CAPITAL GAINS TAXBefore calculating someone’s net capital gain, the assets and events need to be analysed to ensure they are of CGT nature. Mr Smith, an Australian resident, sold several assets on 1 March 2014. These will be discussed below to identify whether any CGT events from CGT assets occurred, with direction from the Income Tax Assessment Act 1997 (Cth), then his net capital gain will be calculated. House According to s100-25(3), someone’s home is identified as a CGT asset, however this CGT asset must result in a CGT event, for a capital gain or loss to be made. Under s104-5, the disposal of a CGT asset gives rise to CGT event A1. S104-10 continues to mention that the disposal of a CGT asset occurs when there is a change in ownership, from one entity to another. Since, Mr Smith sold his home to another entity, CGT event A1 was created. Before the net capital gain on this CGT event can be calculated, it needs to be determined whether any exemptions apply. S118-110 highlights that a dwelling is regarded as your main residence “when you and your family live in it, your personal belongings are in it, it is the address your mail is delivered to, it is your address on the electoral and it is connected to services such as telephone, gas and electricity”. Since Mr Smith lived in the house with his wife since the date of purchase, he meets the criteria for the main residence exemption. Hence, Mr Smith can receive a full or partial exemption from the main residence exemption, depending on his circumstances. As mentioned earlier, Mr Smith has lived on the property and jointly owns it with his wife since the date of acquisition and has not used it to produce assessable income; therefore Mr Smith receives a full exemption and the capital gains resulting from the disposal of his house is disregarded. Vacant Land In addition, on 1 June 1995 Mr Smith purchased vacant land for $30,000 which is located in a separate suburb to his house. He disposed of this land on 1 March 2014 for $150,000. According to, s100-25(2), land is regarded as a common CGT asset, however it must lead to a CGT event. S104-10 suggests that a CGT event A1 happens when there is a change of ownership. Since the sale of land resulted in a transfer of ownership, CGT event A1 occurred. Division 118 explains any exemptions that may apply, which could result in the capital gain or loss being disregarded. Since Mr Smith made the capital gain after September 21, 1999 and held the CGT asset for greater than 12 months, as outlined in s115-24, the CGT discount gain applies. This is where for individuals the capital gain from the CGT event is reduced by 50%. Furthermore, s110-25(1) explains that the cost base of a CGT asset contains five elements; however Mr Smith only incurred element one and two during the acquisition and disposal of the vacant land. S110-35 (2), s110-35(4) and s110-35(5b) define agent’s commission, stamp duty and advertising as indirect costs respectively. Therefore, the total cost base is $37,000 ($30,000+$4,000+$2,000+$1,000=$37,000). The capital proceeds can now be calculated which under s 116-20 generally relates to the consideration received as a result of the CGT event, thus the capital proceeds is purely the sale price of $150,000. Finally, the net capital gain or loss as a result of the CGT event A1 on the sale of the vacant land can be calculated, which is done so below (page 4&5). Car 1|P age Mr Smith incurred a capital loss during the disposal of his television ($200 –$1. which he then sold for $60. the market value substitution modification would apply since no capital proceeds was received. the CGT event is disregarded.000 . Therefore the discount gain does not apply to the disposal of shares in ABC Ltd. According to s104-10. TD1999/40 states that the word ‘antique’ describes an object of artistic and historical significance that. However.000 ($9. the costs associated with the sale are included in the cost base rather than excluded from the capital proceeds. In this situation the market value of $9. s110-25 mentions that the cost base consists of five elements. therefore under TD 1999/40 his vintage car is not classified as an antique. Mr Smith purchased his car on 1 February 2008 for $22. Furthermore. motor cycle or similar vehicle are disregarded. Television Moreover.000.000 shares in ABC Ltd on 1 July 2013 for $7. also suggesting it may be a collectable if it is an antique under subsection 108-10(2).CAPITAL GAINS TAX Furthermore. according to section 118-10(3) any capital gains made from a personal use asset is disregarded if the asset was acquired for less than $10.$22.000 on 1 March 2014.500 = capital loss of $1. motor cycle or similar vehicle is disregarded. division 108 identifies a car as a CGT asset. Since a television is normally acquired for personal enjoyment. Mr Smith purchased a television on 1 July 2009 for $1. However. Vintage Car On 1 March 2002 Mr Smith purchased a 1924 Bentley for $40. when a capital loss is made from a personal use asset. however this CGT event only two of these five elements apply. It is noted that when a CGT asset is bought and sold at an arm’s length transaction.000). therefore resulting in the first cost base element which is described in s110-25(2) as money paid for the acquisition of a CGT asset. when a CGT event occurs the age of the asset exceeds 100 years. subsection 108-20(1) applies where. As mentioned above. 5. Mr Smith owned a 1924 Bentley. hence the disposal of Mr Smith’s television is an example of CGT event A1. as mentioned earlier and in s102-23 the capital gain or loss from this CGT event is disregarded. this change of ownership gives rise to a CGT event A1.000 and then gave his car to his son on 1 March 2014.000 would be used as the capital proceeds. creating a net capital loss of $13.300). Thus.000. otherwise if the shares were sold to a company a CGT G1 event would have resulted. Under s104-5. incidental costs (second element) resulted from the acquisition and disposal of these shares as defined in s110-35. s118-5 remains where a capital gain or loss resulting from the disposal of this vintage car is disregarded. S104-5 claims that a transfer in ownership gives rise to a CGT A1 event. Hence. according to s11525.000 shares in ABC Ltd. In addition. s118-5 states that a capital gain or loss resulting from a car. In addition. Assuming Mr Smith sold these to a passive investor then CGT A1 event occurred. Mr Smith paid $7. Hence.500 and sold it on 1 March 2014 for $200.500 and disposed of these on 1 March 2014 for $18. as stated in s11630. under s118-5 any capital gains or losses resulting from a car. the brokerage fees 2|P age . If the disposal of the car was not disregarded for CGT purposes. However. CGT event A1 occurs when there is a change of ownership from one entity to another. as Mr Smith disposed of the shares within 12 months.000 Shares in ABC Limited Mr Smith purchased 5. meaning it is only 90 years of age at the date of sale.500 to acquire the 5.000. Furthermore. for a discount gain to exist the capital gain must result from a CGT event happening to a CGT asset that was acquired 12 months prior to the CGT event occurring. However. thus this is added to the cost base. bringing it to $6.000 shares in CAB Ltd on 1 July 2010 for $6. s 110-35 explains the second element of a CGT cost base which relates to incidental costs. These are generally known as the costs incurred to acquire a CGT asset or relate to a CGT event. According to the general rule mentioned above. Calculating Total Net Capital Gain 3|P age .000. Similar to the ABC Ltd shares. It is noted that. however before the discount gain can be applied. Hence. S110-25 states that the cost base of a CGT asset contains 5 elements. the capital proceeds for the disposal of shares in ABC Ltd is $18. Mr Smith purchased 2. 2. in accordance with s104-5 a CGT A1 event occurred. as outlined in s 110-25(2).600.300. Mr Smith incurred brokerage fees both during the acquisition and disposal of the shares. According to the general rule defined in s116-20 the capital proceeds from a CGT event are a combination of the money received or are entitled to receive and the market value of any other property you received or entitled to receive. assuming Mr Smith sold these to a passive investor. the cost base and capital proceeds need to be calculated.000 to acquire 2. amounting it to $8.000.000 shares in CAB Ltd. In addition.000. S115-100 mentions that the discount gain reduces the capital gain by 50% for individual. hence resulting in the first element.000 and sold these shares on 1 March 2014 for $8. the capital proceeds are directly the sale price which was $8.CAPITAL GAINS TAX of $300 for the acquisition and brokerage fees of $500 for the disposal of the shares are added to the cost base. Mr Smith paid $6. The net capital gain or loss for the sale of shares in ABC Ltd will be calculated below. The net capital gain or loss for the sale of shares in CAB Ltd will be calculated below (page 4&5). Mr Smith held these shares for longer than 12 months.000 Shares in CAB Limited Additionally. thus unlike the ABC Ltd shares the discount gain applies. 000 5. Net Capital Gain from the disposal of 5.$6.000 Total Cost Base = $8.000 Cost Base Purchase Price $6.000 Shares in ABC Ltd: Disregarded under s118-110 Capital Proceeds Total Capital Proceeds = $18.000 Shares in ABC Ltd $9. Please see below for the calculation for the above mentioned CGT events happening to CGT assets: Step 1: Reduce capital gains for income year by capital losses for income year (in any order you choose).600 = $1.000 Capital Proceeds $18.000 shares in ABC Ltd = $9.000 -Cost Base $8.000 shares in ABC Ltd. House: 5.000 Car: Disregarded under s118-5 Vintage Car: Disregarded under s118-5 Television: Disregarded under s118-10(3) 2.700 2.000 .300 + Advertising $1.000 +Brokerage Fees $500 Cost Base + Brokerage Fees $300 Purchase Price $30.000 + Agent Commission $4.000 Shares in CAB Ltd $1.500 4|P age .700 Less: Prior year net capital losses = $5.400 Total Capital Gain = $154.500 Total Net Capital Gain = $56. this net capital loss of $5.100 Step 2: Apply prior year net capital losses As per s102-15.400 Total Capital Gains Vacant Land $113.000 has not been utilised therefore it can be applied in this income year.000 +Brokerage Fees $400 + Brokerage Fees $200 Total Cost Base = $6.000 Shares in CAB Ltd: Capital Proceeds = Total Capital Proceeds $8.000 Net Capital Gain = + Stamp Duty $2.000 Total Net Capital Gain = $9.700 Step 3: Reduce by discount Net Capital Gain from the disposal of vacant land = $113.000 Less: 50% of Net Capital Gain = $56. the net capital loss from prior income year will be applied to it.CAPITAL GAINS TAX Section 102-5 provides a method for working out net capital gain.500 Total Capital Proceeds = $150.300 Total Cost Base $37. Since the discount gain does not apply to the 5.700 Total Net Capital Gain = $113.000 Vacant Land: Cost Base Capital Proceeds Purchase Price $7.000 Total Net Capital Gain = $4.600 Net Capital Gain = $8. 000 shares in CAB Ltd = $700 + Net Capital Gain from the disposal of 5.900 5|P age .CAPITAL GAINS TAX Net Capital Gain from the disposal of 2.000 shares in CAB Ltd = $1.400 Less: 50% of Net Capital Gain = $700 Total Net Capital Gain = $700 Step 4: Small business concessions Not applicable Step 5: Add up remaining capital gains Net Capital Gain from the disposal of vacant land = $56.500 + Net Capital Gain from the disposal of 2.700 Total Net Capital Gains = $61.000 shares in ABC Ltd = $4.