Capital gains tax in Australia: A Taxpayer's Guide

In Australia, capital gains tax (CGT) is a tax on the profit made from selling an asset, such as property or shares. This tax is a crucial aspect of taxation for many Australians.

The CGT regime in Australia is governed by the Australian Taxation Office (ATO) and is outlined in the Income Tax Assessment Act 1997. This legislation sets out the rules for calculating and reporting CGT.

CGT is only applicable if the sale of an asset results in a capital gain, which is the profit made from selling an asset for more than its original purchase price. If the sale results in a capital loss, this can be offset against other capital gains.

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If you're looking to minimize your capital gains tax (CGT) liability in Australia, it's essential to understand the exemptions and concessions available. One significant exemption is the primary residence exemption, which allows homeowners to exclude capital gains from the sale of their primary residence from CGT.

To qualify for this exemption, you must have used the property as your home for the entire period you owned it, not used it to produce assessable income, and it must be on land less than two hectares. This exemption reflects the policy of encouraging homeownership and provides a substantial benefit to residential property owners.

Assets acquired before 20 September 1985, known as pre-CGT assets, are also exempt from CGT. However, an asset loses its pre-CGT status if substantial changes are made to it, or on the death of the original owner.

Personal use assets, such as boats, furniture, and electrical equipment, acquired for up to $10,000, are exempt from CGT. Items normally sold as a set must be treated together for the $10,000 limit.

Collectables acquired for up to $500, including art, jewellery, and stamps, held for personal enjoyment, are also exempt from CGT. If collectables sometimes rise in value, this exemption can be an advantage to a taxpayer collecting small items.

Here are some specific exemptions and concessions:

Remember to review your specific circumstances and seek professional advice if you're unsure about which exemptions and concessions apply to you.

Calculating capital gains tax in Australia involves several steps. To determine the capital gain or loss, you need to calculate the cost base and the proceeds. The cost base includes the original purchase price, incidental costs like legal fees, and costs of improvement.

The proceeds are the amount of money you received or became entitled to receive when you sold the asset. This amount is reduced if it's not less than market value. For example, if you sold a property for $700,000, but the market value was $600,000, the proceeds would be $600,000.

If the proceeds amount is larger than the cost base, you have made a capital gain. The exact amount of the gain is the difference between the proceeds and the cost base. If the proceeds amount is smaller than the cost base, you have made a capital loss. The amount of the loss is the difference between the cost base and the proceeds.

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Here's a breakdown of the elements that make up the cost base:

For example, if you purchased a property for $500,000, incurred $50,000 in transactional costs, and another $30,000 in ownership costs, the total cost base would be $580,000. If you sold the property for $700,000, the capital gain would be $120,000.

There are also modifications to the general calculation rules, including the indexed cost base method, which applies to assets acquired between 20 September 1985 and 20 September 1999. This method involves calculating the capital gain by comparing the proceeds of sale to the asset's indexed cost base, with indexation stopped at the CPI as of the quarter ending 30 September 1999.

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The cost base is a crucial component in calculating capital gains tax in Australia. It's calculated by adding up several key elements, including the original purchase price, transaction costs, and non-capital costs such as repairs and maintenance.

To determine the cost base, you need to consider the following costs: the amount you originally paid for the asset, transaction costs like real estate agent fees and advertising costs, non-capital costs like costs of repairs and maintenance, insurance, and land tax, and capital expenditure spent on increasing or preserving the asset's value.

Here are the key costs that make up the cost base:

These costs can add up quickly, so it's essential to keep accurate records to ensure you're calculating your cost base correctly.

The indexed cost base method is a way to calculate capital gains for assets acquired between September 20, 1985, and September 20, 1999. This method is used to determine the capital gain or loss by comparing the proceeds of sale with the indexed cost base.

To calculate the indexed cost base, you multiply each element of the cost base by the indexation factor, which is found by dividing the indexation value for the quarter ending September 30, 1999, by the indexation value for the financial quarter when the expenditure was incurred. For example, if the indexation value for September 1998 was 121.9, the indexation factor would be 123.4 / 121.9 = 1.012.

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The indexed cost base is then used to calculate the capital gain or loss. If the proceeds amount is larger than the indexed cost base, a capital gain is made, and the amount of the gain is the difference between the proceeds and the indexed cost base. If the proceeds amount is smaller than the indexed cost base, a capital loss is made, and the amount of the loss is the difference between the indexed cost base and the proceeds.

For example, if you purchased a house in 1998 for $100,000 and sold it in 2015 for $400,000, the indexed cost base would be calculated as follows:

The total indexed cost base would be $126,500, and the capital gain would be $273,500 ($400,000 - $126,500).

The reduced cost base is an important concept in calculating capital gains tax, and it's not as complicated as it sounds. The reduced cost base is calculated by considering all the same elements as the cost base, except for the non-capital costs of owning the asset.

For another approach, see: Capital Cost Allowance

Non-capital costs, such as maintenance and repairs, are excluded from the reduced cost base. This means that if you've incurred costs to maintain or repair an asset, these costs won't be included when calculating the reduced cost base.

For example, in Example 4, Z purchased shares for $30,000 and sold them for $50,000. The cost base was $40,000, but the reduced cost base was not specified. However, if we assume that Z incurred non-capital costs of, say, $5,000, the reduced cost base would be $35,000 ($40,000 - $5,000).

In calculating the reduced cost base, it's essential to exclude non-capital costs, as these costs are not eligible for depreciation. By doing so, you'll arrive at an accurate reduced cost base, which is crucial in determining whether you've made a capital gain or loss.

Here's a summary of the elements that make up the reduced cost base:

By considering these elements and excluding non-capital costs, you'll be able to accurately calculate the reduced cost base and make informed decisions about your investments.

Buying and selling shares and options can be a lucrative way to invest your money, but it's essential to understand the tax implications. If you buy an option and then sell it, it's treated like any other asset for capital gains tax (CGT) purposes.

If the option expires, it's considered disposed of at expiry for nil proceeds. The cost base of the shares you acquire when exercising a call option is the option premium paid plus the exercise price.

When selling shares, you'll need to consider the cost base and proceeds of the sale. The proceeds for shares sold when exercising a put option are the amount received in the exercise, less the option premium previously paid.

Here's a summary of the key points to keep in mind:

It's also worth noting that if you're a share trader, you may be able to treat your shares as trading stock, which can provide tax benefits. However, this requires careful consideration and may not be suitable for everyone.

Identification of shares is crucial for accurate capital gain or loss calculations.

Different parcels of shares acquired at different times or prices require identification.

Share certificates or similar documents clearly identify the parcels being transferred.

The CHESS system used by the Australian Securities Exchange aggregates shares in a bank account style, where taxpayers can nominate which original purchases are sold.

Taxpayers can choose to sell a parcel with a capital loss to realise it immediately.

Keeping particular parcels until they reach 1 year old can result in a 50% discount on gains.

Stapled shares can be a complex beast to deal with, especially when it comes to capital gains tax.

Some listed companies have securities that are "stapled" together, meaning each unit is made up of multiple parts.

For example, the Westfield Group is structured as three parts: a share in Westfield Limited, a unit in the Westfield Australia Trust, and a unit in the Westfield America Trust.

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Taxpayers must treat each part separately for capital gains tax purposes, calculating a gain or loss on each one individually.

However, since stapled securities trade with only a single price for the bundle, the taxpayer needs to use a "reasonable" method to apportion the price across the parts.

The Westfield Group recommends using the ratios of the net tangible asset backing (NTA) of each part to make this calculation.

Options can be a complex and nuanced topic in the world of share and options. It's essential to understand how they work, especially when it comes to capital gains tax.

An option bought and then sold is subject to CGT like any other asset. If it expires instead of being sold, it's taken to have been disposed of at expiry for nil proceeds.

Options can be exercised, which means the holder can buy or sell an asset at a predetermined price. When a call option is exercised, the shares acquired have a cost base which is the option premium paid plus the amount paid to exercise.

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The acquisition date of the shares is the date you exercise the rights or options to acquire the shares. This is a crucial point to remember, as it can affect the capital gains tax implications.

Here are the key points to remember about exercising call and put options:

As a writer of options, you can receive an immediate capital gain from the premium received. However, this gain is reversed when the option is exercised, and you need to consider the proceeds from the sale of shares.

In summary, options can have complex capital gains tax implications, and it's essential to understand how they work to minimize your tax liability.

Demutualisation is a significant event that can impact shareholders, particularly those who have held shares in mutual societies.

The ATO publishes cost bases for significant recent demutualisations.

Demutualisation involves converting memberships to shareholdings, a process that requires companies to advise members of a cost base and reduced cost base for their new shares.

AMP Limited and Insurance Australia Group are examples of companies that have undergone demutualisation.

The cost base represents "embedded value", a key factor in determining capital gains or losses when shares are sold.

This cost base is crucial for calculating capital gains or losses, as it affects the amount of tax payable or refundable.

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