TAXATION CAPITAL GAINS TAX - INTRODUCTION. Paper

Transcription

1 TAXATION CAPITAL GAINS TAX - INTRODUCTION CONTENTS Page 1. Capital Gains Tax (CGT) - The Basics What CGT Applies To Applies To Residents And Non-Residents Exemptions From Capital Gains Tax Motor Vehicle Exemption Cost Basis Capital Gains Tax Date Indexation Only Applicable To Assets Acquired Prior To 21st September Indexation Rates Record Keeping Is Important Fines Business Expenditure Property Acquisition Share Investor s Records Records Have To Be Kept A Long Time Records Help You Determine Sales Priority Records Help Effective Management Plan Whose Name To Invest In Capital Losses % Capital Gains Tax Discount For Individuals /3% Capital Gains Tax Discount For Superannuation Funds Capital Gains Tax Discount For Trusts Capital Gains Tax Discount Not Available For Companies Twelve Month Agreement Null And Void For CGT Discount Calculation Of Capital Gain Or Capital Gain Discount Professional Advice Page 1

2 ADDENDUMS A Discount Capital Gain/Capital Gain Calculation Sheet Page 2

3 TAXATION CAPITAL GAINS TAX - INTRODUCTION 1. Capital Gains Tax (CGT) - The Basics For the Capital Gains Tax (CGT) provisions to be attracted: There must be a disposal (or deemed disposal) of an asset. The asset must have been acquired (or deemed to have been acquired) by the taxpayer after 19th September The disposal of the asset must occur after 19th September When the Capital Gains Tax Legislation was first introduced, assets that were held for more than twelve months, were indexed by the movement in the Consumer Price Index (CPI). The cost value of the asset for Capital Gains Tax purposes was the indexed price. Significant changes were made from 19th September 1999: Indexation of assets does not apply to any assets acquired after 21st September For assets that were acquired prior to 21st September 1999, the indexed cost price to 30th September 1999 can be calculated, but the cost value is frozen at the 30th September 1999 and is now referred to as the "Frozen Indexed Cost Base". A Capital Gains Tax Discount was introduced (Refer Items 20 and 21). Other benefits for small business taxpayers have been introduced. 2. What CGT Applies To Capital Gains Tax applies to just about all assets acquired after 19th September 1985 except the family home and some motor vehicles. The assets subject to CGT include: Businesses Investment Property Holiday Houses Units in Unit Trusts Shares in Companies Land Farms Personal use items including artwork, mementos, medals, coins, boats and various other assets Page 3

4 3. Applies To Residents And Non-Residents Resident: A resident of Australia is subject to Capital Gains Tax on the sale of an asset irrespective of where that asset is situated in the World. Non-Resident: A non-resident of Australia is only liable for Capital Gains Tax on the sale of certain assets with a connection to Australia. 4. Exemptions From Capital Gains Tax There are various exemptions from the Capital Gains Tax provisions including: trading stock of a business betting and other gambling wins art unions, lotteries etc. valour or brave conduct awards One of the most used exemptions is that of the taxpayer s principal place of residence. 5. Motor Vehicle Exemption A motor vehicle is excluded from the definition of an asset for Capital Gains Tax purpose. The type of motor vehicles excluded includes: motor cars, station wagons, panel vans, utility trucks or similar vehicles motorcycles or similar vehicles any road vehicle designed to carry loads of less than 1 tonne or fewer than 9 passengers 6. Cost Basis Capital Gains Tax is imposed on the difference between the cost of buying an asset and it s ultimate selling price. The cost includes the original purchase price plus any costs incurred in improving or in some cases maintaining the asset. The cost of a business would include: legal fees relative to advice on buying the business stamp duty valuation fees The cost of purchasing a holiday home would include the cost of buying it originally plus the cost of any extensions made, say seven years later as well as any maintenance and buying and selling costs, such as agent s fees, stamp duty etc. Page 4

5 7. Capital Gains Tax Date The date of the Sales Contract is the applicable date for Capital Gains Tax purposes, not the date when settlement of a Contract is made. For example a Contract signed on the 21st May 2007, not settled until the 30th September The applicable sale date for the calculation of Capital Gain is the 21st May Indexation Only Applicable To Assets Acquired Prior To 21st September 1999 Indexation was abolished from 21st September For assets acquired prior to then and held for more than twelve (12) months then the various costs that have been incurred in purchasing and holding the asset are indexed by the movement in the consumer price index. Because indexation inflates the cost of the asset, the capital gain for tax purposes is reduced. Indexation has been replaced by Capital Gains Tax Discount for Individuals and Superannuation Funds. (Refer to Item 21). 9. Indexation Rates The indexation rates are based on the Consumer Price Index (CPI). The CPI is announced quarterly and the purchase and/or sales date of an asset (if applicable) is to be associated with the CPI Index number corresponding to the quarter in which the transaction occurs. Following is a summary of CPI figures released since the introduction of the Capital Gains Tax Legislation: Year March June September December Cost base indexation is frozen from 30th September 1999 for Capital Gains Tax purposes. Page 5

6 10. Record Keeping Is Important What the Capital Gains Tax Legislation requires taxpayers to do is to keep separate records of every item which comprises part of their investment and to maintain those records for as long as the taxpayer owns the property, plus a further five years after the taxation assessment for the year the property was sold was issued. This means that a separate file should be created into which copies of all documentation relative to the purchase and ongoing costs of owning and maintaining a property are placed. If taxpayers do not keep the appropriate records, they can end up paying more Capital Gains Tax then otherwise would have been the case. The Australian Taxation Office allows taxpayers to utilise an Asset Register to record Capital Gains Tax transactions. An entry made to the Asset Register has to be certified by a Registered Tax Agent or another person approved by the Australian Taxation Office. The person certifying the entry checks the extraction of information from the original documents and certifies that they have been correctly recorded in the Asset Register. The Register must be maintained in English. Even though an Asset Register has been established, the documents which support the entry in the Asset Register must be retained for five years after the date that the entries are certified. The Asset Register itself must be maintained for at least five years after the sale or disposal of the particular asset. 11. Fines Taxpayers can be fined up to $3,300 for not keeping adequate records of transactions involving Capital Gains Tax. 12. Business Expenditure A business person investing in the acquisition of a business should keep a separate file relative to the purchase costs of that business, so as to assist in the calculation of the capital gain. Records to be kept should include: Contract for the purchase of the business The apportionment of the business acquisition cost Copies of correspondence and invoices from Solicitors relative to legal advice on the acquisition of the business Copies of correspondence relative to Stamp Duty imposed Valuation Fees Any other costs that have been incurred in acquiring the business Page 6

7 13. Property Acquisition If you are acquiring a property you need to keep adequate records of all expenditure incurred in the acquisition of the property. If you have acquired a holiday home you need to record how much money was spent on maintenance, repairs, extensions etc., so that these costs can be included to determine the cost of the asset for the calculation of the capital gain. It is no use trying to calculate these costs in twenty years time if you have not kept any records. You need to establish a file now and place into that file details of all expenditure incurred on the property. 14. Share Investor s Records If you are investing in shares you will need to keep accurate records, particularly if you trade regularly or you are involved in dividend reinvestment schemes. Every dividend reinvested is treated for Capital Gains Tax purposes as a new purchase. 15. Records Have To Be Kept A Long Time Under the Capital Gains Tax Regulations, the taxpayer is required to maintain full supporting records as to the cost of an asset, not only for the entire life of that asset in the taxpayer s hands, but for five years after the taxation assessment for the year the property was sold was issued. In the case of assets acquired by Family Discretionary Trusts where different beneficiaries receive the benefit of distributions from the Trust, the asset could be owned for a number of generations. The Capital Gains Tax Regulations are going to require that a detailed file of the cost pertaining to that asset is maintained for all of that time, plus a further five to six years after the asset has been sold. 16. Records Help You Determine Sales Priority Accurate records help the taxpayer decide which asset to sell. If you decide to sell only a proportion of your shares in a company, knowing when you acquired particular numbers of shares and for what price will greatly assist in selecting the parcel of shares to be sold, so as to minimise the Capital Gains Tax that you are going to pay. Alternatively in some instances you may desire to maximise the capital gain because you wish to offset the capital gain against a capital loss which has arisen from some other type of investment. Page 7

8 17. Records Help Effective Management The maintenance of detailed records of the costs involved in the acquisition of a property and shares and capital losses that have been incurred from various investments will significantly assist in disposing of assets in an orderly manner so as to minimise the imposition of Capital Gains Tax. If you have records which can identify when a particular share was acquired, you can nominate it for sale. In this way you may be able to minimise the capital gain. If you do not have adequate records then the Taxation Department will adopt a first in - first out approach, which could maximise the tax payable. 18. Plan Whose Name To Invest In When you commence investing in assets outside the family home or a business, it is advisable to give consideration to placing the asset in the name of the adult who is expected to be on the lowest income when the asset is eventually sold, so that Capital Gains Tax has less impact. Shares held in the name of a non-working spouse could mean a much lower level of Capital Gains Tax. When an asset is acquired, the taxpayer should assume that one day the asset will be sold and therefore think about the name of the person in whose name the asset is acquired and the record keeping requirements that are going to be necessary so as to minimise Capital Gains Tax at some time in the future. 19. Capital Losses Capital losses are incurred whenever any asset, which would have been subject to capital gain tax, is sold at a loss. The capital loss occurs when an asset acquired post 19th September 1985 is sold where the sale proceeds are less than the original purchase price. Capital losses can only be offset against capital gains realised in that current year or be carried forward and offset against capital gains in subsequent years. Capital losses cannot be written off against revenue income % Capital Gains Tax Discount For Individuals Assets subject to Capital Gains Tax held for at least twelve months by an Individual holding assets in their own names and disposed of after 21st September 1999 will be eligible for discounting at a rate of 50% (which is known as the "50% Capital Gains Tax Discount"). This is calculated on the non-indexed capital gain calculated on the disposal of the asset. This figure is then reduced by 50%. The 50% discount amount is known as the "Discount Capital Gain". Page 8

9 The type of assets that the Discount Capital Gain can apply to include: rental properties shares in public companies shares in private companies units in unit trusts units in public unit trusts active business assets If the asset is held for less than twelve months, then it is not eligible for the "Capital Gains Tax Discount". There is no "asset test" applied to an eligible person or entity to be able to utilise the Capital Gains Tax Discount /3% Capital Gains Tax Discount For Superannuation Funds Assets owned by a Superannuation Fund that are subject to Capital Gains Tax and which have been held for at least twelve months and disposed of after 21st September 1999 will be eligible for discounting at a rate of 33.1/3%. 22. Capital Gains Tax Discount For Trusts The Discount Capital Gain tax discount of 50% applies to trust assets. 23. Capital Gains Tax Discount Not Available For Companies Companies are not eligible for Capital Gains Tax Discount for assets disposed of after 21st September Twelve Month Agreement Null And Void For CGT Discount A capital gain will not be treated as a discount capital gain if the Capital Gains Tax event occurs more than twelve months after the asset was acquired, but under an agreement that the taxpayer entered into within twelve months of the acquisition of the CGT asset. 25. Calculation Of Capital Gain Or Capital Gain Discount An individual, superannuation fund trustee or beneficiary under a trust needs to prepare a calculation so as to ascertain the most favourable method to be utilised to calculate the capital gain to be included in the taxpayer's income tax return. If the asset was acquired by an individual, superannuation fund or trust prior to 19th September 1999 and had been held for more than twelve months as at 19th September 1999, then the taxpayer has the choice of calculating the capital gain based on the indexed cost price of the asset as at 30th September 1999 or utilising the capital gain discount method. Page 9

10 In Addendum A is a "Capital Gains Tax Calculation Sheet" which will facilitate the calculation of either the capital gain or the discount capital gain. If the asset has been held for less than twelve months, then neither of these methods may be used. The capital gain is the difference between the purchase price and the sale price of the asset. In both methods, current year capital losses and capital losses carried forward from previous years have to be deducted as part of the calculation of the capital gain or discount capital gain. 26. Professional Advice Capital Gains Tax is a very complicated area of the income tax legislation. Any person contemplating any business investments, sale of assets, restructuring of their business affairs are encouraged to seek professional advice from their professional accountant or solicitor before embarking on any changes or investments. Page 10

11 Addendum A A Discount Capital Gain/Capital Gain Calculation Sheet Name: Date: For Individuals, Superannuation Funds And Trusts (for assets acquired prior to 19th September 1999) Ref. 1. In whose name is the investment held? 2. Asset name? 3. Date of acquisition of the asset? 4. Cost of asset? 5. Indexed Cost to 30th September 1999? (if applicable - but asset must be held for at least 12 months) 6. Date of sale? 7. Was the asset held for more than 12 months? 8. Sale Price? 9. Calculation of Capital Gain Sale price Less: Indexed Cost to Cost Margin Less: Current Year Capital Losses Capital Losses Carried Forward Capital Gain After Capital Losses Less CGT Discount (50% for Individuals or Trusts and 33.1/3% for Superannuation Funds) NET CAPITAL GAIN: Using Indexation Method Using CGT Discount Method Page 11

12 10. Which is the preferred method to be used in your income tax return? 11. Comments (if any) Page 12

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