Personal investors guide to capital gains tax 2004

There are three ways of calculating your capital gain from the sale of your shares or units:

• the indexation method
• the discount method, and
• the 'other' method.

The indexation method allows you to increase the amount that 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.

The indexation method can only apply to assets that you acquired before 11.45am (by legal time in the ACT) on 21 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% (after deducting any capital losses you have) provided you have owned the shares or units for at least 12 months.

For assets that qualify for both the indexation and discount methods, you can choose the method that gives you the better result. You do not have to choose the same method for all 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.

You make a capital loss from the sale of your shares or units if their reduced cost base is greater than your capital proceeds. You cannot index amounts included in your reduced cost base.

If you received a distribution of a capital gain from a managed fund, part C of this guide explains how you calculate the amount of that capital gain. You must use the same method as that chosen by the fund.

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

Exemptions and rollovers

There may be an exemption that allows you to disregard your capital gain or capital loss. For example, generally you disregard any capital gain or capital loss associated with any pre-CGT assets (that is, those you acquired before 20 September 1985).

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
• capital gains from CGT assets you bought and sold within 12 months.

Example

• As Fred had owned his shares for at least 12 months, he can reduce his $800 gain by the CGT discount of 50% to arrive at a net capital gain of $400 (cents are not shown):
• $800 x 50% = $400

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 your net capital gain which is 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 net capital gain.

Example

• Fred shows his net capital gain of $400 at A item 17 on his tax return or A item 9 if he uses the tax return for retirees.

If your capital losses (including net capital losses from earlier years) were greater than your capital gains, you were directed to this step from step 8.

If you have capital losses (including net capital losses from earlier years) remaining, do not put anything 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 (including net capital losses from earlier years) are greater than your capital gains. You can carry these capital losses forward to be applied against later year capital gains.

Example

• Continuing the example from step 5, if Fred has no other capital losses, he would not put anything at A and $1,125 at V item 17 on his tax return (or at V item 9 if he uses the tax return for retirees) and he would leave H blank.

The following examples show how CGT works in various situations where people have bought and sold shares and units. They may help you meet your CGT obligation and complete item 17 on your tax return, or item 9 if you use the tax return for retirees.

Example 1

• Sonya has a capital gain from one parcel of shares that she bought after 11.45am (by legal time in the ACT) on 21 September 1999 and sold less than 12 months later.
• In August 2002 Sonya bought 1,000 shares in Tulip Ltd for $1,500 including brokerage and sold them in July 2003 for $2,350. She paid $50 brokerage on the sale. The sale is a CGT event.
• As Sonya bought and sold the shares within 12 months, she uses the 'other' method to calculate her capital gain as she cannot use the indexation or discount method. So her capital gain is:
• $2,350 - ($1,500 + $50) = $800.
• As she has no other CGT event and does not have any capital losses, Sonya completes item 17 on her tax return (or item 9 if she uses the tax return for retirees) as follows:

Example 2

• Andrew has a capital gain from the sale of units which he bought before 11.45am (by legal time in the ACT) on 21 September 1999 and gave to his brother more than 12 months later.
• In May 1999 Andrew bought 1,200 units in Share Trust for $1,275 including brokerage. He gave the units to his brother in August 2003. At that time they were worth $1,595.
• The gift is a CGT event. As Andrew bought the units before 21 September 1999 and he owned them for more than 12 months, he can use the indexation or discount method to calculate his capital gain, whichever gives him the better result.
• Indexation method
• If Andrew calculates his capital gain or capital loss using the indexation method, he indexes the cost of his units and the incidental costs of buying them as follows:

• His indexed cost base is worked out as follows:
• His cost ($1,275) X 1.009
• = $1,286.48
• So his capital gain is:

Discount method

If Andrew uses the discount method, his capital gain is calculated as:

• * Andrew does not have any capital losses. If he did he would deduct any capital losses before applying the discount.
• Andrew chooses the discount method because it gives him a smaller capital gain.
• As he has no other CGT event and does not have any capital losses, Andrew completes item 17 on his tax return as follows:

• Note
• If Andrew had received a non-assessable payment from the fund his cost base may have been reduced and the capital gain may have been greater. For more information, see chapter C2.

Example 3

• Fatima has a capital gain from one parcel of shares which she was given before 11.45am (by legal time in the ACT) on 21 September 1999 and sold more than 12 months later.
• In October 1986 Fatima was given 500 shares in FJM Ltd with a market value of $2,500. She sold the shares in October 2003 for $4,500.
• The sale is a CGT event. As Fatima acquired the shares before 21 September 1999 and owned them for more than 12 months, she can use the indexation or discount method to calculate her capital gain, whichever method gives her the better result.
• Indexation method
• If Fatima calculates her capital gain using the indexation method, the indexation factor is:

• Her indexed cost base is:
• Her cost: ($2,500) X 1.546 = $3,865.00
• So her capital gain is calculated as follows:

• Discount method
• If Fatima uses the discount method, her capital gain is calculated as:

• * Fatima does not have any capital losses. If she did she would deduct any capital losses before applying the discount.
• Fatima chooses the indexation method because it gives her a smaller capital gain.
• As she has no other CGT event and does not have any capital losses, Fatima completes item 17 on her tax return (or item 9 if she uses the tax return for retirees) as follows:

Example 4

• Colin has a capital gain from some units he bought after 11.45am (by legal time in the ACT) on 21 September 1999 and redeemed less than 12 months later.
• Colin bought 500 units in Equity Trust for $3,500 in October 2003 and redeemed them in June 2004 for $5,000 by switching or transferring his units from a share fund to a property fund. The redeeming of units is a CGT event.
• As Colin owned the units for less than 12 months, he calculates his capital gain using the 'other' method. Colin's capital gain is:

• As he has no other CGT event and does not have any capital losses, Colin completes item 17 on his tax return as follows:

• Note: If Colin had received a non-assessable payment from the fund, his cost base may have been adjusted and the capital gain may have been greater. For more information, see chapter C2.

Example 5

• Mei-Ling made a capital gain from some shares she bought after 11.45am (by legal time in the ACT) on 21 September 1999 and sold more than 12 months later. She also has a net capital loss from an earlier income year.
• Mei-Ling bought 400 shares in TKY Ltd for $15,000 in October 1999 and sold them for $23,000 in February 2004. The sale is a CGT event. She also has a net capital loss of $1,000 from an earlier income year that has not been applied against later year capital gains.
• As she bought the shares after 21 September 1999, Mei-Ling cannot use the indexation method. However, as she owned the shares for more than 12 months and sold them after 21 September 1999, she can use the discount method. Her capital gain is:

• As she has no other CGT event, Mei-Ling completes item 17 on her tax return (or item 9 if she uses the tax return for retirees) as follows:

Example 6

• Mario made a capital loss from one parcel of shares he bought before 11.45am (by legal time in the ACT) on 21 September 1999 and sold more than 12 months later.
• In October 1986 Mario purchased 2,500 shares in Machinery Manufacturers Ltd for $2,650 including brokerage. He sold the shares in March 2004 for $2,300 and paid $50 brokerage. Mario also made a capital loss of $350 on some shares he sold in the 1999-2000 income year but had not made any capital gain since then that he could use to offset his capital losses.
• The sale is a CGT event. Mario purchased the Machinery Manufacturers Ltd shares before 11.45am (by legal time in the ACT) on 21 September 1999 but he made a capital loss, so neither the indexation nor the discount method applies.
• Mario calculates his capital loss for the current year as follows:

• The capital losses that Mario can carry forward to reduce capital gains he may make in later income years are:

• As he has no other CGT event, Mario inserts '0' (zero) at A and completes item 17 on his tax return (or item 9 if he uses the tax return for retirees) as follows:

This chapter briefly explains less common situations for personal investors, including:

• rights or options
• non-assessable payments
• share buy-backs
• takeovers and mergers
• demergers
• dividend reinvestment plans
• bonus shares and bonus units, and
• dividends paid by listed investment companies (LIC) that include a LIC capital gain.

Rights or options to acquire shares or units

If you hold shares or units, you may be issued rights or options to acquire additional shares or units at a specified price.

Rights and options issued directly to you from a company or trust for no cost

You are taken to have acquired the rights and options at the same time you acquired the original shares or units. Therefore, if you acquired the original shares or units before 20 September 1985, any capital gain or capital loss you make when the rights or options expire or are sold is disregarded as they are pre-CGT assets.

If you acquired the original shares or units on or after 20 September 1985, you make a capital gain if the capital proceeds on the sale or expiry of the rights or options are more than their cost base. You make a capital loss if the reduced cost base of the rights or options is more than those capital proceeds.

Rights and options you paid to acquire from a company or trust or you acquired from another person

If you acquired your rights or options on or after 20 September 1985, they are treated much like any other CGT asset and are subject to CGT.

There are special rules that apply if you exercise the rights. For more information, or if you acquire rights or options under an employee share scheme, see the publication Guide to capital gains tax.

Non-assessable payments

There can be non-assessable payments in relation to both shares and units.

Non-assessable payments from a company to a shareholder

Non-assessable payments to shareholders are sometimes called a return of capital and are not very common (although companies such as Coca-Cola, BHP and Amcor have made non-assessable payments). If you received a payment from a company in respect of your shares and it was not a dividend, you deduct the amount of the payment from both the cost base and the reduced cost base of your shares.

If the non-assessable payment is greater than the cost base of your shares, you include the excess as a capital gain. If you use the indexation method to work out the amount of this capital gain you cannot use the discount method to work out a capital gain when you later sell the shares or units.

Non-assessable payments from a managed fund to a unit holder

The treatment of these payments is similar to non-assessable payments from a company to a shareholder. For more information, see chapter C2.

Non-assessable payments under a demerger

If you receive a non-assessable payment under an eligible demerger, you do not deduct the payment from the cost base and reduced cost base of your shares or units. Instead, you make adjustments to your cost base and reduced cost base under the demerger rules. You may make a capital gain in respect of the non-assessable payment if it exceeds the cost base of your original share or unit, although you will be able to choose rollover.

An eligible demerger is one that happens on or after 1 July 2002 and satisfies certain tests. The head entity will normally advise shareholders or unitholders if this is the case.

For more information, see the Guide to capital gains tax.

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 balance is treated as your capital proceeds for the share and you compare this amount with your cost base and reduced cost base to work out whether you have made a capital gain or capital loss.

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 rollover for any capital gain you made. This means you can defer your capital gain until a later CGT event happens to your shares. Usually, the takeover company would advise you if the scrip-for-scrip rollover conditions were satisfied.

If you also received some cash from the takeover company you only get rollover on the proportion of the original shares for which you received shares in the takeover company. You will need to apportion the cost base of the original shares between the replacement shares and the cash.

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.

Scrip-for-scrip rollover may also be available to the extent that units in a managed fund are exchanged for units in another managed fund.

For more information about takeovers and mergers, see the Guide to capital gains tax.

A demerger involves the restructuring of a corporate or fixed trust group by splitting its operations into two or more entities or groups. Under a demerger the owners of the head entity of the group (that is, the shareholders of the company or unit holders of the trust) acquire a direct interest (shares or units) in an entity that was formerly part of the group.

If you owned interests in a company or fixed trust that is the head entity of a demerger group and you received new interests in the demerged company or trust, you may be entitled to demerger rollover.

Generally the head entity undertaking the demerger will advise whether you are entitled to rollover but you should seek our advice if you are in any doubt. The Tax Office may have provided advice in the form of a class ruling on a specific demerger, confirming that rollover is available.

Even if you do not choose rollover, you must recalculate the cost base and reduced cost base of each of your original interests in the head entity and your new interests in the demerged entity.

Add up all the capital gains you received from funds (grossed up where necessary) together with any capital gains from other assets. Write the total of all of your capital gains for the current year at H item 17.

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

Example

• Tim's fund also distributed a capital gain of $100 calculated using the other method. Tim shows $900 ($800 + $100) at H item 17 on his tax return.

Step 4 Applying capital losses against capital gains

If you have no capital losses from assets you disposed of this year and no net capital loss from an earlier year that you were able to carry forward to this year, go to step 5.

If you had capital losses (including net capital losses from earlier years) deduct them from your capital gains (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 from capital gains distributed from the fund in the following order:

1. capital gains calculated using the 'other' method
2. capital gains calculated using the indexation method, and then
3. capital gains calculated using the discount method.

If your capital losses (including net capital losses from earlier years) are greater than your capital gains, go to step 7.

Example

• If Tim had a loss of $200 when he sold another CGT asset, he deducts his capital loss ($200) from his capital gain ($900) and arrives at $700. As he applied the loss first against the capital gain calculated using the 'other' method and then against the capital gain calculated using the discount method (after grossing it up), Tim can apply the CGT discount to the remaining $700.

Losses from personal use assets and collectables

A net capital loss from collectables can only be used to reduce capital gains from collectables. Losses from personal use assets must be disregarded. See the Guide to capital gains tax for more information.

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

Remember, you cannot apply the CGT discount to capital gains distributed from the fund calculated using the indexation or 'other' method.

Example

• Tim has applied his capital losses (including net capital losses from earlier years) to his capital gain. He now reduces the amount remaining by 50%:
• $700 x 50% = $350
• Tim has a capital gain of $350.

Note

• If the capital gain from the managed fund qualified for the 50% small business CGT reduction, reduce it by 50% after you have reduced it by the 50% CGT discount if that also applied.

Step 6 Work out your net capital gain

Show at A item 17 the amount remaining after completing steps 1-5. This is your net capital gain for the year. Ignore step 7.

Example

• Tim shows $350 at A item 17 on his tax return.

If your capital losses (including net capital losses from earlier years) were greater than your capital gains, you were directed to this step from step 4.

If you have capital losses (including net capital losses from earlier years) remaining, you should not put anything at A.

At V show the amount by which your capital losses (including net capital losses from earlier years) are greater than your capital gains. You carry these capital losses forward to be applied against later year capital gains.

More information

For more information about CGT and managed fund distributions, see the Guide to capital gains tax.

Non-assessable payments from a managed fund to a unit holder are common and may be shown on your statement from the fund as:

• tax-free amounts (where certain tax concessions received by the fund mean it can pay greater distributions to its unit holders)
• CGT-concession amounts (the CGT discount component of any actual distribution)
• tax-exempted amounts (generally made up of exempt income of the fund, amounts on which the fund has already paid tax or income you had to repay to the fund), or
• tax-deferred amounts (other non-assessable amounts, including indexation received by the fund on its capital gains and accounting differences in income).

Note

• You cannot make a capital loss from a non-assessable payment.

CGT-concession amounts received after 30 June 2001 and tax-exempted amounts (whenever they are received) do not affect your cost base and reduced cost base. However, if your statement shows any tax-deferred or tax-free amounts, you adjust the cost base and reduced cost base of your units for future purposes as follows:

• cost base - deduct the tax-deferred amount, or
• reduced cost base - deduct both the tax-deferred and tax-free amounts.

If the tax-deferred amount is greater than the cost base of your units, you include the excess as a capital gain. You can use the indexation method if you bought your units before 11.45am (by legal time in the ACT) on 21 September 1999.

A CGT-concession amount received before 1 July 2001 is taken off the cost base and reduced cost base.

Before 1 July 2001 payment of an amount associated with building allowances was treated as a tax-free amount. Payments of these amounts on or after 1 July 2001 are treated as tax-deferred amounts.

The following worked examples take the steps explained in chapter C1 and put them into different scenarios to demonstrate how they work.

If you have received a distribution from a managed fund, you may be able to apply one or more of these examples to your circumstances to help you work out your CGT obligation for 2003-04 and complete item 17 on your tax return.

Example 1: Bob has received a non-assessable amount.

• Bob owns units in OZ Investments Fund which distributed income to him for the year ending 30 June 2004. The fund gave him a statement showing his distribution included the following capital gains:
  • $100 calculated using the discount method (grossed-up amount $200)
  • $75 calculated using the indexation method, and
  • $28 calculated using the 'other' method.

• These capital gains add up to $203.
• The statement shows Bob's distribution did not include a tax-free amount but it did include:

• $105 tax-deferred amount.

• From his records, Bob knows that the cost base and reduced cost base of his units are $1,200 and $1,050 respectively.
• Bob has no other capital gains or capital losses for the 2003-04 income year.
• Bob follows these steps to work out the amounts to show on his tax return.
• As Bob has a capital gain which the fund reduced by 50% under the CGT discount method ($100), he includes the grossed-up amount ($200) in his total current year capital gains.
• To work out his total current year capital gains Bob adds the grossed-up amount to his capital gains calculated using the indexation method and 'other' method:
  • $200 + $75 + $28 = $303
• As Bob has no other capital gains or capital losses and he must use the discount method in relation to the discount gain from the trust, his net capital gain is equal to the amount of capital gain included in his distribution from the fund ($203).
• Bob completes item 17 on his tax return as follows:

• CGT consequences for Bob
• The tax-deferred amount Bob received is not included in his income or capital gains but it affects the cost base and reduced cost base of his units in OZ Investments Fund for future income years.
• Bob deducts the tax-deferred amount from both the cost base and reduced cost base of his units as follows:

Remember

• A CGT-concession amount is only taken off the cost base and reduced cost base if it was received before 1 July 2001.

Example 2: Ilena's capital loss is greater than her capital gains calculated under the indexation method and 'other' method.

• Ilena invested in XYZ Managed Fund. The fund makes a distribution to Ilena for the year ending 30 June 2004 and provides her with a statement that shows her distribution included:
  • $65 discounted capital gain
  • $50 capital gain calculated using the 'other' method, and
  • $40 capital gain calculated using the indexation method.

• The statement shows Ilena's distribution also included:
  • $30 tax-deferred amount, and
  • $35 tax-free amount.

• Ilena has no other capital gain but made a capital loss of $100 when she sold some shares during the year.
• From her records, Ilena knows the cost base of her units is $5,000 and their reduced cost base is $4,700.
• Ilena has to treat the capital gain component of her fund distribution as if she made the capital gain. To complete her tax return, Ilena must identify the capital gain component of her fund distribution and work out her net capital gain.
• Ilena follows these steps to work out the amounts to show at item 17 on her tax return.
• As Ilena has a $65 capital gain which the fund reduced by the CGT discount of 50%, she must gross up the capital gain. She does this by multiplying the amount of the discounted capital gain by two:
  • $65 x 2 = $130
• To work out her total current year capital gains Ilena adds her grossed-up capital gain to her capital gains calculated under the indexation method and 'other' method:
  • $130 + $50 + $40 = $220
• She shows her total current year capital gains ($220) at H item 17 on her tax return.
• Now Ilena subtracts her capital losses from her capital gains.
• Ilena can choose which capital gains she subtracts her capital losses from first. In her case, she will receive a better result if she:
• 1. subtracts as much as possible of her capital losses (which were $100) against her indexed and 'other' method capital gains. Her gains under these methods were $40 and $50 respectively, a total of $90, so she subtracts $90 of her capital losses against these capital gains:
  • $90 - $90 = $0 (indexed and 'other' method capital gains)
• 2. subtracts her remaining capital losses after step 1 ($10) against her discounted capital gains ($130):
  • $130 - $10 = $120 (discounted capital gains)
• 3. applies the CGT discount to her remaining discounted capital gains:
  • ($120 X 50%) = $60 (discounted capital gains)
• Finally, Ilena adds up the capital gains remaining to arrive at her net capital gain:
  • $0 (indexed and 'other') + $60 (discounted) = $60 net capital gain
• Ilena completes item 17 on her tax return as follows:

• CGT consequences for Ilena
• The tax-deferred and tax-free amounts Ilena received are not included in her income or her capital gain but the tax-deferred amount affects the cost base and reduced cost base of her units in XYZ Managed Fund for future income years. The tax-free amount affects her reduced cost base.
• Ilena reduces the cost base and reduced cost base of her units as follows:

Appendixes

For more information about share transactions in earlier years, visit our website at www.ato.gov.au

• All groups: weighted average of eight capital cities

• *If you use the indexation method to calculate your capital gain, the indexation factor is based on increases in the CPI up to September 1999 only.

Explanation of terms

You may make a capital gain from a CGT event such as the sale of an asset. Generally your capital gain is the difference between your asset's cost base (what you paid for it) and your capital proceeds (what you received 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 (CGT) refers to the income tax you pay on any net capital gain you make and include on your annual income tax return. For example, when you sell (or otherwise dispose of) an asset as part of a CGT event, you are subject to CGT.

Generally, you may make a capital loss as a result of a CGT event if you received less capital proceeds for an asset than its reduced cost base (what you paid for it). Your capital loss is your reduced cost base less your 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 value of shares (or units) you receive on a demerger
• the value of shares (or units) and the amount of cash you receive on a merger/takeover, or
• the market value if you give them away.

The CGT assets covered by this guide are shares and units.

However, CGT assets also include collectables (such as jewellery), assets for personal use (such as furniture or a boat) and other assets (such as an investment property, vacant land or a holiday home). If you have made a capital gain from the sale of one or more of these assets, you may need to read the Guide to capital gains tax.

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

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

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

• money you paid or property you gave for the asset
• certain incidental costs of acquiring or selling it - brokerage, stamp duty, investment consultants fees and legal fees
• 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 establish, preserve or defend your ownership 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.

This generally applies to CGT events that happen on or after 1 July 2002 to interests that you own in the head entity of a demerger group and a company or fixed trust is demerged from the group. Generally the head entity undertaking the demerger will advise owners whether demerger rollover is available but you should seek our advice if you are in any doubt. The Tax Office may have provided advice in the form of a class ruling on a specific demerger, confirming that the rollover is available.

This rollover allows you to defer your CGT obligation until a later CGT event happens to your original or your new shares or units.

A company demutualises when it changes its membership interests to shares. If you received shares as part of a demutualisation of an Australian insurance company (for example, AMP or NRMA), you are not subject to CGT until 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.

If you hold a policy in an overseas insurance company that demutualises, you may be subject to CGT at the time of the demutualisation.

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

• the CGT event happened after 11.45am (by legal time in the ACT) 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 can reduce your capital gain by the CGT discount of 50%. 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 (by legal time in the ACT) on 21 September 1999, you can choose either the discount method or the indexation method, whichever gives you the better result.

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 before you apply any capital losses and the CGT discount.

Under these plans, shareholders can choose to use their dividend to acquire additional shares in the company instead of receiving a cash payment. For CGT 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.

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.

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

The indexation factor is worked out based on the Consumer Price Index (CPI) in appendix 2 of this guide.

The indexation of the cost base of an asset is frozen as at 30 September 1999. For CGT events after that time the indexation factor is the CPI for the September 1999 quarter (123.4) divided by the CPI for the quarter in which you incurred costs relating to the asset. The result is rounded to three decimal places. You may have different indexation factors for different amounts included in your cost base.

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

This is an amount notionally included in a dividend from a listed investment company (LIC) which represents a capital gain made by that company. The amount is not included as a capital gain under item 17 on the tax return, or item 9 if you use the tax return for retirees. (Refer to the instructions for dividend income at item 11 on the tax return or item 8 if you use the tax return for retirees and this example.)

A 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 or small business concession to which you are entitled.

You show the result at A item 17 on your tax return, or item 9 if you use the tax return for retirees.

A non-assessable payment is a payment received from a company or fund that is not assessed as part of your income on 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).

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 non-capital costs of ownership such as interest on monies borrowed to buy the asset.

Rollover allows a capital gain to be deferred or disregarded until a later CGT event happens.

This can apply 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 rollover conditions have been satisfied. This rollover allows you to defer your CGT obligation until a later CGT event happens to your shares or units.

You may only be eligible for partial rollover 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 Tax Office.

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.

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 rollover.

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.

These amounts include indexation received by a managed fund on its capital gains and accounting differences in income. Tax-deferred amounts reduce both the cost base and reduced cost base of your units in a managed fund.

These amounts are generally made up of exempt income of the managed fund - such as amounts on which the fund has already paid tax or income you had to repay to the fund. Tax-exempted amounts do not affect the cost base and reduced cost base of your units in a managed fund.

These amounts allow the managed fund to pay a greater distribution to its unit holders. This is due to certain tax concessions funds can receive. Tax-free amounts affect the reduced cost base but not the cost base of your units in a managed fund.

More information

This guide only covers basic capital gains tax issues relating to shares and managed funds for personal investors and is not designed to cover all circumstances.

For the Tax Office's most up-to-date and comprehensive information about capital gains tax, visit our website at www.ato.gov.au

Publications referred to in this guide are: