Chapter 4

Capital Gains Tax

©2023 John Wiley & Sons Australia Ltd

 Learning objectives

After reviewing this Chapter, you should be able to:

• 4.1 Explain how taxpayers pay tax on their capital gains in
Australia
• 4.2 Define CGT assets
• 4.3 Describe the major types of CGT events
• 4.4 Determine the cost base or reduced cost base of CGT
assets
 Learning objectives

After reviewing this Chapter, you should be able to:

• 4.5 Describe and apply CGT exemptions
• 4.6 Calculate the net capital gain or loss from all CGT
events for an income year
• 4.7 Understand SBE concessions in relation to CGT
• 4.8 Understand the CGT treatment of crypto-currencies
 Australia’s CGT Regime

The Basics
• CGT was introduced into Australia on 20 September 1985.
• The regime aims to tax taxpayers on the gains that are
generated from the transactions or events that involve
capital assets.
• The current CGT regime is covered in Divisions 100 to 104
of ITAA97.
• Note: Although the word ‘tax’ is included in its name,
unlike FBT or GST, CGT is not a separate tax from income
tax.
 Australia’s CGT Regime

The Basics
• Net capital gains are included in a taxpayer’s assessable
income, as statutory income.
• Net capital losses can generally be carried forward to be
offset against any capital gains in the future year(s).
• Capital losses cannot be offset against other assessable
income.
 Australia’s CGT Regime

The Basics
• The general structure of the CGT regime is as
follows:
Australia’s CGT Regime
 CGT Assets

The Basics
• Section 108-5 ITAA97 defines a CGT asset as ‘any kind of
property’ or ‘a legal or equitable right that is not
property’.
• Common examples of CGT assets include:
– Land and buildings
– An equity or debt interest, such as goodwill
– Shares or debts, in a business that could be a
company, a partnership or a trust; and
– Foreign currencies.
 CGT Assets

Special Types of CGT Assets - Collectables

• Special rules apply to collectables acquired for $500 or more.
• Capital losses from collectables can only be offset against
capital gains that are generated from collectables.
• A collectable is defined to include anything that is used or
kept mainly for personal use or enjoyment:
– Artwork, jewellery, an antique, or a coin or medallion or
– A rare folio, manuscript or book, or
– A postage stamp or first day cover.
 CGT Assets

Special Types of CGT Assets – Personal Use Assets

• Special rules apply to personal use assets acquired for
$10,000 or more.
• A personal use asset is an asset mainly used for a taxpayer’s
personal use or enjoyment but cannot be a collectable or a
piece of land or a building. For example:
– Furniture, and
– Other household items and appliances.
• Any capital losses that are incurred from personal use
assets are disregarded.
 CGT Assets

Separate CGT Assets

• A building or structure on land that a taxpayer acquired
post-CGT is regarded as a separate CGT asset from the land.
• A building or structure that is constructed on pre-CGT land
can be treated as a separate CGT asset if the construction
started or the contact was entered into post-CGT.
• This means that there may be a CGT liability when this
building is sold even though the land remains a pre-CGT
asset and exempt from CGT.
 CGT Assets

Capital Improvements
• Usually, a structural change to an existing CGT asset or the
reconstruction or replacement of the entire existing CGT
asset.
• Examples include:
– A house extension or
– The installation of an additional part to existing
equipment.
• Any capital improvements to the existing or original CGT
assets may be treated as separate CGT assets if certain
conditions are satisfied.
CGT Assets
 CGT Events

The Basics
• More than 50 different types of CGT events are provided
for in the CGT regime.
• The most common CGT event is the disposal of a CGT
assets: CGT event A1.
• Other common events are the loss or destruction of a CGT
asset: CGT event C1 and the creating of contractual or
other rights: CGT event D1.
• Understanding whether and what CGT event has occurred
helps determine if the taxpayer has made a capital gain or
loss and the affects on the taxpayer’s income tax liability.
 CGT Events

CGT Event A1 – Disposal of an Asset

• CGT event A1 happens if a taxpayer ‘disposes’ of a CGT
asset.
• The event happens when any contract for the disposal is
entered into or, if there is no contract, when the change of
ownership occurs.
• Examples: sale or gifting of an asset or the transfer of
shares.
• Capital gain if the capital proceeds are more than the
asset's cost base. Capital loss if the capital are less than
the asset's reduced cost base.
 CGT Events

CGT Event A1 – Disposal of an Asset

• A gain or loss arising from CGT event A1 will be
disregarded if:
– There is a change in the legal ownership of an asset
without a beneficial change in the ownership;
– The CGT asset was acquired before 20 September
1985; or
– A lease was granted before, and not renewed or
extended after, 19 September 1985.
 Cost Base and Reduced Cost Base

The Basics
• The cost base is relevant when calculating the capital gain
from a CGT event.
• A reduced cost base (RCB) is used in working out the
capital loss from a CGT event.
• Both the cost base and RCB are comprised of number of
elements.
Cost Base and Reduced Cost Base
Cost Base and Reduced Cost Base
 Cost Base and Reduced Cost Base

Modifications to Capital Proceeds and Cost Base

• In some situations, the cost base or proceed of an asset
may need to be modified.
• In this case, the market value of a CGT asset will be
substituted as the cost or reduced cost base or capital
proceeds.
• Capital proceeds include the money the taxpayer has
received or is entitled to receive and the market value of
any other property the taxpayer has received, or is
entitled to receive.
 CGT Exemptions and Special Rules

Exceptions or exemptions
• Exceptions are identified within the provisions dealing
with each of the CGT events.
• For example, where the asset was acquired before 20
September 1985. In those circumstances the capital gain
or capital loss is disregarded.
• There are also four broad categories of exemption: main
residence, depreciating asset, motor vehicle and SBE
exemptions.
 CGT Exemptions and Special Rules

Main residence exemption

• There is an automatic exemption for the capital gain or
loss that happens to a dwelling that qualifies as the
taxpayer's main residence.
• Two dwellings may be entitled to the main residence
exemption where a new main residence is acquired before
the original one is disposed of.
• The absence concession allows a taxpayer to treat a
dwelling as their main residence despite being absent
from it.
 CGT Exemptions and Special Rules

Main residence exemption

• A partial main residence exemption will apply if the
dwelling was the main residence of the taxpayer for only
part of the ownership period.
• For example, where the dwelling was first rented before it
became the taxpayer's main residence.
• Note: changes in the CGT regime were introduced at 7.30
pm (AEST) on 9 May 2017 in relation to foreign tax
residents’ access to the main residence exemption.
 CGT Exemptions and Special Rules

Depreciating asset exemption

• A capital gain or loss that is generated from a CGT event in
relation to a depreciating asset is generally disregarded.
• However, CGT can still apply to depreciating assets that
are held for private use.
Motor vehicle exemption
• A capital gain or loss that a taxpayer makes from a motor
vehicle, such as a car or a motorcycle, is disregarded.
 Calculation of Net Capital Gains or Net
Capital Losses
Capital Gain or Loss for Most CGT Events
• Separately calculate the capital gains or capital losses for
each CGT event during the year. Noting any exemptions.
• A taxpayer then apply either the indexation method or the
discount method.
• The appropriate method depends on the timing of the
CGT event and whether the taxpayer is an individual,
complying superannuation fund, a trust, or a company.
 Calculation of Net Capital Gains or Net
Capital Losses
Indexation
• The indexation method can be used by all types of
taxpayers, including companies, if the following two
conditions are met:
1. The CGT assets were acquired at or before 11.45 am
(ACT) on 21 September 1999; and
2. The CGT assets have been held for more than 12
months.
 Calculation of Net Capital Gains or Net
Capital Losses
Discount
• The discount method can only be by an individual, or a
complying superannuation fund, or a trust if the following
conditions are met:
1. The capital gains must be made after 11.45 am (ACT) on
21 September 1999; and
2. The cost base that is used in working out the capital
gain does not include indexation; and
3. The CGT assets have been held more than 12 months
before the CGT event happens.
Calculation of Net Capital Gains or Net
Capital Losses
Calculation of Net Capital Gains or Net
Capital Losses
Calculation of Net Capital Gains or Net
Capital Losses
 Special CGT Rules for SBEs

The Basics
• An entity is recognised as a CGT SBE if:
– it carries on a business in the current income year; and
– its annual turnover is less than $2 million; and
– the net value of the assets owned and used in the
business does not exceed $6 million.
• CGT SBE’s may gain access to certain concessions and be
allowed to disregard or defer some or all of a capital gain
from the disposal active assets used in the business.
 Special CGT Rules for SBEs

Active Assets
• A CGT asset is an active asset if it is a tangible asset
owned by the taxpayer and it is used or held ready for use
in the course of carrying on a business, or;
• If it is an intangible asset owned by the taxpayer where it
is inherently connected with the business that the
taxpayer carries on.
• Two further conditions must however be met.
 Special CGT Rules for SBEs

Active Assets
1. When the asset has been owned for up to 15 years, it is
an active asset for at least half of the test period, or;
2. When the asset has been owned for more than 15
years, it is an active asset for at least 7 and half years
during the test period.
• The test period begins with the acquisition of the asset
and ends at the earlier of:
– The CGT event, and
– The cessation of the business if the business ceased in
the 12 months before the CGT event.
Special CGT Rules for SBEs
 CGT Treatment of Crypto Currencies

• Cryptocurrencies by and large are treated as property an

asset for CGT purposes in Australia.
• CGT may apply to certain transactions undertaken by a
taxpayer in respect of cryptocurrencies.
• This may occur for example when a taxpayer:
– Exchanges cryptocurrencies;
– Sells or gifts cryptocurrencies; or
– Converts cryptocurrencies to flat currency.
• The general rules and concessions may apply.
 Summary

LO Key points
4.1 CGT is not a separate tax. Taxpayers are subject
to tax on capital gains as statutory income.
4.2 A CGT asset can be any kind of property or legal
or equitable right
4.3 There are over 50 types of CGT events. Major
ones include A1, C1 and D1.
 Summary

LO Key points
4.4,4.6 Cost base and the RCB each comprise a number
of elements. RCB used when calculating losses.
4.5, 4.7 There are several exemptions and concessions to
the CGT regime i.e. pre-CGT assets, main
residence, motor vehicles and SBE concessions.
4.8 Transactions concerning cryptocurrencies may
be subject to the ordinary rules of CGT.