Part B: Sale of shares or units

Chapter B1 How to work out your capital gain or capital loss

Note: New terms

Some terms in this section may be new to you. They are printed in red the first time they are used and are explained in Explanation of terms at the back of this guide. While we have used the word 'bought' rather than 'acquired' in our examples, you may have acquired your asset without paying for it (for example, as a gift or through an inheritance or through the demutualisation of an insurance company such as the NRMA or a demerger such as the demerger of BHP Steel Limited). Similarly, we refer to 'selling' an asset, when you may have disposed of it in some other way (for example, by giving it away or transferring it to someone else).

To calculate your capital gain from the sale of shares or units in a unit trust (for example, a managed fund), the main steps are to:

1. work out how much you have received from each CGT event (your capital proceeds)
2. work out how much each CGT asset cost you (the cost base), and
3. subtract 2 (the cost base) from 1 (the capital proceeds).

If you received more from the CGT event than the asset cost you (that is, the capital proceeds are greater than the cost base), the difference is your capital gain. The three ways of calculating your capital gain are described in step 3 of part A.

If you made a capital loss-that is, you received less from the CGT event than the asset cost you-you need to work out the reduced cost base for the asset. Generally, for shares, the cost base and reduced cost base are the same. If the reduced cost base is greater than the capital proceeds, the difference is your capital loss.

If the capital proceeds are less than the cost base but more than the reduced cost base, you have not made a capital gain or a capital loss.

The steps on the following pages show you the calculations required to work out your CGT obligation using the 'other' and discount methods. If you want to use the indexation method (by indexing your cost base for inflation) you will need to do this at step 2 and you may find it easier to follow the worked indexation examples in chapter B2.

You may find it useful to use the margins provided beside the following steps (in the paper publication) to do your own calculations so you can transfer the relevant amounts to item 17 on your tax return, or item 9 if you use the tax return for retirees. (Note: You cannot use the 2003 tax return for retirees if you had a distribution from a managed fund during the year.)

Step 1 Work out your capital proceeds from the CGT event

The capital proceeds are what you receive, or are taken to receive, when you sell or otherwise dispose of your shares or units.

For example, with shares the capital proceeds may be:

• the amount you receive from the purchaser
• the amount or value of shares or other property you receive on a merger/ takeover, or
• the market value if you give shares away.

Step 2 Work out the cost base of your asset

Indexing your cost base

There are certain circumstances where a cost base may be indexed. This is called the indexation method and the cost base would then become an 'indexed' cost base. For more information, see part A of this guide or the worked examples in chapter B2.

The cost base of your asset is what your asset cost you, including certain incidental costs of buying and selling it as well as any costs you had in establishing, maintaining and defending your ownership of it. Incidental costs of buying or selling the asset are brokerage, legal fees, investment advisers' fees and stamp duty.

The cost base for an asset such as a share or unit may also need to be reduced by the amount of any non-assessable payment you received from the company or fund during the time you owned the share or unit. This is explained in chapter B3 (shares) and chapter C2 (units).

Interest you have paid on money borrowed to buy shares or units is not included in your cost base if you have claimed a deduction for it in any income year.

For shares, the cost base is usually the cost of buying the shares including brokerage and any stamp duty costs on selling the shares.

Step 3 Did you make a capital gain?

Subtract the amount in step 2 from the amount in step 1. If the capital proceeds are greater than the cost base, the difference is your capital gain.

Step 4 If you did not make a capital gain, work out the reduced cost base of the asset

If you did not make a capital gain, you need to calculate a reduced cost base of your asset before you can work out any capital loss.

The reduced cost base is the cost base less any amounts you need to exclude from it. Interest on borrowings and indexation are excluded.

For shares, the cost base and reduced cost base are generally the same.

For units, adjustments may be needed to the cost base or reduced cost base depending on the types of amounts distributed. Your fund should advise you of these amounts in its statements:

• tax-deferred amount-this reduces the cost base and reduced cost base
• CGT-concession amount-if received BEFORE 1 July 2001, this reduces the cost base and reduced cost base (if received ON or AFTER 1 July 2001, it does not affect either your cost base or reduced cost base).
• tax-free amount-this reduces your reduced cost base only
• tax-exempted amount-this does not affect either your cost base or reduced cost base.

Step 5 Did you make a capital loss?

If the capital proceeds are less than your reduced cost base, the difference is your capital loss.

Step 6 Did you make neither a capital gain nor a capital loss?

If the capital proceeds are less than or equal to the cost base but more than the reduced cost base, you have not made a capital gain or a capital loss.

Step 7 Work out your total current year capital gains

Write the total of all of your capital gains for the current year at H item 17 (or H item 9 if you use the tax return for retirees)

If you only had one asset, show the amount of the capital gain relating to that asset. If you have more than one asset (including assets other than shares and units) which resulted in a capital gain, you should include those capital gains in the total at H.

If you had a distribution from a managed fund you need to include this in your total capital gains. You can calculate the amount at step 3 in C1.

If you have any capital losses, do not deduct them from the capital gains before showing the total amount at H.

Step 8 Applying capital losses against capital gains

If you have no capital losses from assets you disposed of this year nor a net capital loss from an earlier year that you were able to carry forward to this year, go to step 9.

If you had capital losses (including net capital losses from earlier years), deduct them from the amount you wrote at H. You may do this in the order that gives you the greatest benefit.

Offsetting your losses

You will probably get the greatest benefit if you deduct capital losses against:

1. capital gains for which neither the indexation method nor the discount method applies (that is, if you bought and sold your shares within 12 months)
2. capital gains calculated using the indexation method, and then
3. capital gains to which the CGT discount can apply.

Note: Losses from personal use assets and collectables

Remember a net capital loss from collectables can only be used to reduce capital gains from collectables. Losses from personal use assets are disregarded. Refer to the Guide to capital gains tax for more information.

If your capital losses (including net capital losses from earlier years) are greater than your capital gains, go to step 11.

Step 9 Applying the CGT discount

If you have any remaining capital gains you can now apply the CGT discount-if it is applicable-and reduce them by 50%.

Remember, you cannot apply the CGT discount to:

• capital gains calculated using the indexation method, and
• CGT assets you bought and sold within 12 months.

Step 10 Work out your net capital gain

At A item 17 (or A item 9 if you use the tax return for retirees) you show the total of your remaining capital gains:

• calculated using the indexation method
• to which the CGT discount of 50% has been applied, and/ or
• calculated using the 'other' method.

Ignore step 11 – it does not apply if you have a capital gain.

Step 11 Work out your carry-forward losses

If your capital losses were greater than your capital gains, you were directed to this step from step 8.

If you have capital losses remaining, you should show '0' (zero) at A on your tax return.

At V, item 17 (or V item 9 if you use the tax return for retirees) show the amount by which your capital losses are greater than your capital gains. You can carry these capital losses forward to be applied against later year capital gains.