from gambling (which is also tax exempt).
- Bonds and money orders are sold at discounted prices (including coupon-free bonds) and "traditional securities" (certain interest rate records can be converted into shares). The advantages and disadvantages of this are ordinary taxable income.
- Medals and decorations for courage and courage, provided they are acquired at no cost (financially).
- Shares in a joint development fund, which is a special structure with rules that facilitate venture finance. Certain eligible venture capital investments are also excluded from CGT.
- Payments are based on certain government-specific schemes, such as various industrial restructuring schemes.
Stock trading is not considered an asset and is under ordinary income tax. Items from plants that are being breastfed are subject to CGT, but only in the unusual case that they are sold for more than the original cost (see Depreciation of assets below)
Operation
The capital gains tax law is expressed in a set of 52 CGT activities (see ITAA 1997 section 104-5), each setting out results such as gains, losses, or what basic cost adjustments should be made, and how to determine the date to be used for transactions.
The most common event is A1, asset disposal. At disposal, capital gains arise if the outcome is greater than the cost base, capital losses arise if less than the cost base is reduced. The date to be used is the date of the contract of sale (even if the payment is not later), or if there is no such contract then the date the taxpayer ceases to be the owner (eg if the asset is lost).
The cost base of an asset is the amount paid for it, including related costs such as agent commissions. However, there are three forms, from the lowest to the highest:
- reduce basic costs - this is a cost basis with certain costs excluded, or certain additional deductions are applied.
- the cost base - into paid money, and associated costs of the transaction, plus additional capital additional costs, or defend someone's ownership.
- indexed cost bases - elements of each cost base indexed by changes in consumer price index. Each element is indexed according to the cost date incurred. This is only relevant for assets acquired before September 21, 1999.
When removed, then:
- if the result falls under a reduced cost base - the difference is a capital loss.
- if the results are on a regular cost basis - the difference is capital gains.
- if the result is between the deductible cost base and the basic cost of plain there is no gain or loss. (Quite often the deductible cost basis equals the basic cost of plain and this does not show up.)
Capital gains and losses in a particular tax year are summed up, but in three separate categories according to the asset class:
- collection (above the $ 500 release described above).
- personal use items (above the $ 10,000 release described above).
- all other assets.
The existence of separate categories for collectibles and personal items works to prevent losses from them offset by other benefits such as from investments. Consequently preventing subsidized hobbies.
The net losses in each category can be brought forward for the coming years, in their respective categories, but can not be compensated against ordinary income, or with each other.
Capital loss applied before capital gain discount:
- Someone earns $ 100 of capital gains eligible for 50% discount = $ 50 net capital gain. If the person also has a capital loss of $ 50, the loss will be valid first and there will be a remaining $ 50 capital gain that is eligible for a 50% discount = $ 25 capital net gain.
Reduce cost base
When a CGT event occurs in a CGT asset and a cost base greater than the capital yield, then the taxpayer needs to calculate the asset-reduced cost base to determine if there is a capital loss. The reduced cost base of CGT assets has the same five elements as the cost basis, except for the third element.
Common examples of reduced cost bases:
- Greg purchased a rental property on July 1, 1998 for $ 300,000 and made an increase of $ 50,000. Before disposing of the property on June 30, 2011, he has claimed a $ 20,000 working capital deduction. At the time of disposal, the basic cost of the property is $ 350,000. The reduction of the basic cost of the property reduced $ 20,000 to $ 330,000.
Prior to July 1, 2001, the distribution of a property trust typically includes a section called "tax-free" subtracted from a reduced cost base but not a cost base, in a similar way. (See Property trust distribution below.)
Cost base cost method indexed
For assets acquired between September 20, 1985 and September 20, 1999, taxpayers may choose between two methods of capital gains calculation - the discount method described above, or indexing method - which method generates the smallest tax. The indexing method is as follows:
- for each qualified asset, calculates the capital gains: the difference between asset sale proceeds and indexed cost base, but with indexation stops at CPI per quarter ended September 30, 1999.
- capital loss is applied in the normal way: capital losses (in the same year or prior year) reduce capital gains. If there is a net capital gain, it is included in the taxable income and if a negative loss of capital is brought forward to the next year.
For example: Shares purchased by individuals in 1987. Indexed earnings capital is $ 5,000 or grossed Sharia capital is $ 7,500. Capital loss is $ 4,000:
- $ 5,000 Indexed Gain Outcome: $ 4,000 loss applied = $ 1,000 net capital gain
- $ 7,500 Discounted Profit Outcome: The $ 4,000 loss applied gives a $ 3,500 balance, multiplied by 50% discount = $ 1,750 net capital acquisition
With only capital gains - the discount method is usually better (better note indexation for small profits (probably only very small) The choice is basically between reducing capital gains by raising the CPI from the cost base, or halving the CPI indexation may be small, but if the result below then there is no CGT.When the above gain is twice the result of indexation, then the discount method is better.
Specific assets
The following are things related to specific asset classes.
Gift
Gifts made by living people are treated as disposal at current market value. The giver is taxed for disposal at that price, the recipient gets it as their cost base. (s112-20 (1) ITAA 1997)
Trial proceedings, made on death under a will or under the laws of error, are otherwise subject to the provisions of many things (see Death below).
When a shareholder is called to pay further installments on a paid-share share, the amount paid is added to the cost base and the cost basis is reduced. Stock acquisition date remains unchanged.
Splits
When a company divides its shares, for example 2 shares for every 1 previously held there is no direct CGT effect. The date of the acquisition of the taxpayer and the cost base for holding is unchanged, only for the number of new shares. Likewise for consolidation (reverse split).
Bonus issues
The bonus shares issued by the company from their share capital account are treated the same as the split (above), they simply change the number of shares in the holding. However, there are complicated rules to apply when bonus shares are offered in lieu of dividends, or when they are partly paid.
Unit bonuses from unit trust are similar to bonus shares. A fully paid unit with an amount not included in a person's accessible income (as suggested by trust), only changes the number of shares in a person's holdings, otherwise a set of rules applies.
Reshare dividends
Some companies offer dividend reinvestment plans that allow shareholders to choose to receive newly issued shares instead of cash dividends, often at small discounts for prevailing market rates.
Such plans are treated as if shareholders receive dividends and then use the money to buy shares. Dividends are taxed like any other dividend (including with dividend implications), and shares are taken to be taken for cash not received by shareholders.
Investors will need to record each share package received under the dividend reinvestment plan, including the date of issue and the amount of dividends applied to the shares.
When different packages of shares (etc) have been obtained at different times or for different prices, it is necessary to identify which ones are disposed of in the sale, since the profit or loss of capital may be different for each.
If a share certificate or similar is used then clearly the transferred package is. But when shares are held aggregate in the style of a bank account as in the CHESS system used by the Australian Stock Exchange, then the taxpayer can nominate which of the original purchases are sold.
In either case, taxpayers can opt for their profits, such as selling a package with a capital loss to realize it immediately, or keep certain packages until they reach the age of 1 year to get a 50% discount for profit.
More options are available for packages of the same shares earned all on one day. If desired, they can be collected to create one package for the total cost, which is the average price paid. This reduces the document if for example a stock is purchased with a price range throughout the day.
Some listed companies are formed so that their effects are "clamped" together. For example, each Westfield Group unit is a three-part, part of Westfield Limited, a unit at the Westfield Australia Trust, and a unit at Westfield America Trust.
The taxpayer treats each piece of security that is clamped separately for the purpose of capital gains tax, ie calculating the profit or loss on each separately. But since the securities trade is threaded with only the price for the bundle, the taxpayer must use some "reasonable" method to divide the price across sections. The Westfield Group for example recommends on their securities using the ratio of net tangible asset support (NTA) from each section.
Building allowance
Building allowance of 2.5% (or 4% in certain cases) of the original construction cost of the building is allowed as a deduction of income each year (until the initial cost is exhausted). The amount claimed as deductions is subtracted from the cost base and reduces the basic cost of the building. (Note that benefits are calculated on the basis of the original construction cost, not the price paid then, and note also that a building is a CGT asset separate from the ground standing on it, and only the base cost of the building affected.)
Building allowances serve as a kind of depreciation, representing a progressive decline over the lifetime of a building. But unlike the way depreciation has a final balance adjustment to income, the building allowance actually gets it as a capital gain (or loss) through it lowers the cost base.
For example, if it is assumed that the building is of no value at the end of 40 years implied by 2.5% annuity per annum, the owner has experienced progressive deductions during those years and not only realizes the whole in one big capital loss. eventually.
Distribution of property trust
The distribution of property trusts (whether registered or unregistered) typically includes two amounts that affect the capital gains tax,
- "Deferred tax" part of the distribution.
- Distributed capital flows, some under the discount method, some under the indexing method.
Investors deduct the deferred tax portion of the distribution from their cost base (and reduce basic costs). This is called deferred taxes because investors do not pay taxes on that amount immediately, but will pay capital gains tax when they then sell the unit, as it has lowered their cost base.
Tax-deferred amounts are generally derived from building allowances, similar to those for direct property ownership (see above). The simplest works as follows. Suppose a trust generates a $ 100 rental income and has made a $ 20 deduction. Then the net taxable income is $ 80 and the amount is distributed to people who are not eligible for inclusion in their income. The remaining $ 20 of cash is also distributed to the tenants, but this is considered a payback.
The investor's cost base can not be below zero. If the amount of deferred tax has reduced it to zero, then any surplus must be expressed as a capital gain in the year received. This is an unusual situation, generally it can not happen unless an investor has been able to get a trust unit for less than the value of the building.
The capital gains that are distributed by trust arise from the trust sale assets. They are taxed in the hands of investors just like any other advantage. When there is a choice of discount or indexation methods, the trust manager makes that choice.
The benefit of discounted capital is distributed in the form of discounts, ie 50% less for assets owned at least 1 year. Investors should add it by doubling, imposing capital losses, then discounting the rest. (If a person does not have a capital loss to apply then there is no change and the amount received is the amount taxed.)
Options
For option holders, ie takers,
- The purchased and then sold options are subject to CGT like any other asset. If it expires, is not sold, then it is discarded on expiration for zero.
- When the call option is made, the shares (or other assets) earned have a cost base which is the premium paid option plus the amount paid for the exercise. Date of stock acquisition is the date you use the right or option to acquire shares.
- When the put option is exercised, the proceeds of the share sale are the amount received in the exercise, minus the premium of the previously paid option.
For option authors, ie givers,
- When an option is written, the premium received by the author is a direct capital gain. (This is equivalent to selling a newly created intangible asset.)
- When the call option is made, the author sells the stock to the option holder. The capital gains from writing options are reversed and the proceeds for the shares sold are the execution price received plus the premium options received.
- When the put option is executed, the author buys the stock from the option holder. The capital gains from writing the reversed option and the cost base for the stock are the paid exercise price minus the premium of the options received.
Rights or options issued by the company allow existing shareholders to purchase new shares treated as acquired for a zero fee at the same time as the shares acquired. If sold then the result is a capital gain (or not a capital gain if the stock is pre-CGT).
If such rights are exercised then new shares are taken to be purchased with the amount paid and on the date it is executed. If pre-CGT shares then the market value of the rights at the time of the exercise should be added to the cost base of the new stock as well.
Companies issuing rights or options purchased from others (ie not issued directly from the company) are treated like the above options.
Demutualization
When a collective society like an insurance company demutualizes by converting membership into share ownership, the company advises members of the cost base and reduces the basic cost for their new share. The cost base represents "embedded value". ATO publishes a cost base for recent demutualization, such as AMP Limited and Insurance Australia Group. When stocks are then sold, capital gains or losses occur in the usual way.
When a company is under or into the administration, the liquidator, the recipient or the administrator can make a formal statement that they expect no residual distribution to the shareholders (all the money that the creditor pays out first). Shareholders can then, if they wish, claim capital losses on shares as if they were disposed of for empty consideration. If the subsequent liquidation distribution occurs then it is treated as a capital gain.
The liquidator is given the power to make such a statement from 11 November 1991, and other insolvency practitioners from May 11, 1991. Of course shareholders may always sell seemingly worthless shares to third parties with a nominal amount to realize the loss.
Short sales
Short sales are covered under the regular income tax, not the capital gains tax. The reason is that in the first leg, that is sales, investors do not throw away the assets they have.
Depreciation of assets
When deductions are claimed for asset depreciation, and then sold, there are balancing adjustments that must be made for results versus written value. In the usual case that the proceeds are less than the initial cost, the difference between the yield and the written value is earnings or further reductions and CGT is not applicable.
However, if, the result is greater than the original cost, then the amount between the value written and the original cost is income, and the above result is the capital gain. The effective reductions allowed in previous years were reversed, the usual CGT.
A person who buys and sells shares or other assets is a business that treats the asset as a trading share, and the gain or loss is a regular income rather than a capital gain. Taxpayers must determine whether they belong to the category of stock traders or not.
There is no special law on stock traders, but ATO publishes fact sheets with guidelines based on court decisions [1]. This includes a definite example of trade, and definitely not. Factors include whether the intention is to gain profit, repetition and regularity of activity, and whether organized in a practical way. (At worst a taxpayer can use a personal verdict system to get ATO determination on the particular circumstances they are in or are contemplating.)
A trader has the advantage that the losses can be offset by other income (eg dividends), and have the option to assess each stock either the price of a fee or market price each year, so that unrealized losses can be ordered immediately but unrealized gains are retained. The disadvantage for traders is a 50% discount for CGT profit for assets held for 1 year or more are not available.
Prior to the introduction of the capital gains tax in 1985, section 52 of ITAA 1936 required taxpayers to declare (on their return next) assets they acquired for trading. This is known as declaring itself as a stock trader, but now there is no such election.
Rollover
Rollover provisions allow for the suspension of capital gains, either by allowing the new owner to maintain a previous owner's cost base, or by allowing the owner to switch to a similar new asset and retaining an old cost base.
Death
At the time of death, CGT assets transferred to the beneficiary (either directly or first to an executive) are not treated as discharged by the deceased, but the beneficiary is taken to obtain it on the date of the death of the deceased and on a cost basis and reduces the cost of the base on that date.
This rollover is not applicable if the heir is not a resident of Australia, or is a tax-advantaged entity such as a pension fund. In such a case, the deceased was brought for sale to the heirs by market value at the date of death, and the usual capital gain tax applies. Churches and charities are also considered to be taxable, but the inheritance to register "Reduced Gift Recipients" is not taxable. Rewards under the Cultural Heritage Program are also not taxed.
Also, this rollover does not apply to pre-CGT assets (ie acquired by the deceased before September 20, 1985), in which case assets are taken for disposal at market value to the recipient, on the date of the death of the deceased. Being pre-CGT, there is no capital gains tax for the property, but the pre-CGT status of the assets is lost.
Note that for pre and post CGT assets there is no tax liability to the deceased's estate for casual cases of transfer to an Australian recipient individual. This means in most cases the capital gain tax does not operate as a proxy for death or real estate taxes.
The unused net capital losses brought by the deceased from the last fiscal year were lost with their death. This loss is not recoverable by plantations or beneficiaries (TD 95/47).
Wedding details
When an asset is transferred between a pair under a court-approved settlement after marriage breakdown, certain rollover provisions automatically apply. Basically, the pair receiving the asset retains the original cost base and the date of the acquisition. Newly created intangible assets such as rights or options have a cost base only what is actually spent in creating them (eg lawyers' fees).
Transfers not made under court approval are not subject to rollover, normal CGT rules apply to any disposal. And if the asset is not transferred at market value and not in transaction "duration" then for the purpose of CGT transfer will be considered has been done at market value.
Takeover
"Scrip for scrip" rollovers may be available for a takeover or merger in which shareholders receive new shares or new trust units rather than cash. When rollover is available, new ownership of shares is treated as a continuation of the old one, on the basis of the cost and date of the same acquisition. Scripts for script rollover are available when:
- original stock is a CGT asset. Rollover is not available on pre-CGT shares.
- the bid value is high enough that capital gains will arise if treated as a disposition of the original stock. Rollover does not apply to capital losses that must be realized instead.
- A swap is a stock for a stock, or a trust unit for a trust unit. This does not apply to structural changes.
- the takeover took place on or after December 10, 1999, the introduction of this rollover provision.
- The bidder has made its offer available to all voting shareholders, and is the owner of 80% of the voting stock. This serves to limit the rollover to the original takeover.
- certain other anti-tax-avoidance rules are not triggered. This applies to a target company or trust only with a small number of shareholders or where there are significant joint stakeholders.
Shareholders may choose not to use scrip for scrip rollover, and instead treat it as a disposition of their original ownership for the value of new shares, realizing capital gains. Shareholders may choose a rollover on the part of share ownership.
Under Australian company law, if a bidder gets 90% of receipt, he can force the remaining shareholders to take the offer. The holder is in the same position as those who voluntarily accept (especially note that the "compulsory acquisition rollover" rollover below is not applicable).
Demergers
When a company plays a part of its business as a separate new company and gives the new shareholder a share in the new company, the taxpayer's cost base of the original share is divided between the original and the new one. The Company advises the appropriate proportion and the shareholders will allocate the original cost base between the two entities. New ownership is taken for acquisition on the demerger date. The base cost of ownership of the original shares is reduced by the base of the cost of ownership of new shares.
In the abolition of certain rollover demographics may be available, the company will generally advise it. If available and if the taxpayer chooses to use it, newly acquired holdings have been acquired on the same date as the original holding, and that includes being pre-CGT if the original is pre-CGT.
Usually rollover assistance (when available) is an advantage, maintaining pre-CGT status and helping a person meet a 1-year period for a 50% discount on profits. However, on pre-CGT assets in which the new holding market value is below the cost base, taxpayers are better off not using rollover but allowing new holding into CGT assets so that capital losses there can be utilized.
Destruction or compulsory acquisition
When an asset is forcibly acquired by a government agency, or is destroyed and insurance or compensation is received, the taxpayer may choose between,
- Regarding that as a sale at that price.
- Rollover in which compensation is used to replace or repair an asset and is considered a continuation of the original. The original date of the acquisition did not change, especially the pre-CGT assets remained pre-CGT.
When rolling-over, there are rules to use when compensation is different from replacement or repair costs. And in particular there is a 120% limit on market value if replacing pre-CGT assets (so it is not possible to get much larger assets into pre-CGT status).
Note that this provision applies only to capital assets, not to stock trading, or to planting the depreciated.
Small business
Four capital gains tax concessions for small businesses have been available since 21 September 1999.
- 15 years of release. Exclusion from CGT for owners who own a small business for 15 years and sell due to retirement (aged over 55 years) or due to permanent disability.
- 50% active asset reduction. Capital gains minus 50% for assets actively used in business (including intangibles). A normal 50% discount rule for assets held at least 1 year also applies, in this case a 50% discount from the remaining 50%, for an overall 75% discount.
- Small business retirement exceptions. When selling a small business and not more than 55, CGT is not payable on net capital paid to superannuation funds. There is a life limit of $ 500,000 for this release.
- Small business rollover. Net capital gains generated from the sale of active assets may be reduced by the amount spent on the nominated replacement assets. This is just a profit suspension, it crystallizes if a replacement is sold or a change in its use (but a subsequent rollover can be created if desired).
The key elements of a small business are:
- up to $ 6 million in net assets. "Related entity" is calculated against this limit.
- One "controlling individual" has 50% or more votes plus 50% or more of economic interest. Or two people like that if they have half each. But note the three individuals with the same bet will fail the test, because none of them are in a control position.
Exemptions for profits paid to superannuation funds are similar to what an employee can do with eligible termination payments (accumulated unused leave, etc.) upon leaving the job. But the small business case is only a net profit after applying a CGT discount that needs to be paid to the fund to escape the CGT obligations, the rest can be saved in cash.
Changes have been made by ATO to relax some of these terms. Check the ATO Website for details.
See also
- Taxation in Australia
Note
References
- Guide to Capital Gains Tax , Australian Taxation Office, publication NAT 4151-6.2005 [2]
- Guide to Capital get Tax Concession for Small Business , Australian Tax Office, NAT publication 8384-06.2005 [3]
- Running a stock trading business - Fact Sheet, Australian Taxation Office
- Income and Investment Tax , N. E. Renton, 2nd ed., 2005, ISBN 0-7314-0221-9
External links
- Changes to small business capital gains (CGT) concessions - Australian Taxation fact sheets
Source of the article : Wikipedia
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