Advanced guide to capital gains tax concessions for small business

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Chapter 1 - About capital gains tax

What is capital gains tax?

Capital gains tax (CGT) is not a separate tax but the amount of income tax that you pay on any capital gain that you make.

You must include the net capital gain that you make in an income year in your assessable income for that year. There is no separate tax on capital gains, rather, the 'capital gains tax' forms part of your income tax, because you include your capital gain on your tax return.

Consequently you are taxed on your net capital gain at the normal marginal tax rate that applies to your taxable income.

Your net capital gain is the difference between your total capital gains for the year and your total capital losses (from your business and other assets), less any relevant CGT discount or concessions.

CGT events

A capital gain or capital loss is made when certain events or transactions happen. These are called CGT events . Most CGT events involve a CGT asset. Some CGT events, such as the disposal of a CGT asset, happen often and affect many different taxpayers. Other CGT events are rare and affect only a few taxpayers, for example, those concerned directly with capital proceeds and not involving a CGT asset.

CGT assets

The most common CGT assets are land, buildings, shares in a company, and units in a unit trust. Less well-known CGT assets include contractual rights, options, foreign currency, leases, licences, and goodwill.

Capital gains and losses

In general, you make a capital gain if you receive an amount from a CGT event (such as the disposal of a CGT asset) that is more than your total costs associated with that event. You make a capital loss if you receive an amount from a CGT event that is less than the total costs associated with that event.

In some cases, you are taken to have received the market value of the CGT asset even if you received a different amount or nothing at all, for example, when you give an asset away.

This rule is especially relevant to family succession transactions, for example, where you gift (give) the family farm or other business assets to your children.

You can use a capital loss only to reduce a capital gain, not to reduce other income. You can generally carry forward any unused capital losses to a later income year and apply them against capital gains in that year. Generally, you can disregard any capital gain or loss made on an asset you acquired before 20 September 1985.

ATO references:
NO NAT 3359