Personal investors guide to capital gains tax 2001

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Part A: How capital gains tax applies to you

What is capital gains tax?

Capital gains tax (CGT) refers to the tax you pay on any capital gain you make (for example, from the sale of an asset) that you include in your annual income tax return.

When you sell an asset, this transaction is known as a CGT event . You can only make a capital gain or capital loss if a CGT event happens or you receive a distribution of a capital gain. You show the total of your current year capital gains at label H item 17 in your 2001 tax return for individuals (supplementary section) .

Note: new terms

We may have used some terms that are not familiar to you. The first time these words are used they are linked to their explanation under the heading Explanation of terms .

While we have used the word 'bought' rather than 'acquired' in our examples, you may have acquired your shares or units without paying for them (for example, as a gift or through an inheritance). Similarly, we refer to 'selling' shares or units when you may have disposed of them in some other way (for example, giving them away or transferring them to someone else). All of these disposals are CGT events.

Note: world - wide obligations

Australian residents make a capital gain or capital loss if a CGT event happens to any of their assets anywhere in the world.

Capital gains tax affects your income tax if you have made a net capital gain in your current income year . Your 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. You show your net capital gain at label A item 17.

Handy Hint

You need to keep good records of any assets you have bought or sold so you can correctly work out the amount of capital gain or capital loss you have made when the CGT event happens. You must keep these records for five years after the CGT event has happened.

How to meet your capital gains tax obligations

To work out whether you have a capital gains tax obligation, you need to follow these three main steps:

• Step 1: Decide whether a CGT event has happened
• Step 2: Work out the time of the CGT event
• Step 3: Calculate your capital gain or capital loss.

Step 1 - Decide whether a CGT event has happened

CGT events are the different types of transactions or events which attract capital gains tax. Generally, a CGT event has happened if you have sold (or otherwise disposed of) a CGT asset during 2000 - 01. Other examples of CGT events include when a company makes a payment other than a dividend to you as a shareholder, or when a trust or fund makes a non-assessable payment to you as a unit holder.

For the purposes of this guide, CGT assets include shares and units in a unit trust (including a managed fund).

Also, if a managed fund makes a capital gain and distributes income to you, you are treated as if you made a capital gain from a CGT event.

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.

If you did not have a CGT event, print X in the NO box at label G item 17. If you had a CGT event, print X in the Yes box and read on.

Step 2 - Work out the time of the CGT event

The timing of a CGT event is important because it tells you which income year is affected by your capital gain or capital loss. If you sell an asset to someone else, the CGT event happens when you enter into the contract of sale.

If there is no contract, the CGT event happens when you stop being the asset's owner.

Generally, any capital gain or capital loss you make in relation to a CGT event is disregarded if you acquired the asset before 20 September 1985.

Step 3 - Calculate your capital gain or capital loss

The most common form of capital gain for individuals results from the sale of shares or units, or from a distribution from a managed fund.

There are three ways of calculating your capital gain: the indexation method , the discount method and the 'other' method . The 'other' method applies when the indexation and discount methods do not apply.

The indexation method allows you to increase the value of what your asset has cost (the cost base ) by applying an indexation factor that is based on increases in the Consumer Price Index (CPI) up to September 1999.

If you use the discount method, you do not apply the indexation factor to the cost base, but you can reduce your capital gain by the CGT discount of 50%.

Generally, if you held your shares or units for 12 months or more, you can choose either the discount method or the indexation method to calculate your capital gain, whichever gives you the best result.

However, you cannot use the indexation method for any assets you acquired after 21 September 1999. You do not have to choose the same method for all of your shares or units, even if they are in the same company or fund.

You must use the 'other' 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). To calculate your capital gain using the 'other' method, you simply subtract your cost base from what you have received - your capital proceeds .

If you sold your asset for less than you paid for it, you have made a capital loss. This happens when your reduced cost base is greater than your capital proceeds. The excess is the amount of your capital loss.

The following table explains and compares the three methods of calculating your capital gain.

	Indexation method	Discount method	Other method
Description of method	Allows you to increase the cost base by applying an indexation factor based on CPI up to September 1999	Allows you to halve your capital gain	Basic method of subtracting the cost base from the capital proceeds
When to use each method	Use for shares or units held for 12 months or more, if it produces a better result than the discount method. Only for use with assets acquired before 21/9/99	Use for shares or units held for 12 months or more, if it produces a better result than the indexation method	Use if you have bought and sold your shares or units within 12 months (that is, when the indexation and discount methods do not apply)
How to calculate your capital gain using each method	Apply the relevant indexation factor (see CPI table in appendix 1 ), then subtract the indexed cost base from the capital proceeds (see worked examples in chapter B2 )	Subtract the cost base from the capital proceeds, deduct any capital losses, then divide by 2 (see worked examples in chapter B2 )	Subtract the cost base from the capital proceeds (see chapter B1 )

If you have sold some shares or units in a unit trust (including a managed fund) this income year, go to part B of this guide to find out how to calculate and report your capital gains tax obligation.

If you have a capital gain from a managed fund, the statement you receive from the fund should give you the amounts you need.

If you have received a distribution of a capital gain from a managed fund this income year, go to part C of this guide to find out how to report your capital gains tax obligation.

Exceptions, exemptions, discounts or other concessions

There may be exceptions, exemptions, discounts, roll-over or other concessions that allow you to reduce, defer or disregard your capital gain or capital loss. For example, generally you can disregard any capital gain or capital loss associated with any pre-CGT assets you acquired before 20 September 1985.

For example, if a company in which you hold shares is taken over or merges with another company, you may have a capital gains tax obligation if you are required to dispose of your existing shares. If this happened this income year, you may be able to defer or roll over your CGT obligation until a later CGT event happens. This is known as scrip for scrip roll-over and it does not apply if you make a capital loss.

Another example of a roll-over is in relation to transferring a CGT asset to your former spouse after a marriage breakdown. In this case, you may not have to pay capital gains tax on the transfer, but capital gains tax may need to be paid when a later CGT event happens to the asset (for example, if your former spouse disposes of the asset).

Where to now?

Please go to the parts of this guide that apply to you:

• part B for the sale of shares or units , and/or
• part C for distributions of a capital gain from a managed fund .

Note:

If you have sold a rental property, have assets from a deceased estate, or had several CGT events this income year, this guide does not provide you with enough detail. You need to obtain a copy of the Guide to capital gains tax 2001 to find out how to calculate and report your capital gains tax obligation.

ATO references:
NO NAT 4152