Topic 3: Capital Gains Tax (CGT)

Transcription

1 Tpic 3: Capital Gains Tax (CGT) Step 1: Is there a gain r lss? CGT Event CGT Asset Timing f the Event Step 2: Determine the amunt f the gain r lss. What are Capital Prceeds (Div 116)/Mdificatins What is the Cst Base? Reduced Cst Base? Cst Base Mdificatins. Step 3: Calculating the gain r lss (net) GCT Lsses 50% General Discunt Exemptins and Cncessins Rll-Over Cncessins Net Capital Gains as Assessable Incme Recmmended Structure: 1. Is the amunt/asset pre CGT? 2. Asset (s 108-5) (tw parts: prperty, legal and equitable rights) a. Identify what the capital asset is b. Cllectables c. Persnal Use Assets (PUAs) 3. CGT Event (s ) a. What happened t the asset did yu dispse f it, was it lst r destryed? b. A1 mst cmmnly ccurring event, C1, C2, D1, F1, H2. 4. Timing a. When yu acquired the asset b. When yu dispsed f the asset 5. Calculate a gain r a lss a. This is a grss amunt (grss gain r lss) b. The tw equatins i. CG = CP CB ii. CL = RCB CP 6. Cnsider cncessins r discunts a. Divisin 115 b. Main Residence r Discunt c. Death (dispsal n death, r acquiring prperty n estate) 7. Net gain r lss. a. This net amunt is then included in yur assessable incme

2 Intrductin What is CGT? General: Tax n capital gains. Capital gain is the increase in the value f a capital asset (real estate r investment) that gives a higher wrth than the purchase price. The gain is nt realised until the asset is sld. CGT is "essentially a tax upn gains frm the realisatin f prperty where the realisatin is nt an aspect f the carrying n f a business". In ther wrds, CGT aims t tax gains made n the dispsal f assets and smetimes als t tax the receipt f certain ther capital amunts that d nt derive frm the dispsal f assets. Relates t assets acquired after 20 September 1985 (when CGT came int effect). If yu acquired an asset Pre-CGT = N tax cnsequences. CGT is a tax f last resrt if an amunt can be assessable elsewhere, then that is where it will sit. Yu will get a clue that yu need t deal with CGT. CGT Prvisins: The CGT prvisins d nt fllw the basic structure f s 6-5 and s 8-1. The CGT prvisins include as assessable incme a net capital gain. As such CGT is statutry incme. Step 1: Is there a Gain r Lss? When des CGT arise? Fr Capital tax prvisins t apply, s requires that there is a CGT event (a summary f these events is cntained in s 104-5). In ther wrds, unless there is a CGT event, there will be n capital lss r gain.

3 Basic rules relating t each event, the timing f acquisitin and dispsal and the methd f calculating the net gain r net lss, are then utlined in mre detail in ss CGT ASSET S 108-5(1) ITAA 97 defines a CGT asset in general terms: any kind f prperty r a legal r equitable right that is nt prperty. Nte: Cllectables / Persn Use Assets tw separate and specific categries f assets, if the asset yu are lking at fits int ne f these categries, then we will n lnger lk at 108-5, we will lk at their sectins. What is Prperty? Prperty is a very brad term and can be used t describe everything that a persn may have cntrl ver. Langdale M. R. (Jnes v Skinner) said: Prperty is the mst cmprehensive f all terms that can be used, inasmuch as it is indicative and descriptive f every pssible interest that a party may have. Tangible: Items f tangible prperty (have physical existence) such as land, buildings, and chattels d nt prvide any difficulty when cnsidering the meaning f the term prperty. They are capable f pssessin, wnership may be transferred and the right f wnership may be defended in a curt. Intangible: An idea may be a CGT asset if it is manifest either in a Trademark, a cpyright r an applicatin fr patent. Smething still in yur head is nt prperty (knwledge r knw-hw). It has t be in the frm f cpyright, IP r patent.

4 If yu create a patent r ther industrial prperty ver yur idea r knwledge, prperty exists in the patent as it is transferable and may be the subject f legal actin. If yu sell the patent t anther persn, yu have given up the right t use that idea and therefre yu have transferred prperty t a new wner. Legal and Equitable Rights that are Nt Prperty Enfrceable cntractual bligatins 1. Specific t individual 2. Nt a general right r smething that is available t everyne has t be crystallised, specific t smene. 3. Enfrceable S we have a right t a safe learning envirnment, but until smene falls ver and hurts themselves, the right is nt enfrceable e.g. judgement and right t receive cmpensatin specific t yu, nt transferable, yu can sue and recver damage/lss The secnd limb (S108-5 (1)(b)) f the definitin f a CGT asset includes legal and equitable rights that are nt prperty. This wuld include nn-prprietary rights. Fr example, right t cmpensatin fr a cancelled cntract fr wrk, r the terms f an emplyment cntract. Hepples v FCT (1991) In Hepples v FCT (1991) the taxpayer was paid $40,000 n his retirement fr agreeing nt t disclse the secrets f his emplyer receipt was nt a substitute fr incme and was a capital payment fr entering the restrictive cvenant n terminatin f emplyment. He has a receipt fr $40,000, a capital gain, created a cntractual right in anther persn being his emplyer, and then that will be a capital lss fr them paying the $40,000. An asset is real r intangible prperty Prprietary right right relating t prperty Nt persnal rights eg. right t wrk r trade Nt civil rights - available t all Extract frm prvisin: S 108-5(1), defines a CGT asset in general terms and then s 108-5(2) specifically includes in the definitin f a CGT asset: a) Part f, r an interest in, an asset referred t in s 108-5(1) b) Gdwill r an interest in it c) An interest in a partnership asset d) An interest in a partnership nt cvered in (c). Inclusin f item (a) reslves a difficulty with the ITAA 36 legislatin by making it clear that CGT applies t parts f assets and interests in assets. Cllectables and ther persnal use assets (if it is NOT prperty r legal and equitable rights) - If it is ne f these, skip and g t their prvisins : Cllectables 1. An exhaustive list / has t be n the list is it n the list in (2)? 2. Only cnsider CGT if acquisitin is mre than > $500?

5 : if yu have a cllectable, and it is purchased fr less than 500, then this is the perative prvisin t disregard any CGT cnsequences. a. Cnversely, If it is purchased fr mre than $500, yu shuld still nte that it is a cllectable under , and yu d cnsider CGT. 4. Yu can nly ffset r use a capital lss n a cllectable fr a gain n anther cllectable. a. E.g. purchase a cllectable fr $600, make a capital lss f $400, yu can nly use that $400 lss t ffset a gain n anther cllectable. S (2) a cllectable is: a) Artwrk, jewellery, an antique, r a cin r medallin b) A rare fli, manuscript r bk c) A pstage stamp r first day cver that is used r kept mainly fr yur persnal use r enjyment. Cllectables are nly included in calculatins fr CGT if their PURCHASE value was ver $500 The acquisitin cst/purchase price. If it is less than $500, we disregard it, rather than it being exempt. Subdivisin 108-B defines cllectables and enacts the majr difference frm ther CGT assets, in that capital lsses realised n cllectables can nly be used t reduce capital gains frm cllectables (s (1)). Where lsses n cllectables cannt be utilised in the year f realisatin they may be carried frward t reduce future capital gains n cllectables nly. Hwever, yu shuld nte s which exempts frm CGT cllectables which cst $500 r less. Summary fr cllectables Cllectables: s (2) Listed and fr persnal use and enjyment Event A1 n sale S (1): Cst $500 r less gain/lss disregarded S (1): Lsses nly available against ther gains realised n cllectables S : Sets f cllectables are a single asset Persnal Use Assets This is nt a set list! Think f husehld items persnal use r enjyment. Persnal use assets that are nt included in the definitin f cllectables are cvered by Subdiv 108-C. These assets are exempt frm CGT if they cst $ r less (s (3)), but any capital lsses realised are als disregarded (s (1)). Include cars (but nt really), televisin, fridge, furniture etc. Nte that cllectables is exhaustive definitin, s start there, then query whether PUA Yu cannt use a capital lss under this categry t ffset they are disregarded

6 2. CGT EVENT Really all yu re ding at this pint is identifying which event it is. S states that a capital gain/lss nly ccurs if a CGT event happens and s sets ut the events that need t be cnsidered. Therefre, yu need an event t ccur t have CGT cnsequences. Yu need t determine which event applies as this may affect hw yu wrk ut capital gain r lss (and may determine the timing f it). S : Only applies if there is a CGT events Div 104: Cvers all CGT events - each event describes: What causes the event When the event ccurs Calculatin f gain r lss Sme specific exemptins There are 53 separate events. Events are gruped by letter: summary s EG: C1 - C3 deals with assets that n lnger exist but nt sld. We lk at nly the main CGT events: A1, C1, C2, D1, F1, H2. A1 dispsal f a CGT asset C1 lss r destructin f a CGT asset C2 cancellatin, surrender and similar endings D1 creating cntractual r ther rights F1 granting a lease H2 receipt fr event relating t CGT asset Event A1 is the mst general: s we use this t teach the principles. T reslve any cnflicts that may arise in determining which CGT event is t be applied, s describes the steps necessary t make this determinatin. As a general rule the mst specific event is t be used but there are sme exceptins. The steps fr selecting the applicable CGT event can be summarised as fllws. 1. Select which f the CGT events apply (ignre D1 and H2 these are left t last). 2. If mre than ne event applies select the mst specific. 3. If n previusly cnsidered CGT event applies cnsider if D1 applies. 4. If D1 des nt apply cnsider if H2 applies. 5. If nne f the abve apply there is n CGT. S nw yu have picked yur event (1), yu need t then identify yur CGT asset (2). The mst imprtant and bradest CGT event is event A1. Event A1 raises sme terms that are imprtant t the peratin f CGT. Pursuant t s ITAA 1997 CGT event A1 happens if yu dispse f a CGT asset. We therefre need t address the meaning f dispsal and CGT asset. The definitin f CGT asset is critical - the CGT events are based n circumstances affecting these assets.

7 3. TIMING OF THE EVENT Dispsal: As we said, CGT event A1 ccurs n the dispsal f a CGT asset. We have discussed CGT asset (prperty) and we nw lk t dispsal f that asset. Using CGT Event A1 as an example, dispsal f a CGT asset wuld generally ccur when wnership f an asset passes frm ne wner t anther. This can ccur because f sme act r because f the peratin f law. Fr example, fr CGT Event A1 (see s (3)), the timing f the event is when: a) Yu enter int the cntract fr the dispsal; r b) If there is n cntract when the change f wnership ccurs. The time f dispsal ccurs as prescribed by the Act. Fr prperty/land, there will always be a cntract and REMEMBER it is the earlier date that dispsal ccurs, nte settlement. Nte that fr event A1, a dispsal will nt ccur where yu stp being the legal wner, but cntinue t be the beneficial wner f the asset. Ges t the pint that, if yu wn smething, yu generally have legal and beneficial wnership (e.g. f huse title (l) and can live in it (b)) what if huse mves int trust f which yu are beneficiary, legal wnership is held by trust, but beneficial wnership is still yurs. Acquisitin: Yu can nly dispse f a CGT Asset that yu have acquired. S prvides that in general, yu acquire a CGT asset when yu becme its wner. Date f acquisitin is the flip f date f dispsal same terms S Fr an asset that yu create (build a building, paint a picture, write a bk) the asset is acquired when the wrk... started SUMMARY OF STEP 1 1. Identify that there is a CGT asset; 2. Identify that there has been dispsal f the asset t trigger a CGT event; 3. Identify the date yu had acquired the asset; 4. Identify the date yu dispsed f the asset. This infrmatin can nw be used t wrk ut CGT liability calculating the capital gain.