Guide to capital gains tax 2001

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Explanation of Terms

Assessable income

This is all the income you have received that should be included in your income tax return. Generally, assessable income does not include non-assessable payments from a unit trust, including a managed fund.

Bonus shares

Bonus shares are additional shares a shareholder receives as a dividend in whole or in part. You may also pay an amount to obtain them.

Bonus units

Bonus units are additional units a unit holder receives from the trust. The unit holder may also be required to pay an amount to obtain them.

Calls on shares

A company may sometimes issue a share at less than its par or face value and then make calls to pay up part or all of the remaining outstanding balance.

Capital gain

You may make a capital gain (or profit) as a result of a CGT event, for example when you sell an asset for more than you paid for it. You can also make a capital gain if a managed fund or other unit trust distributes a capital gain to you.

Capital gains tax

Capital gains tax (CGT) is the tax you pay on any capital gain you make and include in your annual income tax return. For example, when you buy (or otherwise acquire) or sell (or otherwise dispose of) an asset as part of a CGT event, you are subject to capital gains tax.

Capital improvements

You make a capital improvement to an asset when you incur expenditure to improve it that is then reflected in its value and does not include a repair that is otherwise deductible for income tax purposes.

Capital loss

Generally, you may make a capital loss as a result of a CGT event if you sold an asset for less than you paid for it. Your capital loss is the difference between your reduced cost base and your capital proceeds.

Capital proceeds

Capital proceeds is the term used to describe the amount of money or the value of any property you receive or are entitled to receive as a result of a CGT event. For shares or units, capital proceeds may be:

• the amount you receive from the purchaser
• the amount you receive from a liquidator
• the amount you receive on a merger/ takeover, or
• the market value if you give them away.

CGT asset

CGT assets include shares, units in a unit trust, collectables (such as jewellery) , assets for personal use (such as furniture or a boat), and other assets (such as an investment property).

CGT-concession amounts

These amounts are the CGT discount component of any actual distribution from a managed fund.

CGT discount

The CGT discount is the amount (or percentage) by which a gain may be reduced under the discount method (see Discount method .

CGT event

A CGT event happens when a transaction takes place such as the sale or purchase of a CGT asset. The result is usually a capital gain or capital loss.

Convertible note

A convertible note is another type of investment you can make in a company or unit trust. A convertible note earns interest on the amount you pay to acquire the note until the note's expiry date. On expiry of the note, you can either ask for the return of the money paid or convert that amount to acquire new shares or units.

Cost base

The cost base of an asset is generally what it cost you. It is made up of five elements:

• money you paid for the asset
• incidental costs of acquiring or selling it (for example, brokers fees and stamp duty)
• non-capital costs associated with owning it (generally this will not apply to shares or units because you will usually have claimed these costs as tax deductions)
• costs associated with increasing its value (for example, if you paid a call on shares) , and
• what it has cost you to preserve or defend your title or rights to it.

The cost base for a share or unit may need to be reduced by the amount of any non-assessable payment you receive from the company or fund. Generally, interest you have paid on money borrowed to buy shares or units will not form part of your cost base.

Debt forgiveness

A debt is forgiven if you are freed from the obligation to pay it. A commercial debt that is forgiven may reduce your capital loss, your cost base or your reduced cost base.

Demutualisation

A company demutualises when it changes its membership interests to shares. If you received shares as part of a demutualisation of an insurance company (for example the NRMA), you may be subject to capital gains tax when you sell the shares.

Usually the company will advise you of your cost base for the shares you received. The company may give you the choice of keeping the shares they have given you or of selling them and giving you the capital proceeds.

Discount method

The discount method is one of the ways to calculate your capital gain if:

• the CGT event happened after 11.45am on 21 September 1999, and
• you acquired the asset at least 12 months before the CGT event.

If you use the discount method, you do not index the cost base, but you may be able to reduce your capital gain by the CGT discount. However, you must first reduce your capital gains by the amount of all your available capital losses (both current year and prior years) , before you discount any remaining capital gain.

If you acquired the asset before 11.45am on 21 September 1999, you may be able to choose either the discount method or the indexation method, whichever gives you the best result.

Discounted capital gain

A discounted capital gain is a capital gain that has been reduced by the CGT discount. If the discounted capital gain has been received from a managed fund, the amount will need to be grossed up in your income tax return before you apply any capital losses and then the CGT discount.

Dividend reinvestment plans

Under these plans, shareholders can choose to have their dividend used to acquire additional shares in the company instead of receiving a cash payment. For capital gains tax purposes, you are treated as if you received a cash dividend and then used it to buy additional shares. Each share (or parcel of shares) received in this way is treated as a separate asset when the shares are issued to you.

Dwelling

A dwelling can be any building or part of a building suitable for residential accommodation. Examples include a home, an apartment, a strata title unit or a unit in a retirement village.

Employee share schemes

If you acquired shares at a discount under an employee share scheme, you would have included the amount of the discount in your assessable income in your tax return.

For capital gains tax purposes, the cost base of the shares is the amount paid to the company when you acquired them, plus the amount of the discount included in your assessable income under the ordinary tax provisions.

Gross up

Grossing up applies to unit holders who are entitled to a share of the fund's income that includes a capital gain reduced by the CGT discount. In this case, you 'gross up' your capital gain by multiplying by two your share of any discounted capital gain you have received from the fund.

Income year

The income year is the financial year relating to your current income tax return.

Indexation factor

The factor is worked out based on the Consumer Price Index (CPI) amounts at appendix 1 of this guide.

The indexation factor is the CPI figure for the September 1999 quarter (123.4) , divided by the CPI figure for the quarter in which you incurred costs relating to the asset. The result is rounded to three decimal places. The indexation of the cost base of an asset is frozen as at 30 September 1999.

Indexation method

The indexation method is one of the ways to calculate your capital gain if you bought a CGT asset before 11.45am on 21 September 1999. This method allows you to increase the cost base by applying an indexation factor (based on increases in the Consumer Price Index up to September 1999).

You cannot use the indexation method for:

• CGT assets bought after 11.45am on 21 September 1999, or
• expenditure relating to a CGT asset acquired after that date.

You may prefer to use the discount method for CGT events after 21 September 1999 if that method gives you the best result.

Main residence

Your main residence is your home - that is, the dwelling you regard as your main place of residence and nominate as such for any CGT concessions dealing with the disposal of a main residence.

Main residence exemption

Generally, you can ignore a capital gain or capital loss from a CGT event that happens to a dwelling that is your main residence (also referred to as 'your home').

Managed fund

A managed fund is a type of unit trust. Managed funds include property trusts, share trusts, equity trusts, growth trusts, imputation trusts and balanced funds.

Net capital gain

The net capital gain is the difference between your total capital gains for the year and your total capital losses (including capital losses from prior years) , less any CGT discount to which you are entitled.

Non-assessable payment

A non-assessable payment is a payment received from a company or fund that is not assessed as part of your income in your income tax return. This includes some distributions from unit trusts and managed funds and, less commonly, from companies.

'Other' method

To calculate your capital gain using the 'other' method, you subtract your cost base from your capital proceeds. You must use this method for any shares or units you have bought and sold within 12 months (that is, when the indexation and discount methods do not apply) .

Ownership interest

You have an ownership interest if you own a dwelling or land and/ or meet the conditions outlined in chapter 6.

Reduced cost base

The reduced cost base is the amount you take into account when you are working out whether you have made a capital loss when a CGT event happens. The reduced cost base may need to have amounts deducted from it such as non-assessable payments. The reduced cost base does not include indexation or interest on monies borrowed.

Roll-over

Roll-over allows a capital gain to be deferred or disregarded until a later CGT event happens.

Scrip for scrip roll-over

This generally applies to CGT events that happen on or after 10 December 1999 in the case of a takeover or merger of a company or fund in which you have holdings. The company or fund would usually advise you if the roll-over conditions have been satisfied. This roll-over allows you to defer your capital gains tax obligation until a later CGT event happens to your shares or units.

You may only be eligible for partial roll-over if you received shares (or units) plus cash for your original shares. In that case, if the information provided by the company or fund is not sufficient for you to calculate your capital gain, you may need to seek advice from the ATO.

Share buy-backs

If you disposed of shares back to a company under a buy-back arrangement, you may have made a capital gain or capital loss.

Some of the buy-back price may have been treated as a dividend for tax purposes. The time you make the capital gain or capital loss will depend on the conditions of the particular buy-back offer.

Takeovers and mergers

If a company in which you held shares was taken over and you received new shares in the takeover company, you may be entitled to scrip for scrip roll-over.

If the scrip-for-scrip conditions were not satisfied, your capital proceeds for your original shares will be the total of any cash and the market value of the new shares you received.

Tax-advantaged entity

A tax-advantaged entity is a tax-exempt entity, or the trustee of:

• a complying superannuation fund
• a complying approved deposit fund, or
• a pooled superannuation fund.

Tax-deferred amounts

These amounts include indexation allowed to a trust on its capital gains and accounting differences in income.

Tax-exempted amounts

These amounts are generally made up of exempt income of the trust, amounts on which the trust has already paid tax, or income you had to repay to the trust. Tax-exempted amounts do not affect your cost base or your reduced cost base.

Tax-free amounts

These amounts allow the trust to pay greater distributions to its beneficiaries. This is due to certain tax concessions trusts can receive (for example, deductions for the cost of buildings).

Unit trust

A unit trust is a trust or fund that is divided into units representing capital and income entitlements. Units may be traded or redeemed (including the switching and transferring of units). A managed fund is a type of unit trust.

Worksheets

Capital Gain or Loss Worksheet

Download a copy of the Capital Gain or Loss Worksheet here .

This worksheet helps you calculate a capital gain for each CGT asset or any other CGT event using the indexation method, the discount method and/ or the 'other' method. It also helps you calculate a capital loss.

Notes for this worksheet:

1 CGT event

A capital gain or capital loss is made if certain events or transactions (called CGT events) happen. Most commonly, CGT events happen to a CGT asset (for example, the disposal of a CGT asset) but some CGT events can happen without involving a CGT asset. For more information about CGT events refer to the Guide to capital gains tax 2001.

2 Indexation method*

For CGT assets acquired before 11.45am by legal time in the ACT on 21 September 1999, the indexation of the cost base of an asset is frozen as at 30 September 1999. Individuals, trusts and superannuation entities can choose to use either the cost base indexed, frozen as at 30 September 1999, or the CGT discount.

3 Discount method*

If a CGT event happens in relation to a CGT asset after 11.45am by legal time in the ACT on 21 September 1999 and the asset was acquired at least 12 months before the CGT event, you may be entitled to discount the capital gain after applying capital losses. The discount percentage for an individual or trust is 50% and for a complying superannuation entity is 33 1 / 3 %. Companies (other than those life insurance companies and friendly societies which carry on life insurance business that are entitled to the CGT discount in respect of their complying superannuation business) are not eligible for the CGT discount. Current year capital losses and then prior year net capital losses are applied against current year capital gains before applying the CGT discount. If any capital gains qualify for the CGT small business concessions, those concessions are then applied to each capital gain.

* Note: For CGT assets acquired before 11.45am by legal time in the ACT on 21 September 1999, you have the option of choosing the CGT discount or calculating the capital gain using indexation frozen as at 30 September 1999. Calculate your capital gain under each option to determine the best result in your particular circumstances.

4 Other CGT assets and any other CGT events

This category is for a capital gain or loss made from a CGT asset or any other CGT event that is not from shares and units (in unit trusts), real estate or a collectable. Capital gains from personal use assets are included here. If a personal use asset was acquired for $10 000 or less, any capital gain is disregarded. Capital losses from personal use assets are disregarded.

* Note: Plant: A capital gain or loss from plant is also disregarded. For CGT events after 11.45am by legal time in the ACT on 21 September 1999, any capital gain or capital loss on the disposal of plant is treated as an additional form of balancing adjustment under the plant depreciation provisions.

5 Collectables

If a collectable, for example jewellery or an antique, was acquired for $500 or less, any capital gain or loss is disregarded. Capital losses from collectables can only be used to offset capital gains from collectables.

6 Acquisition or purchase cost

This is money you paid or property you gave or you are required to pay or give to acquire a CGT asset. The market value of any property you gave, or are required to give, is worked out at the time of acquisition. Modifications and special rules may apply to this element of the cost base, for example, the market value substitution rule.

7 Incidental costs that relate to a CGT event

This includes the incidental costs of disposal of a CGT asset or, if there is no disposal of a CGT asset, those incidental costs that relate to the CGT event.

8 Non-capital costs of ownership

Non-capital costs of ownership include interest on borrowed money, rates and land tax, and the costs of repairing or maintaining the CGT asset. They are included in the cost base provided the CGT asset was acquired after 20 August 1991. These costs cannot be indexed or used to work out a capital loss. Non-capital costs of ownership are not included in the cost base of collectables or personal use assets.

9 Cost base and reduced cost base

For the cost base, exclude all expenditure recouped or that has been deducted or can be deducted on assets acquired after 7.30pm by legal time in the ACT on 13 May 1997. For assets acquired before this time, exclude all expenditure recouped, or in respect of incidental costs and non-capital costs, that have been deducted or can be deducted. In some cases, cost base reductions are made before indexing (for example, recouped expenditure) in others, after indexing (for example, special building write-off deduction). For the reduced cost base, exclude any expenditure recouped or that has been deducted or can be deducted or is a non-capital cost of ownership. Indexation does not apply to the reduced cost base.

10 Indexation factor

Indexation is not relevant to:

• expenditure incurred after 11.45am by legal time in the ACT on 21 September 1999 relating to a CGT asset acquired before that time, or
• expenditure relating to a CGT asset acquired after that time.

The cost base includes indexation, frozen as at 30 September 1999, only if the CGT asset was acquired at or before 11.45am by legal time in the ACT on 21 September 1999 and has been owned for at least 12 months. There are some exceptions, for example, roll-overs and assets inherited from a deceased estate. Indexation is not available for non-capital costs of ownership and it is not relevant to the reduced cost base. The indexation factor is an amount equal to the Consumer Price Index (CPI) figure for the quarter of the year in which the CGT event happened to the asset, divided by the CPI figure for the quarter of the year in which you incurred the expenditure included in any of the cost base elements (except the third element, which is non-capital costs of ownership). A list of CPI figures is included in Appendix 1 of the Guide to capital gains tax 2001 .

11 Capital proceeds

This is money and the market value of any property that has been received or is entitled to be received, in respect of the CGT event happening. Modifications and special rules may apply to change the capital proceeds for certain CGT events. If the capital proceeds are greater than the cost base, a capital gain is made. If the capital proceeds are less than the reduced cost base, a capital loss is made. If the capital proceeds are between the cost base, or if applicable the indexed cost base, and the reduced cost base, neither a capital gain nor a capital loss is made.

12 Capital losses

Capital losses from collectables can only be used to offset capital gains from collectables. Capital losses from personal use assets are disregarded. You cannot deduct a net capital loss from your assessable income. If you became a bankrupt during the year, prior year net capital losses are disregarded.

CGT summary worksheet

Download a copy of the CGT summary worksheet here .

This worksheet is for the use of individuals (including individual partners in partnership), companies, trusts and funds.

Capital gains tax (CGT) schedule 2001

Download a copy of the Capital gains tax (CGT) schedule 2001 here .

Date Issued: Monday, August 25, 2003

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Copyright

Commonwealth of Australia 2004

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ATO references:
NO NAT 4151