Personal investors guide to capital gains tax 2002
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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 on your annual income tax return. There is no separate tax on capital gains, it is merely a component of your income tax. You are taxed on your net capital gain at your marginal tax rate. Your net capital gain is the difference between your total capital gains for the year and your total capital losses (including capital losses from previous years), less any CGT discount to which you are entitled.
When you sell an asset, this transaction is known as a CGT event. You can make a capital gain or capital loss if a CGT event happens or you receive a distribution of a capital gain from a managed fund. You show the total of your current year capital gains at H item 17 on your 2002 tax return for individuals (supplementary section) .
You show your net capital gain at A item 17 on your tax return.
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 entry in 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 or through the demutualisation of an insurance company such as the NRMA). If you acquired shares or units in any of these ways you may be subject to CGT when you sell them.
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 can make a capital gain or capital loss if a CGT event happens to any of their assets anywhere in the world. There are special rules that apply to non-residents that are not dealt with in this guide.
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 a CGT event happens. You must keep these records for 5 years after the CGT event has happened or after you claim any capital loss from that event against future capital gains.
How to meet your CGT obligation
To meet your CGT obligations, you need to follow these 3 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 CGT. Generally, a CGT event has happened if you have sold (or otherwise disposed of) a CGT asset during 2001-02. 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). 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 a listed investment company (LIC) pays a dividend to you that includes a LIC capital gain amount , you are not treated as if you made a capital gain from a CGT event. You should refer to the publication You and your shares if you have received such an amount as you may be entitled to a deduction. If you did not have a CGT event, print X in the NO box at G item 17 on your tax return. 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. If you received a distribution of a capital gain from a managed fund, you are taken to have made the capital gain in the income year shown on your statement from the managed fund. | |
Step 3 | Calculate your capital gain or capital loss |
There are 3 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 '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 per cent. Generally, if you have 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 better 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 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. 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 3 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. Use only with assets acquired before 21 September 1999. | Use for shares or units held for 12 months or more, if it produces a better result than the indexation method. | Use for shares or units if you have bought and sold them 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 ). |
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 (that is, those 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 CGT 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 (in whole or in part) 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 CGT on the transfer, but CGT 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?
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 CGT obligation.
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 CGT obligation.
Information
If you have sold a rental property, have assets from a deceased estate or have several CGT events this income year, this guide does not provide you with enough detail. You need to read the publication Guide to capital gains tax to find out how to calculate and report your CGT o bligation.
ATO references:
NO NAT 4152
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