Capital gains/losses

Contributed by AnnetteMorgan and current to 27 July 2018

If you sell, give away, assign or otherwise dispose of an asset which you acquired (or which the Acts regard you as having acquired) on or after 20 September 1985, you may have to pay tax on any gain you make when you dispose of the asset. The legislation governing Capital Gains Tax (CGT) is now contained in the 1997 Act. The legislation in this area is extremely complex and the following only gives a general outline of the relevant provisions. There is no separate tax on capital gains as such, but rather a taxable net capital gain is included in your assessable income. However, there are differences in the way this income is treated compared to your other assessable income.

Liability to CGT arises when a CGT event occurs to a CGT asset. A CGT event is, generally speaking, the sale, gift, assignment or disposal of the asset within one or more categories listed in the 1997 Act.

A capital gain arises, basically, when the cost of you acquiring an asset (the cost base) is less than the amount you receive (the capital proceeds) when a CGT event happens in relation to the asset. Specific rules relate to the calculation of the cost base of an asset and the capital proceeds arising on the occurrence of a CGT event (such as where parties to the sale or purchase of an asset are not acting at arm’s length, or you incurred no expenditure for the acquisition of an asset, the cost base of the asset will be its market value).

The definition of “asset” under the CGT provisions is extremely broad and therefore you may have a capital gain in a situation where you might not have foreseen such a gain arising. For example, you receive an amount of money in return for agreeing not to work for another employer within a specified geographical area for a particular period of time. In such a case, you are deemed to have disposed of an asset (your ability to work) which is subject to tax.

However, not all assets are subject to CGT. One of the most important exceptions is your family home used as your sole or principal dwelling. Further, most motor vehicles and some personal-use assets are not subject to CGT.

There is some uncertainty as to whether compensatory damages are subject to CGT. The courts have been inconsistent in their approach. The ATO has issued Taxation Ruling 95/35 as a guide to its views on this issue.

If you are an individual or a trustee, you will be assessed on only 50 per cent of any capital gain you make as long as you have held the asset for at least 12 months.

You are assessed only on your net capital gains for an income year. This means that any capital losses are offset against any capital gains you make in a particular income year. You will have a capital loss if the amount you receive when you dispose of an asset is less than the asset’s cost base. If you have a net capital loss (that is, your capital losses exceed your capital gains), it cannot be offset against other forms of assessable income. However, net capital losses can be carried forward indefinitely to be offset against your future capital gains. It is important to note that you must deduct your capital losses prior to claiming any discount.

In some cases, a CGT event is offset by roll-over relief. This means that any gain you make on the disposal is effectively ignored until the time, if any, that another CGT event occurs in relation to the asset. Roll-over relief is available:

• where you receive assets under a will; If you receive assets under a will the cost base to determine the capital gain depends on when the asset was acquired by the deceased person, and whether it was the deceased person’s main residence. If the asset was the deceased person’s main residence you have up to two years exemption before a sale of the property becomes taxable;
• where you are granted assets under a property settlement when a marriage breaks down;
• when strata title conversions occur;
• where you sell a small business with net assets of less than $6 million OR you are a Small Business Entity for CGT purposes (this means your turnover of your business is less than $2 million) and you reinvest the proceeds of the disposal in another business;
• for transfers of an asset by a partnership to a wholly owned company.

In some situations, roll-over relief occurs automatically, while in other situations you will need to make an election (usually this election will be evidenced by the way your tax return is prepared) to receive the relief. It is important to seek professional advice for such matters.

Where you sell a small business with net assets of less than $6 million OR you are a Small Business Entity for CGT purposes (this means your turnover of your business is less than $2 million) you may be eligible for a range of tax concessions. If this is the case you should seek professional advice to clarify your eligibility.

Capital gains on some assets (for example, trading stock, shares acquired under employee share schemes) are potentially taxable under both ordinary income and CGT provisions. However, you will not be taxed on the proceeds under CGT rules to the extent that they are taxable under ordinary income provisions. For further information, you might like to refer to the Guide to Capital Gains Tax, which the ATO publishes on its website.