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CAPITAL GAINS TAX

Before calculating someones 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), someones 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 agents
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
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CAPITAL GAINS TAX


Furthermore, Mr Smith purchased his car on 1 February 2008 for $22,000 and then gave his car to
his son on 1 March 2014. Under s104-5, this change of ownership gives rise to a CGT event A1.
However, under s118-5 any capital gains or losses resulting from a car, motor cycle or similar vehicle
are disregarded. If the disposal of the car was not disregarded for CGT purposes, as stated in s11630, the market value substitution modification would apply since no capital proceeds was received.
In this situation the market value of $9,000 would be used as the capital proceeds, creating a net
capital loss of $13,000 ($9,000 - $22,000). However, as mentioned earlier and in s102-23 the capital
gain or loss from this CGT event is disregarded.

Vintage Car
On 1 March 2002 Mr Smith purchased a 1924 Bentley for $40,000, which he then sold for $60,000
on 1 March 2014. As mentioned above, s118-5 states that a capital gain or loss resulting from a car,
motor cycle or similar vehicle is disregarded. However, division 108 identifies a car as a CGT asset,
also suggesting it may be a collectable if it is an antique under subsection 108-10(2). Furthermore,
TD1999/40 states that the word antique describes an object of artistic and historical significance
that, when a CGT event occurs the age of the asset exceeds 100 years. Mr Smith owned a 1924
Bentley, meaning it is only 90 years of age at the date of sale, therefore under TD 1999/40 his
vintage car is not classified as an antique. Thus, s118-5 remains where a capital gain or loss resulting
from the disposal of this vintage car is disregarded.

Television
Moreover, Mr Smith purchased a television on 1 July 2009 for $1,500 and sold it on 1 March 2014
for $200. According to s104-10, CGT event A1 occurs when there is a change of ownership from one
entity to another, hence the disposal of Mr Smiths television is an example of CGT event A1. Since a
television is normally acquired for personal enjoyment, 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 $10,000.
However, Mr Smith incurred a capital loss during the disposal of his television ($200 $1,500 =
capital loss of $1,300). Hence, subsection 108-20(1) applies where, when a capital loss is made from
a personal use asset, the CGT event is disregarded.

5,000 Shares in ABC Limited


Mr Smith purchased 5,000 shares in ABC Ltd on 1 July 2013 for $7,500 and disposed of these on 1
March 2014 for $18,000. S104-5 claims that a transfer in ownership gives rise to a CGT A1 event.
Assuming Mr Smith sold these to a passive investor then CGT A1 event occurred, otherwise if the
shares were sold to a company a CGT G1 event would have resulted. In addition, according to s11525, 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. Therefore the discount gain
does not apply to the disposal of shares in ABC Ltd, as Mr Smith disposed of the shares within 12
months. Furthermore, s110-25 mentions that the cost base consists of five elements, however this
CGT event only two of these five elements apply. Mr Smith paid $7,500 to acquire the 5,000 shares
in ABC Ltd, 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. In addition, incidental costs (second element) resulted
from the acquisition and disposal of these shares as defined in s110-35. It is noted that when a CGT
asset is bought and sold at an arms length transaction, the costs associated with the sale are
included in the cost base rather than excluded from the capital proceeds. Hence, the brokerage fees
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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, amounting it to $8,300. 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. Hence, the capital
proceeds for the disposal of shares in ABC Ltd is $18,000. The net capital gain or loss for the sale of
shares in ABC Ltd will be calculated below.

2,000 Shares in CAB Limited


Additionally, Mr Smith purchased 2,000 shares in CAB Ltd on 1 July 2010 for $6,000 and sold these
shares on 1 March 2014 for $8,000. Similar to the ABC Ltd shares, assuming Mr Smith sold these to a
passive investor, in accordance with s104-5 a CGT A1 event occurred. It is noted that, Mr Smith held
these shares for longer than 12 months, thus unlike the ABC Ltd shares the discount gain applies.
S115-100 mentions that the discount gain reduces the capital gain by 50% for individual, however
before the discount gain can be applied, the cost base and capital proceeds need to be calculated.
S110-25 states that the cost base of a CGT asset contains 5 elements. Mr Smith paid $6,000 to
acquire 2,000 shares in CAB Ltd, hence resulting in the first element, as outlined in s 110-25(2). In
addition, 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. Mr
Smith incurred brokerage fees both during the acquisition and disposal of the shares, thus this is
added to the cost base, bringing it to $6,600. According to the general rule mentioned above, the
capital proceeds are directly the sale price which was $8,000. The net capital gain or loss for the sale
of shares in CAB Ltd will be calculated below (page 4&5).

Calculating Total Net Capital Gain


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CAPITAL GAINS TAX


Section 102-5 provides a method for working out net capital gain. 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).
House:
5,000 Shares in ABC Ltd:
Disregarded under s118-110
Capital Proceeds
Total Capital Proceeds = $18,000
Vacant Land:
Cost Base
Capital Proceeds
Purchase Price $7,500
Total Capital Proceeds = $150,000
+Brokerage Fees $500
Cost Base
+ Brokerage Fees $300
Purchase Price $30,000
Total Cost Base = $8,300
+ Advertising $1,000
Net Capital Gain =
+ Stamp Duty $2,000
Capital Proceeds $18,000
+ Agent Commission $4,000
-Cost Base $8,300
Total Cost Base $37,000
Total Net Capital Gain = $9,700
Total Net Capital Gain = $113,000
Car:
Disregarded under s118-5
Vintage Car:
Disregarded under s118-5
Television:
Disregarded under s118-10(3)

2,000 Shares in CAB Ltd:


Capital Proceeds
= Total Capital Proceeds $8,000
Cost Base
Purchase Price $6,000
+Brokerage Fees $400
+ Brokerage Fees $200
Total Cost Base = $6,600
Net Capital Gain = $8,000 - $6,600
= $1,400
Total Capital Gains
Vacant Land $113,000
5,000 Shares in ABC Ltd $9,700
2,000 Shares in CAB Ltd $1,400
Total Capital Gain = $154,100

Step 2: Apply prior year net capital losses


As per s102-15, this net capital loss of $5,000 has not been utilised therefore it can be applied in this
income year. Since the discount gain does not apply to the 5,000 shares in ABC Ltd, the net capital
loss from prior income year will be applied to it.
Net Capital Gain from the disposal of 5,000 shares in ABC Ltd = $9,700
Less: Prior year net capital losses = $5,000
Total Net Capital Gain = $4,700
Step 3: Reduce by discount
Net Capital Gain from the disposal of vacant land = $113,000
Less: 50% of Net Capital Gain = $56,500
Total Net Capital Gain = $56,500
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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 2,000 shares in CAB Ltd = $700
+ Net Capital Gain from the disposal of 5,000 shares in ABC Ltd = $4,700
Total Net Capital Gains = $61,900

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