Guide to capital gains tax 2004

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Introduction

This guide is designed to help you work out whether any of the assets you own (or may own in the future), and any events that happen to you are subject to capital gains tax (CGT). Where they are, it tells you how to work out your capital gain or capital loss. It also covers what records you need to keep.

Consolidated income taxation of corporate groups

The rules that apply to members of a consolidated group modify the application of the capital gains tax rules. Consolidation is explained in detail in the Consolidation reference manual . To get other consolidation products, or if you have technical tax enquiries, phone the Tax Reform Infoline on 13 24 78 or visit www.ato.gov.au .

• * Unfamiliar terms
• We may use some terms that you are not familiar with. These words are printed in red the first time they are used and explained in Explanation of terms . Generally they are also explained in more detail in the section where they first appear.
• While we have sometimes used the word 'bought' rather than 'acquired', you may have acquired an asset subject to capital gains tax (a CGT asset) without paying for it (for example, as a gift or through an inheritance). Similarly, we refer to 'selling' such 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). Whether by sale or by any other means, all of these disposals are CGT events.

Your tax return

If you have a capital gain or capital loss for 2003-04, this guide will help you - whether you are an individual or an entity (company, trust or fund) - to complete the capital gains item on a tax return.

Worksheets

You may wish to use the two CGT worksheets to help you keep track of your records and make sure you pay no more CGT than necessary.

There is a:

• Capital gain or capital loss worksheet for working out your capital gain or capital loss for each CGT 'event', and a
• CGT summary worksheet to help you summarise your capital gains and capital losses and produce the final net amount you need to include on your tax return.

Capital gains tax schedule

If you are a company, trust or fund with total capital gains or capital losses of more than $10,000 this income year, you must complete a Capital gains tax (CGT) schedule 2004. Partnerships and individual paper tax preparers are not required to lodge a schedule.

The CGT schedule is explained in detail in part C .

What's new

There are a number of recent and proposed CGT changes to bear in mind when calculating your capital gain or capital loss.

Convertible notes

There has been a change to the tax treatment of convertible notes issued by a company after 14 May 2002 if the notes are traditional securities. Under the change:

• any gains you make when these notes are converted or exchanged for ordinary shares in a company will not be ordinary income at the time of conversion or exchange, and any losses you make will not be deductible
• instead, any gains or losses you make on the later sale or disposal of the shares (incorporating any gain or loss that would have been made on the conversion or exchange of the notes) will be:
  • subject to CGT if you are an ordinary investor, or
  • ordinary income (or deductible, in the case of a loss) if you are in the business of trading in shares and other securities.

For more information, get the publication You and your shares .

Foreign exchange gains and losses

New legislation dealing with foreign exchange (forex) gains and losses generally applies from 1 July 2003. The legislation introduces CGT events K10 and K11. The new CGT events mean that short-term forex gains or losses arising under a transaction for the acquisition or disposal of certain capital assets are integrated into the tax treatment of the capital asset or are matched to the character of the gain or loss that would arise from the disposal of the asset. For the new rules to apply, the due date for payment must be within 12 months of acquiring the asset or disposing of it. Taxpayers could choose, generally by 16 January 2004, not to have this rule apply so forex gains and losses were instead assessable or deductible. For more information, refer to 'Forex - the 12 month rule' on our website at www.ato.gov.au .

GST input tax credits

The Government has introduced legislation into Parliament to ensure that GST net input tax credits are excluded from the cost base, reduced cost base and other relevant amounts used for the purposes of working out the amount of a capital gain or capital loss. The amendments will apply to CGT events that happen after 19 February 2004. (The existing law provides for input tax credits to be excluded only from the first, second and third elements of the cost base of assets acquired after 7.30pm - by legal time in the ACT - on 13 May 1997.)

If you have excluded certain GST input tax credits when calculating a capital gain or capital loss for a CGT event which happened on or before 19 February 2004, you may be entitled to apply for an amended assessment - refer to Draft Taxation Determination TD 2004/D3 - Capital gains: are input tax credits excluded from a CGT asset's cost base and reduced cost base worked out under sections 110-25 and 110-55 of the Income Tax Assessment Act and from other equivalent amounts used in working out a capital gain or loss? and other information on our website at www.ato.gov.au .

Rollover for financial service providers

The Government has introduced legislation into Parliament to provide automatic CGT rollover for financial service providers on transition to the financial services reform (FSR) regime when, during the FSR transitional period (11 March 2002 to 10 March 2004):

• an existing statutory licence, registration or authority is replaced with an Australian financial service licence
• a qualified Australian financial service licence is replaced with an Australian financial service licence, and
• an intangible CGT asset is replaced with another intangible CGT asset.

The legislation is expected to apply to CGT events happening on or after 11 March 2002.

Exemption for certain Second World War payments

The Government has introduced legislation into Parliament to exempt Australian residents from income tax and CGT on all Second World War compensation payments received on or after 1 July 2001 where the payment relates to suffering from a wrong or injury and/or property loss through persecution (or flight from persecution).

Sugar exit grants

Legislation has been passed to exempt any capital gain or capital loss you make from a CGT event relating directly to a sugar industry exit grant paid under the Sugar Industry Reform Program.

Foreign hybrids

If you have an investment in a foreign hybrid, the Government has introduced legislation into Parliament which will change the tax treatment from 1 July 2003 or optionally from 1 July 2002. A foreign hybrid is an entity that is taxed in Australia as a company but taxed overseas as a partnership. This can include a limited partnership, a limited liability partnership and a US limited liability company. Investors in these entities are now treated for Australian tax purposes as having a partnership interest. Previously, the investors were treated as shareholders and distributions they received were taxed as dividends. When the change becomes law, more information will be available on our website at www.ato.gov.au .

Shares in foreign companies

The Government has introduced legislation into Parliament to disregard capital gains and capital losses made on certain disposals by Australian companies of their shares in foreign companies with underlying active businesses. The proposed legislation will also reduce attributable income arising from certain CGT events happening to shares owned by a controlled foreign company (CFC) in a foreign company.

The changes will only apply if:

• the company held a direct voting percentage in the foreign company of at least 10%, and
• the shares were held by the company for a continuous period of at least 12 months in the two years before the CGT event.

It is intended that the changes apply to CGT events happening on or after 1 April 2004. For more information call the Tax Reform Infoline on 13 24 78 .

Budget announcements

Worthless shares

On 11 May 2004, as part of the Budget, the Government announced proposed changes to the law allowing shareholders to choose to make a capital loss where any insolvency practitioner (not just a liquidator) declares in writing that shares are worthless. The new law would also apply to securities other than shares. The Government's intention is that the change will apply to declarations made after the date the amending law receives royal assent.

Testamentary gifts

On 11 May 2004, as part of the Budget, the Government announced that it proposes to remove the condition that a testamentary gift of property to a deductible gift recipient must be independently valued at greater than $5,000 before a CGT exemption can apply to the gift. The Government's intention is that the change will apply to gifts made after the date the amending law receives royal assent.

ATO references:
NO NAT 4151