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Capital gains tax in Australia

Capital gains tax (CGT), in the context of the Australian taxation system, is a tax applied to the capital gain made on the disposal of any asset, with a number of specific exemptions, the most significant one being the family home. Rollover provisions apply to some disposals, one of the most significant of which are transfers to beneficiaries on death, so that the CGT is not a quasi estate tax.

CGT operates by treating net capital gains as taxable income in the tax year in which an asset is sold or otherwise disposed of. If an asset is held for at least 1 year then any gain is first discounted by 50% for individual taxpayers, or by 33.3% for superannuation funds. Capital losses can be offset against capital gains. Net capital losses in a tax year cannot be offset against normal income, but may be carried forward indefinitely.


Personal use assets and collectables are treated as separate categories and losses, which are quarantined so they can only be applied against gains in the same category, not other gains. This works to stop taxpayers subsidising hobbies from their investment earnings.

History[edit]

A capital gains tax (CGT) was introduced in Australia on 20 September 1985, one of a number of tax reforms by the Hawke/Keating government. The CGT applied only to assets acquired on or after that date, with gains (or losses) on assets owned on that date, called pre-CGT assets, not being subject to the CGT. In calculating the capital gain, the cost of assets held for 1 year or more was indexed by the consumer price index (CPI), which meant that the part of the gain which was due to inflation was not taxed. Indexation was not used if an asset was held for less than 12 months or a sale results in a capital loss. Also, an averaging process was used to calculate the CGT. 20% of a taxpayer's net capital gain was included in income to calculate the taxpayer's average tax rate, and the average rate was then applied to all the taxpayer's gross income (i.e., including the capital gain in full). So if a large capital gain were to push a taxpayer into a higher tax bracket in the tax year of sale, the brackets was stretched out, allowing the taxpayer to be taxed at their average tax rate.


From 20 September 1999, the Howard government discontinued indexation of the cost base and (subject to a transitional arrangement) introduced a 50% discount on the capital gain for individual taxpayers. Assets acquired before 21 September 1985 continued to be CGT-free. For assets acquired between 20 September 1985 and 20 September 1999, the taxpayer had an option of using indexation (up to the CPI as at 30 September 1999) or using the 50% discount method. Also from 21 September 1999, small business CGT concessions were introduced (below), reducing tax on small business owners retiring, and on active assets being sold, and allowing a rollover when selling one active asset to buy another. The 50% CGT discount is not available to companies. Superannuation funds are entitled only to a 33% CGT discount.

Any asset acquired before 20 September 1985, known as a pre-CGT asset. But an asset loses its pre-CGT status if substantial changes are made to it (e.g. major additions to a building), or on the death of the original owner.

The house, unit, etc., which is the taxpayer's main residence, and up to the first 2 of adjacent land used for domestic purposes.

hectares

Personal use assets, acquired for up to $10,000, including boats, furniture, electrical equipment, etc., which are for personal use. Items normally sold as a set must be treated together for the $10,000 limit.

Capital loss made from a personal use asset. (s108-20(1)ITAA1997 … any capital loss made from a personal use asset is disregarded)

Collectables acquired for up to $500, including art, jewellery, stamps, etc., held for personal enjoyment. Items normally sold as a set must be treated as a set for the $500 limit. If collectables sometimes rise in value then this exemption can be an advantage to a taxpayer collecting small items.

Cars and other small motor vehicles such as motorcycles ("small" being a carrying capacity less than 1 tonne and less than 9 passengers). Since cars normally decline in value this exemption is actually a disadvantage. But the exemption applies even to antique or collectible vehicles, so if they rise in value then the exemption is an advantage.

Compensation for an occupational injury, or for personal injury or illness of oneself or a relative. (However, compensation for breach of contract is subject to CGT.)

Life insurance policies surrendered or sold by the original holder. Such gains are instead taxed as ordinary income (when held for less than 10 years). A third party who buys such a policy will be subject to CGT as on an ordinary investment.

Winnings or losses from (which are also free of income tax).

gambling

and notes sold at a discount (including zero-coupon bonds) and "traditional securities" (certain interest bearing notes convertible to shares). Gains and losses from these are ordinary taxable income.

Bonds

Medals and decorations for bravery and valour, provided they are acquired for no (financial) cost.

Shares in a pooled development fund, which is a special structure with rules facilitating . Certain other eligible venture capital investments are also exempt from CGT.

venture financing

Payments under particular designated government schemes, for example various industry restructuring schemes.

The law is framed so as to apply to all assets, except those specifically exempted. It applies both to assets owned outright and to a partial interest in an asset, and to both tangible and intangible assets. Current exemptions, in approximate order of significance are:


Trading stock is not regarded as an asset and instead comes under ordinary income tax. Items of plant being depreciated are subject to CGT, but only in the unusual case that they are sold for more than original cost (see Depreciating assets below)

reduced cost base — this is the cost base with certain costs excluded, or certain extra reductions applied.

cost base — being money paid, and associated expenses of the transaction, plus later capital costs of additions, or defending one's ownership.

indexed cost base — the elements of the cost base each indexed by changes in the . Each element is indexed according to the date the cost was incurred. This is relevant only for assets acquired before 21 September 1999.

consumer price index

"Tax deferred" portion of the distribution.

Capital gains distributed, some under the discount method, some under the indexation method.

the original shares are CGT assets. Rollover is not available on pre-CGT shares.

the value of the bid is high enough that a capital gain would arise if treated as a disposal of the original shares. Rollover does not apply to a capital loss that must be realised instead.

the swap is shares for shares, or trust units for trust units. It does not apply to a change of structure.

the takeover occurs on or after 10 December 1999, the introduction of this rollover provision.

the bidder has made its bid available to all voting shareholders, and becomes the owner of 80% of the voting shares. This works to restrict rollover to genuine takeovers.

certain other anti-tax-avoidance rules are not triggered. These apply to a target company or trust with just a small number of shareholders or where there's a significant common stakeholder.

Taxation in Australia

Guide to Capital Gains Tax, , publication NAT 4151-6.2005 [2]

Australian Taxation Office

Guide to Capital Gains Tax Concessions for Small Business, , publication NAT 8384-06.2005 [3]

Australian Taxation Office

Australian Taxation Office

Carrying on a business of share trading - Fact Sheet

Income Tax and Investment, N. E. Renton, 2nd edition, 2005,  0-7314-0221-9

ISBN

to the small business capital gains tax (CGT) concessions - Australian Taxation Office fact sheet

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