Docstoc

Capital+Gains+Tax

Document Sample
Capital+Gains+Tax Powered By Docstoc
					                                                                               1

               CAPITAL GAINS TAX MTG 12- 000
                                 ITAA97 Pt 3-1 and 3-3
Capital gains tax (CGT) legislation came into effect on the 20th September 1985

Capital gains tax is the tax paid on any *net capital gain. The *net capital gain
is included in your annual income tax return along with all other income which
forms assessable income. Assessable income will determine the marginal rate of
tax to be levied.

There is no separate tax on *net capital gain; it is merely a component of your
income tax.

       The *NET CAPITAL GAIN for a year is: MTG 12-030

       total capital gains for the year

                     minus

       total capital losses (including any net capital losses from previous years)

                     minus

       any CGT discount and CGT small business concessions entitlements.

You make a capital gain or capital loss if a CGT event (MTG 12-240)
happens or if a managed fund or other trust distributes a capital gain to you.

Most CGT events involve disposal of a CGT asset, for example

      land and buildings—for example, a holiday home
      shares in a company
      units in a unit trust or managed investment fund
      collectables—for example, jewellery, and
      personal use assets—for example, furniture.

The sale of an asset is simply one of more than 30 CGT events that can produce
a capital gain or capital loss. Some of the more common CGT events or
situations that may produce a capital gain or loss are:

      an asset you own is lost or destroyed
      you give an asset away you enter into an agreement not to work in a
       particular industry for a set period of time
      shares you own are cancelled, surrendered or redeemed
      shares you own are declared worthless by a liquidator

For most CGT events:- MTG 12-170; 12-180; 12-550

                                                                               1
                                                                                2
Capital gain -         your capital proceeds exceed the cost base of your CGT
                       asset (you received more for an asset than you paid for it.)

Capital loss -          your reduced cost base is greater than your capital
                       proceeds. (you receive less for the asset than you paid for
                       it.)

You cannot deduct a capital loss from your income, but it can be used to reduce
any capital gain you made in the same financial year. You can only use capital
losses from collectables to reduce capital gains from collectables.

If your capital losses in a financial year exceeded your capital gains for that year,
you have made a net capital loss for that year. You can carry forward this net
capital loss to reduce any capital gains you make in future years. MTG 12-040

To determine the capital gain for most CGT events the following is applied:-

                 # Capital proceeds from disposal

Less             * Acquisition Cost, plus    }
                 * Capital Improvements     }
                 * Incidental Costs          } *COST BASE
                 * Non Capital Costs        }
                 * Title Costs              }

Equals           Net Capital Gain

#      If proceeds from sale are less than historical cost of the asset no indexing
       is allowed to calculate the capital loss.

       If proceeds from sale are greater than the historical cost, but less than the
       indexed cost base, than there is no capital gain or loss

*      Cost Base can be indexed to cover for inflation if the asset was not
       bought and sold within 12 months. If asset is bought and sold within 12
       months than historical cost needs to be used.

       Formula used for indexation cost base is:-

                       Cost Base x CPI at date of disposal
                                   CPI at date of acquisition


       The indexed factor is rounded to 3 decimal places, rounding up if the
fourth decimal place is five or more.

There are three methods you can use to calculate your capital gain or capital loss
for a year.

                                                                                2
                                                                                   3
1.      Indexation             MTG 12-610, 42-225 & 42-230

The cost base is indexed in line with inflation using the CPI figures.

Indexation was frozen on the 30 September 1999 with an indexation factor of
123.4

The table provided helps calculate your capital gain using the indexation. The
indexation factor is based on increases in the CPI up to September 1999

                                      Quarterly CPI
                                  Quarter ending
      Year          31 March            30 June         30 Sep           31 Dec
      1985                 -               -              71.3            72.7
      1986            74.4                75.6            77.6            79.8
      1987            81.4                82.6            84.0            85.5
      1988            87.0                88.5            90.2            92.0
      1989            92.9                95.2            97.4            99.2
      1990            100.9              102.5           103.3           106.0
      1991            105.8              106.0           106.6           107.6
      1992            107.6              107.3           107.4           107.9
      1993            108.9              109.3           109.8           110.0
      1994            110.4              111.2           111.9           112.8
      1995            114.7              116.2           117.6           118.5
      1996            119.0              119.8           120.1           120.3
      1997            120.5              120.2           119.7           120.0
      1998            120.3              121.0           121.3           121.9
      1999            121.8              122.3           123.4            N/A




If the CGT event happened before 11.45am on 21 September 1999,

                                 CPI for quarter when CGT event happened
     Indexation factor =
                               CPI for quarter in which expenditure was incurred

If the CGT event happened on or after 11.45am (by legal time in the ACT) on
21 September 1999.

                                 CPI for quarter ending 30 September 1999
     Indexation factor =
                               CPI for quarter in which expenditure was incurred




                                                                                   3
                                                                                 4
2.       Discount           MTG 12- 033

You may be eligible for a CGT discount if:

        you are an individual, a trust or a complying superannuation fund
        a CGT event happens in relation to an asset that you own
        the CGT event happens after 11.45 am on 21 September 1999
        you acquired the asset at least 12 months before the CGT event, and
        you (or others) have not chosen to use the indexation method.

If all of the above apply, you can reduce the capital gain that you have made
(after subtracting any capital losses) by the discount percentage that applies to
you.

The discount percentage for :- Individuals and trusts is 50%,

                                Complying superannuation funds is 33 1/3%.

For an individual or trust without any capital losses, this means only half of the
capital gain is included in assessable income.

For superannuation funds, this means only two-thirds of the capital gain is
included in assessable income.

3.       Other

(For all CGT events where the asset has been owned for less than 12 months)




                                                                                 4
                                                                                                                                     5

Cost Base                                                                  Indexed Cost Base-                              Reduced Cost Base-

- Used where asset has been held for less than 12 month                    - Used where asset has been held for at         - Used when determining capital

no indexing or CGT discount allowed                                        least 12 months                                 losses

                                                                           - Cost Base inflated by CPI

- Used where asset held for at least 12 months and CGT discount            - Indexation factor = index # for the quarter

method elected                                                             asset was sold (frozen indexation 30/09/99)

                                                                           divided by the    index # for the quarter in

                                                                           which the amount was paid

                                                                           -Rounded to 3 decimal places



Five elements:                                                             Five elements:                                  Five elements:

1. Acquisition costs                                                        1.Same as cost base but Indexed                1. Same as cost base – never

Consideration given on acquisition (money, property, or market value                                                       indexed

where not at arms length)



-Where an asset was acquired after 13/05/97 any amounts that have

been deducted re building write off 2.5% must be deducted from the

cost base




2. Incidental Costs                                                        2. Same as cost base but Indexed                2. Same as cost base – never

Incurred by the taxpayer in the purchase of the capital asset (valuation                                                   indexed

fees, legal fees, transfer costs, stamp duty)

As from 1 July 2005 non capital ownership expenses can be treated as

incidental costs such as marketing, search fees, borrowing expenses.



3. Ownership Costs                                                         3. Same as cost base – never indexed            3. Excluded

Non Capital Costs of ownership of a CGT asset acquired post 20/08/91

where no deduction has been allowed for these expenses eg interest,

rates.

Excluded from cost base where asset is a collectable or personal asset

As from 1 July 2005 it is no longer necessary that these costs are non

capital

4. Enhancement Costs                                                       4. Same as cost base but Indexed                4. Same as cost base – never

Capital expenditure incurred to increase the value of CGT asset                                                            indexed

(renovations)

5. Title Costs                                                             5. Same as cost base but Indexed                5. Same as cost base – never

Capital expenditure to establish preserve or defend your title                                                             indexed

                                                                                                                                     5
                                                                                6
Exemptions and exceptions MTG 12-640

Generally speaking, you disregard a capital gain or capital loss on:

      an asset you acquired before 20 September 1985
      cars, motorcycles and similar vehicles
      compensation you received for personal injury
      disposing of your main residence. This can change depending on how you
       came to own the residence, whether it is on more than 2 hectares of land
       and what you have done with it—for example, if you have rented it out,
       you may be liable to some tax when you sell it
      a collectable—for example, an antique or jewellery—if you acquired it for
       $500 or less, or
      a personal use asset if you acquired it for $10,000 or less. You also
       disregard any capital loss you make from a personal use asset,
       irrespective of the cost.



There are special rules that apply to depreciating assets. A depreciating asset
is an asset that has a limited effective life and can reasonably be expected to
decline in value over the time it is used. Plant and equipment that you use in your
business are examples of depreciating assets. Under the uniform capital
allowance system that applies from 1 July 2001, any gain or loss on a
depreciating asset will be included in your assessable income or allowed as a
deduction to the extent the asset was used for a taxable purpose (for example, to
produce assessable income).

You make a capital gain or capital loss from a depreciating asset only to the
extent you have used the depreciating asset for a non-taxable purpose (for
example, for private purposes).




                                                                                6
                                                                                 7
Small business CGT 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 a business has continuously owned the
      asset for at least 15 years, the relevant individual is 55 or over and retiring,
      or is permanently incapacitated, and other conditions are satisfied.

   2. The small business 50% active asset reduction provides a 50%
      reduction of a capital gain if the basic conditions are satisfied.

   3. The small business retirement exemption provides an exemption for
      capital gains up to a lifetime limit of $500,000 if the conditions for the
      exemption are satisfied. If the recipient is under 55, the amount must be
      paid into a superannuation (or similar) fund.

   4. The small business rollover provides a deferral of a capital gain if a
      replacement asset is acquired and other conditions are satisfied. However,
      you may make a capital gain equal to the deferred gain if the replacement
      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 on disposal of
      the replacement asset.




                                                                                 7
                                                                                 8
IN SUMMARY:-


a.    Capital Gain

Capital Gain will arise where the capital proceeds from a CGT event are greater
than the cost base of the CGT asset. The cost base may be indexed if the asset
was held for at least 12 months and the taxpayer elects to use the indexation
method



b.    Capital Loss

Capital Loss will arise where the capital proceeds from a CGT event are less
than the reduced cost base of the CGT asset. (No indexation allowed and
unclaimed holding costs cannot increase the capital loss i.e. Element 3 of the
cost base is excluded)

Capital Losses can only be offset against capital gains


c.    Neither Capital gain nor loss

Where the taxpayer uses the indexation method and the capital proceeds from a
CGT event falls between the reduced cost base and the indexed cost base, there
is neither a gain nor a loss




                                                                                 8
9




9
                                                                              10
LEARNING ACTIVITY 1

January 17, 1990 Wilma buys a large sailing boat to be used for her leisure
costing $42,000.

She sells the boat for $75,000 in December 2010.

Agent Fees for sale total $1,600.

Improvements in January 1992 cost $2,000

Incidental costs at time of purchase $200

Calculate the Capital gain/loss using both indexation and discount methods



LEARNING ACTIVITY 2

Taxpayer purchase property 1st March 1990 costing $95,000

Purchase price was 10% deposit with balance payable in instalments over
15years.

Additional cost associated with the purchase totalled $3,000

Renovation was made on property costing $15,000 in February 1996

Consideration on sale on 10th March 2011 was $160,000

Calculate the Capital gain/loss using both indexation and discount methods

LEARNING ACTIVITY 3

Taxpayer purchases a block of land December 1st 1990 for $90,000. Incidental
buying costs are $3,000.

Property disposed on the 26th January 2011 for $230,000. Selling costs are
$4,000

Ownership expenses (non – deductible) incurred were $12,000

March 1995 incurred costs of $10,000 for fencing of the property

Calculate the Capital gain/loss using both indexation and discount methods




                                                                              10
                                                                               11
LEARNING ACTIVITY 4

Taxpayer sold a property on the 10th September 2010.

The following costs were incurred in relation to the property:-

14/10/88      Purchase Price                     $155,000
14/11/88      Stamp Duty & Legal costs              6,000
25/07/92      Renovations                          55,000
13/07/05      Valuation Fees                        4,000
10/09/10      Agents selling commission             4,500

Calculate the net capital gain or loss under indexation, if the property was sold for
          a.     $300,000
          b.     $230,000
          c.     $180,000

Calculate the net capital gain or loss under discount, if the property was sold for
          d. $300,000




                                                                               11

				
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
views:1
posted:10/25/2011
language:English
pages:11