Guide to capital gains tax 2010

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Introduction

This guide will help you work out whether any of the assets you own (or may own in the future), and any events that happen, are subject to 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.

New terms We may use some terms that are new to you. These words are explained in Definitions . 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 CGT (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

Whether you are an individual or an entity (company, trust or fund), if you have a capital gain or capital loss for 2009-10, this guide will help you to complete the capital gains item on your tax return.

Worksheets

You may wish to use the two CGT worksheets provided 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 (PDF, 96KB) for working out your capital gain or capital loss for each CGT event
• a CGT summary worksheet for 2009-10 tax returns (PDF, 210KB) (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.

You can print out these forms and complete them as you work through the guide.

CGT 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 2010 (CGT schedule). Partnerships and individuals who lodge a paper tax return are not required to lodge a schedule.

The CGT schedule is explained in detail in part   C .

What's new?

Changes and proposed changes to the law

Capital gains tax (CGT) roll-over for changes to water entitlements

The government is extending the capital gains tax (CGT) roll-over for transformation arrangements to any capital gains or losses arising from changes to water entitlements to include pre-transformation transactions. Transformation is the process by which an irrigator permanently changes their right to water against an irrigation infrastructure operator into a statutory licence held by an entity other than the operator. The measure takes effect from the 2005-06 income year with transitional provisions applying until the measure becomes law.

Currently, pre-transformation changes could trigger immediate CGT liabilities for parties dealing with water entitlements. Operators may undertake pre-transformation transactions to ensure irrigators are treated equitably during the transformation process. This measure will enable taxpayers to defer any CGT consequences arising from the replacement of their water entitlements with one or more different water entitlements.

At the time of publishing these instructions the changes had not become law.

Capital gains tax treatment for earnout arrangements

In the 2010-11 Budget the government announced that it will allow all payments under a qualifying earnout arrangement to be treated as relating to the underlying business asset. The measure will take affect once the legislation is passed, with transitional provisions available in certain cases from 17   October 2007. Earnout arrangements structure the sale of business or business assets to manage uncertainty about the value of the business. The current tax treatment can result in anomalous outcomes for taxpayers where the actual payments under the earnout right differ from the amounts estimated at the start of the arrangement.

At the time of publishing these instructions the changes had not become law.

Capital gains tax - roll-over for certain trusts

The Tax Laws Amendment (2009 Measures No.   6) Act 2010 introduced, with effect from 1   November 2008, a CGT roll-over for assets transferred between trusts that satisfy a number of specified requirements. As a result of this measure, trustees of certain trusts will be able to defer the CGT consequences of the asset transfer until the receiving trust subsequently deals with the asset. This will allow certain trusts to restructure without immediate CGT consequences.

Capital gains tax - aligning scrip for scrip roll-over requirements with the Corporations Act 2001

On 6   January 2010, the Assistant Treasurer announced the intention to make it easier for takeovers and mergers regulated by the Corporations Act 2001 to qualify for a scrip for scrip roll-over , with effect from 6   January 2010. Currently, the requirements of the roll-over can be inconsistent with the requirements in the Corporations Act 2001 . As a result, a merger that meets the requirements of the Corporations Act 2001 may not qualify for the roll-over. This measure will remove this inconsistency.

At the time of publishing these instructions the changes had not become law.

Capital gains tax - demerger relief for certain demerger groups

In the 2010-11 Budget the government announced the intention to amend the capital gains tax (CGT) demerger provisions so that an entity is excluded from being a member of a demerger group if it is a corporation sole or a complying superannuation entity. This proposed amendment will have effect from 7.30 pm (AEST) on 11   May 2010.

At the time of publishing these instructions the changes had not become law.

Capital gains tax - extension of the roll-over for conversion of a body to an incorporated company

In the 2010-11 Budget the government announced the intention to make the capital gains tax (CGT) roll-over for the conversion of a body to an incorporated company more flexible to accommodate situations where a body is wound up and then reincorporated under a different corporations law. This will include providing a roll-over for any gains or losses made by the original entity when it ceases to own its CGT assets, trading stock, and depreciating and revenue assets that become assets of the newly incorporated entity as part of the reincorporation.

The expanded roll-over will also allow a taxpayer to receive shares on incorporation that reflect all of the interests and rights they held in the body prior to the transfer of incorporation.

At the time of publishing these instructions the changes had not become law.

Capital gains tax - share sale facility interactions with CGT roll-overs

In the 2010-11 Budget the government announced the intention to allow access to broader range of capital gains tax (CGT) roll-overs where an entity restructures using a share or interest sale facility for foreign interest holders provided that ownership requirements are appropriately maintained. It is proposed that these amendments will have effect from 7.30 pm (AEST) 11   May 2010.

Currently if a business uses a share or interest sale facility, Australian resident interest holders may not be able to access a relevant CGT roll-over. This is because certain roll-overs require that all interest holders exchange their interests in the original entity for interests in the new entity. Under a share or interest sale facility, new interests which would have been allocated to foreign interest holders are allocated to an agent.

At the time of publishing these instructions the changes had not become law.

Taxation of financial arrangements (TOFA)

New rules have been introduced, the TOFA rules, which modernise the tax treatment of gains and losses on financial arrangements. The key provisions of the TOFA rules are found in Division   230 of the Income Tax Assessment Act 1997 (ITAA 1997).

Do the TOFA rules apply to you?

The TOFA rules will apply to you if you are:

• an authorised deposit-taking institution, securitisation vehicle or financial sector entity with an aggregated annual turnover of $20   million or more
• a superannuation entity, managed investment scheme or entity with a similar status under foreign law relating to foreign regulation with assets of $100   million or more
• any other entity (other than an individual) which satisfies one or more of the following
  • an aggregated turnover of $100 million or more
  • assets of $300 million or more
  • financial assets of $100 million or more.

The TOFA rules cover qualifying securities that you hold, which end more than 12   months after you start to have them regardless of your turnover or assets.

If you do not meet these requirements you can elect to have the TOFA rules apply to you.

When do the TOFA rules start to apply to you?

If the TOFA rules apply to you, they will apply to the financial arrangements that you start to have in your income year commencing on or after 1   July 2010. However, you can elect to have the TOFA rules apply a year early, so that it applies to financial arrangements that you start to have in your income year commencing on or after 1   July 2009.

This means that the TOFA rules will not affect your taxable income for 2009-10 or how you complete your 2010 tax return unless you make an election for the TOFA rules to apply to your financial arrangements early.

Impact on CGT

The TOFA rules have the following key interactions with CGT:

• They may operate to modify the cost base or capital proceeds of a CGT asset.
• A capital gain or capital loss made from a CGT asset that is a financial arrangement may be disregarded.
• Certain gains and losses from hedging financial arrangements may be taxed under the CGT rules.

More information

For more information, see Guide to the taxation of financial arrangements (TOFA) rules .

Tax certainty to investors in forestry managed investment schemes

The tax law has recently been amended to protect investors in forestry managed investment schemes (FMIS) from unintended and adverse tax outcomes when the FMIS is wound-up or restructured . The government has amended this four-year holding period rule for FMIS to ensure that an investor cannot fail the requirement for reasons genuinely outside its control. This measure applies to CGT events happening on or after 1   July 2007.

Announced by the government

These changes have been announced by the government but they had not become law when this guide was finalised.

Capital gains tax relief for compulsory acquisitions of part of a main residence

On 19   March 2009, the government announced it will seek an amendment to the law so that the CGT main residence exemption can apply in certain circumstances to the compulsory acquisitions of, and certain other involuntary events in relation to part of, a taxpayer's main residence.

The amendments will ensure taxpayers do not pay CGT on compulsory acquisitions of part of their main residence and they are not better or worse off as a result of a compulsory acquisition.

The changes will apply to CGT events that happen after the date of royal assent. Taxpayers can also apply the changes from the 2004-05 income year to the date of royal assent.

Capital gains tax - recognition of termination and exit fees in a capital gain or capital loss calculation

The government announced on 27   February 2009 its intention to allow termination and exit fees to be recognised when calculating a capital gain or capital loss on an asset by including these costs in the asset's cost base. The intention is for this change to apply to CGT events that happen on and after 1   July 2008 for all CGT assets.

ATO references:
NO NAT 4151