STATUTORY INCOME Section 6-10 provides: Your assessable income also includes some amounts that are not ordinary income. Amounts that are not ordinary income, but are included in your assessable income by provisions about assessable income, are called statutory income (see section 10- 5 for a list of statutory income)

Introduction CGT introduced on 20 September 1985 Originally contained in Part IIIA ITAA36 Now contained in Parts 3-1 and 3-3 ITAA97 [¶24.1] Foundations of Taxation Law © CCH Australia Limited Foundations of Taxation Law

CAPITAL GAINS The Need For Specific Legislation: Ordinary Concept of Income narrow Inequity

Current Provisions Found in Part 3.1 (general provisions) and Part 3.3 (specialised provisions) ITAA ‘97 Section 102-5 Your assessable income includes your net capital gain (if any) for the income year.

CGT Net gain is: The excess of capital gains over Capital losses A net capital loss arises where losses exceed gains for the year.

Net capital gain Net capital gain included in assessable income (s 102-5) and worked out as follows: Step 1: Capital gains - capital losses (made during the year) Step 2: Remaining capital gains – “net capital losses” (from earlier years) Step 3: Remaining capital gains which are “discount capital gains” reduced by “discount percentage” Step 4: Remaining capital gains that qualify for “small business concessions” reduced by those concessions Step 5: Remaining capital gains = taxpayer’s net capital gain for the year Foundations of Taxation Law © CCH Australia Limited

Net capital loss Cannot be claimed as a deduction Can be carried forward to offset against capital gains in future years Net capital loss Capital losses for the year Capital gains for the year = – [¶24.2](b) Foundations of Taxation Law © CCH Australia Limited Foundations of Taxation Law

Net capital loss Cannot be claimed as a deduction (s 102-10(2)) Can be carried forward to offset against capital gains in future years (s 102-15(3))

Capital gains and capital losses Capital gains and capital losses can only arise as a result of a “CGT event” Most CGT events happen in relation to “CGT assets” Over 50 different kinds of CGT events contained in Div 104 ITAA97 Some capital gains and capital losses are disregarded [¶24.3] Foundations of Taxation Law © CCH Australia Limited Foundations of Taxation Law

CGT Event Importance of CGT Event It is only a CGT event that can give rise to a gain or loss CGT event equates to realization of gain or loss. Over 50 different kinds of CGT events contained in Div 104 ITAA97 (s104.5 gives a summary) “CGT event A1” to “CGT event L8” Exception: capital gains or losses made on CGT assets acquired before 20 September 1985

Foundations of Taxation Law CGT assets (s 108-5(1)) Most CGT events happen in respect of CGT assets Definition of CGT asset: Any kind of property, or A legal or equitable right that is not property Examples: Land Shares Options Goodwill [¶17.5](a) Foundations of Taxation Law © CCH Australia Limited

CGT Assets The asset is acquired on or after 20 September 1985 (each CGT event defines the date - i.e. s104-10(5)(a) Special Rules apply to non residents Must be necessary connection with Australia (s.855.10) Necessary connection can be either a direct or indirect interest.

AUSTRALIAN CONNECTION taxable Australian real property an indirect interest in Australian real property a business asset of a permanent establishment in Australia an option or right to acquire any of the CGT assets in assets in above 3 dot points a CGT asset that is deemed to be Australian taxable property where a taxpayer, on ceasing to be an Australian resident, makes an election under s 104-165 (i.e. you do not dispose of the asset on leaving Australia)

CGT Event CGT events: Many rely on change of ownership of an asset i.e. Event A1 Others simply rely on a designated type of receipt rather than on the existence of any asset. i.e. Event D1 (Eg. Restrictive covenant)

CGT event A1 Arises where taxpayer “disposes” of a “CGT asset” Disposal occurs where there is a change of beneficial ownership (eg sale or gift of CGT asset) Time of CGT event is when: A contract for disposal is entered into, or If no contract, when change of ownership occurs Capital gains and losses made on CGT assets acquired before 20 September 1985 are disregarded Capital gain Capital proceeds Asset’s cost base – = Capital loss Asset’s reduced cost base Capital proceeds – = [¶24.7] Foundations of Taxation Law © CCH Australia Limited Foundations of Taxation Law

Elements of the cost base 1st element – total of the money paid, or required to be paid, and the market value of any property given, or required to be given, in respect of acquiring the asset 2nd element – “incidental costs” incurred to acquire the asset or that relate to the CGT event 3rd element – costs of owning the asset (only applies to assets acquired after 20 August 1991 but not personal use assets or collectables) 4th element – capital expenditure incurred to increase or preserve the asset’s value (except goodwill) 5th element – capital expenditure incurred to establish, preserve or defend taxpayer’s title to asset [¶24.8](b) Foundations of Taxation Law © CCH Australia Limited Foundations of Taxation Law

CGT Assets Asset defined in section 108.5 Variation on Concept of Asset Additions to Pre CGT assets s.108-55 post CGT building on pre CGT land; s. 108-60 Depreciating assets of building are separate assets; s. 108-65 adjacent land S.108-79 capital improvements

Buildings and structures may be treated as separate CGT assets from land in certain cases Land acquired post-CGT that is adjacent to land acquired pre-CGT is treated as a separate asset if amalgamated Capital improvement to land may be treated as a separate CGT assets

Special rules for specific assets Collectables Capital losses from collectables can only be applied against capital gains from collectables Capital gains and capital losses are disregarded if collectables acquired for under $500 Personal use assets Capital losses disregarded Capital gains disregarded if personal use asset acquired for $10,000 or less [¶24.5](b) Foundations of Taxation Law © CCH Australia Limited Foundations of Taxation Law

EXEMPTIONS Exemptions are to be found in Division 118. Some are: Cars & motor cycles Certain gains/losses on collectibles and personal use assets Trading Stock Main residence Depreciating assets Small Business gains (Division 152)

CALCULATING TAX IMPORTANT TERMS Cost Base Indexed Cost Base Only relevant for assets acquired before 11.45 on 21 Sept 1999 Reduced Cost Base Discounted Gain Reduced Cost Base

Calculating Gain - Indexation Asset Acquired on 29 September 1985 for $100,000 Asset sold on 29 September 1998 for $500,000 Calculate Indexed Cost Base $100,000 x 121.3 71.3 = $100,000 x 1.701 = $170,100 The Gain is $500,000 LESS $170,100 =$329,900 NOTE: The discount method is not available as the asset was sold before 21 September 1999.

Calculating Gain – two Cost Base Asset Acquired on 29 September 1985 for $100,000 Renovations costing $60,000 incurred on 20 January 1990 Asset sold on 29 September 1998 for $500,000 Calculate Indexed Cost Base Of original asset = $170,100 Of renovations $60,000 x 121.3 = 60,000 x 1.202 100.9 = $72,120 TOTAL Indexed Cost Base = $170,100 + 72,120 = $242,220 GAIN = $500,000 – 242,220 = 257,780

Calculating Gain – Discount Method Asset Acquired on 29 September 1985 for $100,000 Asset sold on 1 March 2000 for $500,000 Calculate Indexed Cost Base $100,000 x 123.3 = $100,000 x 1.731 71.3 = $173,100 GAIN = $500,000 - $173,100 = $326,900 OR $500,000 - $100,000 = $400,000 x 50% GAIN = $200,000

SPECIAL RULES Vast Array of rules for a variety of Unusual circumstances – Division 124 Sub divisions 124B - 129F Passing on death No CGT chargeable to the deceased. The person who gets assets from the deceased will pay CGT on disposal of the asset. Division 128 has valuation and timing rules for such assets. See s 128-15