BUSN3014w4

A taxpayer's income tax liability is affected by CGT because assessable income includes the net capital gain for the income year, where net capital gains consist of the total capital gains for the year reduced by certain capital losses. Taxpayer cannot deduct a net capital loss, however, a loss may be carries forward to be offset against gains in future years

Taxation of Capital Gains- CGT came into affect in 1985. CGT only applies to assets acquired on or after 20/9/1985 (post CGT assets). Pre 1985 CGT assets are referred to as pre CGT assets. In 1999 there was an important policy change, before 99 you may elect indexation of cost base in computing capital gains provided asset has been held for 12 months (but index number frozen after 00). Capital gains made on or after 21/9/1999 may be discounted by 50% for an individual.For CGT event (generally refers to selling asset, also includes other possibilities) Whenever a single transaction leads to both capital gain and ordinary income then you only counter ordinary income and not capital gain. Index to remove to reduce impact of inflation. 

Taxable Australian Property A CGT asset that is deemed to be Australian taxable property where a taxpayer, on ceasing to be an Australian resident.

Three Key Terms CGT Asset, CGT event (disposal) and acquisition. If you own an asset you should have acquired it earlier. You have no capital gains tax when you buy-only when you dispose then it's a CGT event. Capital gain (cost base) capital loss  (reduced cost base). Offset capital loss against capital gain. capital gain>capital loss we can subtract any accumulated capital loss from previous years. If capital loss>capital gain then we have net capital loss for that year and you can only carry forward the net capital loss

There is a three step process to determine whether a taxpayer is affected by the CGT provisions. It is necessary to follow this process and within each of these three steps we ask a series of questions to ultimately determine the affect of the CGT provisions on a taxpayer's liability to pay income tax.Step 1 Have you made a capital gain loss?-Has a CGT event happened to the taxpayer? Division 104 triggered application of capital gain provision. Can make capital gain/loss only if CGT happens. s104-5 has summary of events. Division provides event time and how to work out capital gain/loss and any exception. Events include and will be listed further down in notes-Is the asset a CGT asset? (s108-5 law tries to cover everything. Law defines CGT asset as any kind of property or a legal or equitable right that is not property so anything that gives you an ownership right e.g. transfer, sell, dispose but when when it's not transferrable its regarded as CGT asset e.g. right under contract). Part of or interest in a CGT asset is also a CGT asset. Interest in an asset of partnership or interest in partnership or goodwill are CGT assets. CGT arises in land, building and share sales) Be aware of Separate CGT Assets whether law trie to treat some easiest as separate assets e.g. when accessory is attached to principle asset accessory becomes part of asset e.g. building on a land. This is so people pay more tax. If you have an improvement to pre-CGT asset beyond 'improvement threshold table" & 5% of capital proceeds then also not separate asset.-Does an exception or exemption apply?-Can there be a roll over?Step 2: Work out the amount of capital gain or loss -Work out your capital proceeds from the CGT event The cap proceeds are the total of the money and the market value of any other property you have received or are entitled to. There are 6 modifications to this rule. Market value substitution rule: WHere cap proceeds can't be value or taxpayer did not deal at arm's length with another entity in connection with the event. Apportionment rule which is relevant if payment received in connection with transaction relates in part only to CGT event. Cap proceeds are so much of payment as is reasonably attributable to that event. Non-receipt rule relevant if taxpayer does not receive or isn't likely to receive some or all of the capital proceeds from a CGT event and capital proceeds are reduced by amount not received. Repaid Rule. Assumption of Liability Rule. Misappropriation rule pg 335-Work out the cost base for the CGT asset The cost base of the asset consists of 5 elements1. the money you paid and MV of other property you gave to acquire asset, incidental costs incurred (minor costs related to acquisition of asset and CGT event), costs of owning the asset you incurred (but only if you acquired the asset after 20/8/1991), capital expenditure you incurred to increase or preserve the asset's value, or to install or move it and capital expenditure you incurred to establish, preserve or defend you title to the asset-Subtract the cost base from the capital proceeds-If proceeds>cost base the difference if your capital gain, if not work out the reduced cost base for the asset-If the reduced cost base exceeds the capital proceeds, the difference is your capital loss-If the capital proceeds are less than the cost base but more than the reduced cost base, you have neither a capital gain nor a capital lossStep 3: Work out the net capital gain or loss for the income year-reduce the capital gains for the income year in the order you choose, by your capital losses for the income year from your assessable income-reduce any remaining capital gains by any unapplied net capital losses for previous income years-reduce any remaining discount capital gains by the discount percentage-if you carry on a small business apply small business concessionsadd up any remaining cap gains that are not discount cap gains and any remaining discount cap gains

CGT EventsEvent A1- Happens when you dispose of CGT asset i.e. change of ownership occurs. The time is when you enter into the contract (or if no contract) when change of ownership occurs. Event doesn't happen if disposal was to provide or redeem a security.If it was disposed and no money was taken (i.e. disposed or give as gift) then the market value substitution rule appliesGain and loss is not defined the same in accounting and tax low. Loss is based on reduced cost base- capital proceeds and Gain is based on capital proceeds-cost base. With a security for a loan even though the bank has an interest in the ownership of property as mortgage, no CGT event A1 occurs when loan is repaid and security redeemed and bank's name removed from title of property.Event B1 Use and Enjoyment before Title pass- buyer allowed to use asset for trial period before they decide to buy asset. When asset is sold, event B1 applies not A1. Time of event is when other entity first obtains use of asset Event C1 the loss or destruction of a CGT asset the time of which occurs when you first receive compensation or if no compensation received when loss is discoveredEvent C2 Taxpayer enters into contract that results in asset ending particularly for owners of an intangible asset. The time is when you enter into a contract that ends the asset or when the asset endsEvent D1 Creating contractual or other right in another entity s104-35. Time is when you enter into contract or create the right.Event H1- Forfeiture of Deposit Happens if a deposit paid to you is forfeited because a prospective sale or other transaction does not proceed. The time of the event is when the deposit is forfeitedEvent H2 Receipt for Event Relating to a CGT Asset This is last resort. Order of Application of CGT EventsSelect event most specific to your situation and then if nothing fits go to D1 before H2.Does it matter if you select a wrong CGT Event Yes taxpayer may be disadvantaged if a wrong CGT event is used, the timings are different for the events. difference in timing may affect eligibility for indexation and discount, availability of capital loss and tax liability.

Acquisition of CGT Assets  s109-5(2) sets out specific rules for the time when you acquire a CGT asset as a result of a CGT event. The time is important because an asset acquired before 20 September 1985 is generally exempt from capital gains tax. Second, indexation or the CGT general discount only applies where an asset is held for at least 12 months. Where a taxpayer acquires a CGT asset as a result of a CGT event, specific rules contained in s109-5(2) will apply before the general provisionSpecific rules also apply where a CGT asset comes into existence without a CGT event e.g. taxpayer may construct or create a CGT asset time of acquisition is when construction that resulted in the creation started. If someone dies and the CGT asset passes to you, you acquire the asset when they died

Incidental costs include 1. remuneration for professional services, cost of transfer of ownership, stamp duty or other similar duty, costs of advertising or marketing, costs relating to making of any valuation or apportionment, search fees, conveyancing kit, borrowing expensesCosts of owning the asset include interest on money you borrowed to acquire the asset, or to increase the asset's value, costs of maintaining repairing and insuring, rates or land tax if asset is land THIS CANNOT BE INDEXED AND IS NOT INCLUDED IN REDUCED CBCost base does not include any part of expenditure that has been or can be deducted, recoupment is received in respect of it, input tax credit for GST purposes, prevented from being a deductionExample- Asset sold within 12m You need to identify proceeds and cost base (price you paid for asset 11000 and incidental costs on puchase and on sale 165+15+270+25) whenever you own asset for more than 12 months before 1999 concession given is indexation, after1999 you're allowed a discount. Where taxpayer aquires asset before 21 September, they will have a choice to use either indexation or the CGT general discount discussed below in Step 3. Discount doesn't apply to companies, only to individual trusts and super fundsIndexation of Cost Base You only index if you acquired before 1.45 EST 21/9/1999 but after you can't use indexed numbersExample-Indexation of CB Index and discount- Only the first two can be indexed because they fall under 'cost base' criteria. Not rates though. Do the indexation calculation and then round and then multiply by the cost base amount. If we were told asset is sold this year then we would just use the last indexation numberDiscount Capital gains Subdivision 115-A discount can be made by anyone other than a company. Gain must result from CGT event happening after 11.45am on 21/9/1999 and be worked out without indexing the cost base from CGT event happening at least 12 months after acquisitionReduced Cost Base Discount applied in computing net capital gain. 1,2,4 and 5 are the same except the third element. The third element of the reduced cost base is an amount included in the taxpayer's assessable income because of certain balancing adjustment. Further, the elements of the reduced cost base cannot be indexed.  The reduced cost base does not include any of the costs the taxpayer has previously claimed or can claim in the current year as a deduction. For example, the cost base must be reduced by any capital works deductions claimed for capital expenditure. Reduced cost base does NOT include any costs of owning the asset.

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