Capital Gains Tax - General Guides

Capital gains tax (CGT) generally does not apply to assets acquired before 20 September 1985 (pre CGT assets).

 

However in particular it should be remembered that CGT event K6 can result in capital gains (but not capital losses) if certain CGT events happen to pre-CGT shares in a ‘private’ company or pre-CGT interests in a ‘private’ trust where the market value of its post-CGT property is at least 75% of its net value (‘the 75% test’). 

 

Refer to TR 2004/18 below in the links.

 

 

Subsection 110-25(4) of the ITAA 1997 provides that the third element of the cost base of an asset acquired after 20 August 1991 is the costs of owning the asset. The costs include, but are not limited to, costs of maintaining, repairing or insuring it, interest on money borrowed to acquire the asset or to refinance such a borrowing, interest on money borrowed to finance capital improvements to the asset, and if the asset is land, rates and land tax 

For costs to fall within the third element of the cost base of an asset, they must be costs of owning the asset. Travel and accommodation costs will be costs of owning the asset where the carrying out of the repairs on the asset is the sole or main purpose of the travel and accommodation.

You cannot include them at all in the cost base of collectables or personal use assets.

You cannot index these costs or use them to increase a capital loss

Tip!

This element is particularly useful in relation to holiday homes that are not made available to earn income the whole year.

NB! Who is keeping the records?

It is advisable to keep records of the amounts spent on an annual basis, as they can be very difficult to find and substantiate many years later when the property is sold.

Refer to the links below on the Third Element. 

 

Use the indexation method to calculate your capital gain if:

 

> a CGT event happens to an asset you acquired before 11.45am (AEST) on 21 September 1999, and

 

> you owned the asset for 12 months or more (excluding day of purchase and day of sale).

 

If you are not a company and you meet the 2 conditions above and you wish to use the indexation method, you must choose to do so, otherwise the discount method will apply. If you are a company (other than a listed investment company) and the capital gain meets the above conditions, you must use the indexation method to calculate the capital gain.  The discount method does not apply to a company.

 

Under the indexation method, you increase each amount included in an element of the cost base, (other than those in the third element - costs of owning the asset) by an indexation factor.

 

The indexation factor is worked out using the consumer price index (CPI).

 

If the CGT event happened on or after 11.45am (by legal time in the ACT) on 21 September 1999 you can only index the elements of your cost base up to 30 September 1999. You use this formula:

 

Indexation factor =	CPI for quarter ending 30.9.99 (123.4)
	CPI for quarter in which expenditure was incurred

 

If the CGT event happened before 11.45am (by legal time in the ACT) on 21 September 1999, you use this formula:

 

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

 

Work out the indexation factor to three decimal places, rounding up if the fourth decimal place is five or more.

 

 

 

 

 

The discount method does not apply to companies.

 

You may use the discount method if:

 

> a CGT event happens to an asset you acquired after 11.45am (AEST) on 21 September 1999, and

 

> you owned the asset for 12 months or more (excluding day of purchase and day of sale).

 

The non-indexed gain is reduced by the relevant discount, being 50% for individuals and 33⅓% for complying superfunds.  However capital losses must first be applied against the pre-discounted capital gain to be included in assessable income. [S102 – 5(1)]

 

For a year of income use this order to calculate the taxable capital gain:

 

1.       Add together current year capital gains (before discount) of each asset.

2.       Subtract the sum of all current year capital losses.

3.       Subtract eligible unrecouped previous year capital losses.

4.       This gives you the notional net capital gain.  *

5.       Subtract the sum of the discounts that may be applicable.

6.       Subtract any small business concessions that may be applicable.

7.       This equals the taxable capital gain.

 

*If this total is negative any concessions available at items 5 and 6 are effectively lost.