TAXATION - CAPITAL GAINS

Overview of Capital Gains Tax MTG (M) 12-000

Read division 100 (ITAA 1997) s. 100-5 to s. 100-70
CGT - catch-all provisions - catch all gains that arise as a result of a CGT event happening irrespective of
whether the gains are of a capital nature or not Example trading stock could be caught as a CGT Event type A1 but also assessable under the ordinary
income provisions - trading stock is exempted from CGT.
Anti-overlap provisions
Where capital gain arises from CGT event and an amount is also assessable under another ITAA (nonCGT) provision eg, a Whitfords beach speculative gain caught as ordinary income under s. 6-5 - double
taxation avoided by reducing or eliminating the amount of the capital gain, MTG 12-690
Importance of CGT events
Can only make capital gain or loss if CGT event happens - s. 100-20. Most CGT events involve a CGT
asset - s. 100-25
Exception or Exemption apply s. 100-30
Exempt assets, eg motor cars
Exempt transactions, eg, personal injury compensation
Anti-overlap provisions s. 118-20, MTG 12-690
Family home - fully or partially exempt MTG 12-730
Trading stock, s. 118-25
Collectables - acquisition price not >$500, s. 108-10,
Personal use assets - acquisition price not >$10,000 s. 108-20,
Gains from gambling, competition with prizes. s118-37
Main issues to consider:
What is a CGT event.
What is a CGT asset most CGT events involve a CGT asset under CGT event a1
Acquisition & disposal
Cost base & indexation
Reduced cost base
Capital proceeds
Calculation of net capital gain
Calculation of tax payable
Exemptions
see s.100-20 to s.100-70; see MTG para 12-000

Most CGT events involve a CGT asset - s. 100-25

However, concept of a CGT event is wider than the concept of a CGT asset. Many CGT events are
concerned with capital receipts but do not involve a CGT asset see CGT event H1- forfeiture of a
deposit.
see MTG 12-240 CGT events
What is a CGT asset?
Division 108 - read definition s.108-5 & s.108-7, see MTG para 12-380
CGT asset is: s. 108-5(1), 108-5(2)
(A)
(B)

any kind of property; or

a legal or equitable right that is not property

(A) Property generally regarded as something capable of:

assignment (disposal by sale, gift); or
transmission (upon death or bankruptcy transmitted to executor.
(B) Rights which are not capable of assignment or transmission which are
not property) but which are CGT assets if created on or after 26 June 1992
include:
(1)rights under a contract for personal services
(2)rights of a party to a restrictive covenant or exclusive trade agreement
(3)rights of a sporting club under an agreement requiring a sportsperson to play for that club
Collectables Subdivision108-B MTG 12-390
Definition s.108-10(2) in order to be a collectable must be a CGT asset that is listed under the definition
of a collectable that are used or kept mainly for the personal use or enjoyment of the taxpayer or an
associate of the taxpayer:
artwork, jewellery, an antique, a coin or medallion,
a rare folio, rare manuscript, rare book,
a postage stamp, first day cover.
Capital asset is not a collectable merely because it is an asset that somebody may collect (eg football cards,
David Beckhams socks). Collectables include interests in collectables and an option or right to acquire
collectables s. 108-10(3).
Note: s.118-10(1) exemption in respect of a capital gain or capital loss from collectables if acquired for
$500 or less.
Sets of collectables - treated as a single collectable if the collectables would ordinarily be disposed of as a
set and are disposed of in one or more transactions for the purpose of trying to obtain the exemption for
collectables under $500.
Treatment of capital losses from collectables - s.108-10(1) and s.108-10(4)
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Capital losses from collectables can only to reduce capital gains from collectables s.108-10(1). If capital
losses from collectables are greater than capital gains from collectables in an income year, the excess can
be applied against future capital gains from collectables.
Note a capital loss from an ordinary capital asset (eg, shares) may be written off against a gain from a
collectable provided that the cost base of the collectable was more than $500.
Cost base of collectables - s.108-17 - disregard the third element of cost base - non-capital costs of
ownership.
Personal use assets - Subdivision 108-C MTG para 12-400
Definition s.108-20(2)
Note: s.118-10 exemption if acquired for $10,000 or less.
Note: s. 108-20(3) a personal use asset does not include land, a stratum unit or a building or structure that
is considered a separate CGT asset because of Subdivision 108-D.
Sets of personal use assets - treat as a single personal use asset- s.108-25
Cost base of personal use assets - disregard 3rd element of cost base non-capital costs of ownership - s.
108-30
Capital losses from personal use assets - disregard s.108-20(1).
Note a capital loss from an ordinary capital asset (eg, shares, may be written off against a gain from a
personal use asset provided that the cost base of the personal use asset was more than $10,000.
Note: an ordinary income loss (s. 6-5) can be written off indefinitely against any gain that is assessable
income that is against both ordinary income gains (s.6-5) and capital gains (s. 6-10)
Separate CGT assets - Subdivision 108-D
MTG 12-410, Subdivision 108-D, s. 108-50, ITAA97
CGT exceptions to the common law principle that what is attached to land or the principal asset is part
of the land or principal asset;
special rules about buildings and adjacent land;
rules about when a capital improvement to a CGT asset is treated as a separate CGT asset.
Under common law principle, if land or a principal asset had been acquired pre-CGT, any post-CGT
building or addition to the land or principal asset would take the legal status of the pre-CGT asset towhich
they are attached.
CGT exceptions to the common law principle whereby an asset is treated as a separate post-CGT asset in
relation to a principal pre-CGT asset.

Examples:
Buildings and structures on pre-CGT land
Building or structure erected post-CGT on land acquired pre-CGT are treated as a separate CGT asset
from the land if the contract for the construction was entered into post-CGT or, in the absence of a
contract, if the construction started post-CGT - s. 108-55(2).
Depreciating assets that are part of a building or structure
Depreciating asset that is part of a building or structure is taken to be a separate CGT asset from the
building or structure s. 108-60, eg, a lift, escalator, plumbing fixtures added to a rest room.
Adjacent land
Post-CGT land which is adjacent to pre-CGT land is treated as a separate CGT asset from the pre-CGT
land if amalgamated into one title - s.108-65
Capital improvements
A capital improvement to a pre-CGT asset (not necessarily land) is treated as a separate asset from the
pre-CGT asset if its cost base of each unrelated improvement (or the total of the cost bases of all related
improvements) when a CGT event happens to the pre-CGT asset is:
(i) more than the improvement threshold (2008/2009 - $119,954) for the income year in which the event
happens; and
(ii) more than 5% of the capital proceeds for the event. s. 108-70
See indexed cost base thresholds - s. 108-80
Thresholds are only relevant for capital improvements that are not buildings or structures.
Apportionment
If improvements are separate asset, the capital proceeds from the event must be apportioned between the
original asset and the improvements s. 116-40.
A capital improvement may include a non-tangible improvement council approval to rezone, subdivide.
CGT events Division 104, MTG para 12-240 to 12-280
Capital gain or loss can only arise if a CGT event occurs.
Most but not all CGT events involve a CGT asset
Summary of events - s.104-5
A1 disposal of a CGT asset
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B1
C1
C3
D1
D2
F1
F3
F4
F5
H1

use and enjoyment before title passes

loss or destruction of a CGT asset
end of an option to acquire shares
creating contractual rights Bringing a CGT asset into existence
granting an option
granting a lease
lessor pays lessee to get lease changed
lessee receives payment for changing lease
lessor receives payment for changing lease
forfeiture of a deposit

Some CGT events do not involve a CGT asset But relate only to an event which gives rise to a capital
receipt - eg. Event - H1-forfeiture of a deposit
Division 104 sets out all the CGT events for which a capital gain or capital loss may be made. MTG 12240
CGT event A1 - Disposal of an asset - s.104-10
see MTG para 12-250
CGT event A1 - most common CGT event.
Arises where a taxpayer disposes of a CGT asset or there is a part disposal of a CGT asset.
CGT event A1 happens where there is a change of ownership occurs from a taxpayer to another entity
s. 104-10(2).
Time of CGT event A1 occurs when contract for the disposal is entered into.
If there is no contract for the disposal of the asset, CGT event 1occurs when the change of ownership
in the asset occurs.
Example, if taxpayer enters into contract to sell a CGT asset on 1 June and the contract is settled on
1 September, CGT event 1 occurs on 1 June.
Capital gain arises if the capital proceeds from the disposal are more than the assets cost base.
If the capital proceeds are less than the reduced cost base of the CGT asset, a capital loss is made.
CGT event B1 - use and enjoyment before title passes - s.104-15
see MTG para 12-260 hire purchase agreement
CGT event B1 happens if a taxpayer enters into an agreement with another entity under which the right to
the use and enjoyment of a CGT asset owned by the taxpayer passes to the other entity and title will or
may pass to the other entity at or before the end of the agreement eg, a hire purchase agreement, a terms
contract for the sale of land.
CGT event B1 happens at the time the first entity obtains the use and enjoyment of the asset.
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If title to the asset does not actually pass under the agreement, for example, because some of the
payments are not made, any capital gain or capital loss is ignored.
Example - owner of a factory rents the factory to a tenant where the lease gives the tenant the right to
acquire the factory from the owner at any time during the period of the lease. CGT event B1 occurs
when the tenant first obtains the use and enjoyment of the factory.
If the tenant never takes up the right to buy the factory by the end of the lease, the capital gain or
capital loss under CGT event B1 is ignored.
A capital gain is made if the capital proceeds from the agreement are more than the cost of the asset.
If the capital proceeds are less than the reduced cost base of the asset, a capital loss is made.
CGT event C1 loss or destruction of a CGT asset
Subdivision 104-C s. 104-20, MTG para 12-270.
CGT event C1 occurs when a CGT asset owned by a taxpayer is lost or destroyed and the taxpayer
receives compensation.
The time of CGT event C1 is when the compensation is first received. If no compensation is received CGT
event C1 happens at the time the loss is discovered or when the destruction occurred.
A capital gain is made from CGT event C1 if the capital proceeds from the loss or destruction of the asset
exceed its cost base.
If the capital proceeds are less than the reduced cost base of the asset, a capital loss is made.
CGT event C3 end of an option to acquire shares - s.104-30
CGT event C3 occurs if an entity is granted an option by a company or the trustee of a unit trust to
acquire share of the company or units of the unit trust and the option ends because it is:
not exercised before it expires;
cancelled; or
released or abandoned
CGT event C3 occurs when the option ends s. 104-30(2)
A capital gain occurs if the capital proceeds received by the company or trust from the grant of the option
exceed the expenditure incurred in granting it. a capital loss is made if the capital proceeds are less than the
expenditure incurred.

Bringing an asset into existence Subdivision 104-D

CGT event D1 creating contractual or other rights

s.104-35 - see MTG para 12-280

CGT event D1 only applies if no CGT event happens other than CGT event H2 s. 102-25, ITAA97.
CGT event D1 happens when a taxpayer creates a contractual right or other legal or equitable right in
another entity such as a restrictive covenant s. 104-35(1).
Example - a person:
agrees not to compete with another person for a specified period within a specified distance.
agrees to play sport only with a particular club
agrees to enter into an exclusive trade tie agreement with another person
agrees to endorse the use of product
grants management rights over property
agrees to withdraw an objection to a town planning application
Example
An actor had been engaged by a film company under an agreement to produce, direct and act in a film.
The completed film had been shown in London and New York for a period but had not been very
popular. It was agreed that the best way to promote interest in the film would be for the taxpayer to
refrain from appearing in, directing or producing any other film for a period of 18 months other than for
the film company for which he received $1 million. There was no obligation for the film company to
employ him and it did not do so during the period.
Based on Higgs v Olivier 33 TC136, the receipt is likely to be a capital receipt for giving up the right
to earn income as an actor during the specified period and not from the exercise of his vocation. As the
taxpayer had performed all his obligations under the original agreement before the restrictive covenant
came into being, the sum received by him can not be regarded as further remuneration for his services
under the original agreement.
In entering into the agreement, the actor brought into existence a CGT asset the contractual rights
under the agreement (legal or equitable rights that are not property s. 108-5, ITAA97). CGT event
D1 occurs.
CGT event D1 happens when the taxpayer enters into the contract or creates the other right.
If a contractual or other right is acquired by a taxpayer as a result of CGT event D1, it is acquired at the
time of that CGT event s. 104-34(2).
A taxpayer makes a capital gain from CGT event D1 if the capital proceeds from creating the right are
more than the incidental costs incurred in creating it (losses vice versa) s. 104-35(3).
A capital gain from CGT event D1 cannot be a discount capital gain see MTG 12-280 and 12-033.
Following the example above, CGT event C3 will apply and a loss by the film producer will be recognised
when the agreement expires and the producer loses the right to enforce the agreement
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 see WBME at 7-165.

CGT event D2 - granting an option Subdivision 104-d
s.104-40. see MTG para 12-280
CGT event D2 happens when a taxpayer grants an option to an entity, or renews or extends a previously
granted option s. 104-40(1). Although CGT event D1 would cover the granting of an option, CGT event
D2 specifically covers a the granting of an option and therefore takes precedence over CGT event D1.
The time of CGT event D2 happens when the taxpayer grants, renews or extends the option s. 10440(2).
CGT event D2 is ignored if the option is exercised - s. 104-40(5).
Example WBME at 7-170.
If a property which is the subject of the granting of the option is eventually disposed of as a CGT event
A1, the sum received for the granting of the option is included in the sellers capital proceeds as well in the
cost base of the purchaser. An amendment may need to be made in the sellers earlier tax return which
included a sum in respect of the granting of the option.
A taxpayer makes a capital gain from CGT event D2 if the capital proceeds from granting, renewing or
extending the option are more than the expenditure incurred in making the grant, renewal or extension
(losses vice versa) s. 104-40(3)
A capital gain from CGT event D2 cannot be a discount capital gain
see MTG 12-280 and 12-033.
CGT event F1 - granting a lease s.104-110, MTG para 12-300
CGT event f1 happens when a lessor grants, renews or extends a lease pursuant to a contract or if there is
no contract at the time of the start of the lease.
If a lease granted before 20 September 1985 is renewed or extended after 20 September 1985, CGT event
F1 applies to the renewed or extended lease - s. 104-110(2)(a) and s. 104-110(2)(b). As a result of CGT
event F1 the lessee will have acquired a CGT asset.
If the lessee then assigns the rights under the lease to another party, CGT event A1 happens. When the
lease expires CGT event C2 will happen.
A taxpayer makes a capital gain from CGT event F1 if the capital proceeds, for example, a lease premium,
from granting, renewing or extending the lease are more than the expenditure incurred in relation to it s.
1o4-110(3) (losses vice versa s. 104-110(4)).
Lease inducements

In Coolings case and Montgomerys case a cash lease inducement paid to a partnership of solicitors on the
taking up of a lease of premises by the partnerships service company was held to be ordinary income.
These payments also give rise to a CGT event D1. in these circumstances, the capital gain is reduced to
prevent double taxation s. 118-20, ITAA97.
CGT event F3 lessor pays lessee to get lease changed
MTG 12-300, s. 104-120, ITAA97
CGT event F3 happens if a lessor incurs expenditure to get the lessees agreement to vary or waive a term
of the lease s. 104-120.
CGT event F3 gives rise to a capital loss only.
The time of this CGT event is when the lease is varied or waived s. 104-120(2).
The lessor makes a capital loss equal to the amount of the expenditure incurred s. 104-120(1).
CGT event F4 lessee receives payment for changing lease
MTG 12-300, s. 104-125, ITAA97
CGT event F4 gives rise to a capital gain only.
It is the opposite side to CGT event F3. The amount received by the lessee from the lessor for agreeing to
vary or waive a term of the lease is treated a capital gain s. 104-125(1).
The time of this CGT event is when the lease is varied or waived s. 104-125(2).
The lessee makes a capital gain if the capital proceeds from CGT event F4 exceed the leases cost base at
the time of the event.
The cost base of the lease to the lessee is reduced to nil if the lessee makes a capital gain s. 104-125(3).
If the capital proceeds are less than the cost base, the cost base of the lease to the lessee are reduced by the
capital proceeds s. 104-125(4).
Consider the example provided by WBME at 7-270.
CGT event F5 lessor receives payment for changing lease
MTG 12-300, s. 104-130, ITAA97
CGT event F5 happens if a lessor receives a payment from the lessee for agreeing to vary or waive a term
of the lease s. 104-130(1).
The time of this CGT event is when the lease is varied or waived s. 104-130(2).
A lessor makes a capital gain from CGT event F5 if the capital proceeds from the event exceed the
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expenditure incurred by the lessor in relation to the waiver or variation. a capital loss is made if the capital
proceeds are less than the expenditure incurred.
Where CGT event F5 happens, the payment by the lessee is capital expenditure incurred to enhance the
value of the lease and is included in the fourth element of the leases cost base and reduced cost base for
the lease.
CGT event H1 - forfeiture of a deposit Subdivision 104-H
s.104-150. MTG para 12-320
CGT event H2 happens when a deposit paid to a taxpayer is forfeited because a prospective sale or other
transactions does not proceed s. 104-150(1)
The time of CGT event H2 is when the deposit is forfeited s. 104-150(2).
A taxpayer makes a capital gain from CGT event H2 if the deposit is more than the expenditure incurred in
connection with the prospective sale or other transaction. (losses vice versa) s. 104-150(2).
Question does CGT event (1) H2 involve a capital asset or is it (2) concerned only with a capital
receipt that does not involve a capital asset?
Answer no capital asset is involved merely a capital transaction.
Acquisition rules - division 109
MTG 12-440 to 12-470; division 109, ITAA97
The timing of the acquisition a CGT asset is important because:
(1) An asset acquired before 20 September 1985 generally no CGT liability;
(2) The acquisition date which determines whether the CGT discount is available only applies in respect of
certain CGT assets which have been held for at least twelve months;
(3) The acquisition date determines whether the cost base of the asset is indexed up to 30 September
1999;
(4) The acquisition factor (where relevant) is determined quarterly;
(5)Time of acquisition is relevant for certain provisions which require a determination of an assets market
value on the date of acquisition, for example, where property is a acquired on the death of a person.
General rule - s.109-5, ITAA97
see chart s.109-5(2)
Taxpayer acquires a CGT asset when taxpayer becomes its owner. For example, this rule applies if a
person constructs or creates a building, painting, statue or other physical object for another person.
Acquisitions without a CGT event - s.109-10
There are also specific rules for situations where a CGT asset is acquired independently of a CGT event
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happening.
See s. 109-110, items 1 to 3, and examples:
(1) if a taxpayer (or agent) constructs a CGT asset (physical or intangible) and owns it when the
construction is finished , or asset is created, , it is acquired when construction or work that
resulted in the creation, started. for example, creation of:
sculpture,
building of a factory or machinery for a manufacturer,
goodwill,
creation of a patented process by a chemist).
(2)if a company issues or allots equity interests (for example,
shares) in the company, they are
acquired when the contract is entered into, or if there is no contract, when the equity interests are
issued or allotted.
Cost base rules - Division 110
MTG 12-550 to 12-610,
General rules on cost base - s.110-25
Impact of GST on capital proceeds
Where a purchaser registered for GST is entitled to an input credit for GST paid on an asset acquired for
the purpose of making taxable supplies, the cost of the GST will not usually be added to the cost base of
the asset s. 103-30, ITAA97.
Where the purchaser of a CGT asset is not registered for GST, any GST borne by the purchaser is included
in the CGT cost base of the asset.
Elements of cost base
Cost base includes five elements s. 110-25(1)-(6).
The cost base is reduced by net input tax credits see note 2, s. 110-25(1), s. 103-30, ITAA97.
(1)

Acquisition costs s. 110-25(2)

The total of the money paid, or required to be paid, in respect of
acquiring the asset and the
market value of any other property given to acquire the CGT asset. The element may be modified by
the market value substitution rule WBME 7-645.

(2) Incidental costs incurred in acquiring a CGT asset or in

s. 110-25(3).

relation to a CGT event (disposal)

Incidental costs incurred to acquire a CGT asset or that relate to a CGT event are specifically defined
in s. 110-35 to only include:
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 costs of surveyor, valuer, auctioneer, legal adviser, broker,

agent, legal advisor, accountant,
consultant
transfer costs
stamp duty
advertising costs, marketing expense, to find a seller or a buyer
valuation or apportionment costs for CGT purposes
search fees relating to a CGT asset
cost of a conveyancing kit
borrowing expenses (such as loan application fees and mortgage discharge fees)
(3)

Costs of owning an asset (formerly non-capital costs) s.110-25(4)

This element is only included if the asset was acquired after 20 August 1991. This element includes
the cost of owning the asset, not the cost of becoming the owner. Includes interest on money
borrowed to acquire the asset, maintenance, repairs, insurance, rates or land tax, interest on money
borrowed to refinance the money borrowed to acquire the asset and to finance the capital
expenditure to increase the assets value.
Expenses are not included in the cost base to the extent that such non-capital expenses are
deductible s. 110-40(2).
The third element does not apply to collectables or personal use assets s. 109-17; s. 108-30,
ITAA97.
Taxpayer cannot include the third element to create or increase a capital loss.

(4) Enhancement, preservation, installation and moving costs s. 110-25(5)

This element includes non-deductible initial repairs.
Since 1 July 2005 it is not necessary that the expenditure be reflected in the state of the asset at the
time of the CGT event,
Example - expenditure incurred in building a house which is then required to be demolished as a
result of a court order is included in element 4.
(5)

Title costs capital expenditure incurred to establish, preserve, or defend the taxpayers title to the
asset or a right over an asset s. 110-25(6).

Expenditure is not included as part of the cost base of an asset to the extent that;
(1) Expenditure that is deductible is not included in any of the five elements of the cost base
(2) The expenditure is an input tax credit for GST purposes;
(3) A non-assessable recoupment is received in respect of it.
(4) It is a bribe to a public official;
(5) It is in respect of entertainment;
(6) It is a penalty that is excluded from deduction under s. 26-5, ITAA97.

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Reduced cost base rules Subdivision. 110-B

General rule -s.110-55, MTG. para 12-560
Reduced cost base is relevant to determining if a capital loss has been made.
All of the elements (except the 3rd) of the reduced cost base are the same as the cost base.
The elements cannot be indexed.
Amounts not included in the reduced cost base
Expense is not included in any element of the reduced cost base if:
(1)
(2)

It is deductible (interest, repairs, etc in regard to a rental property); or

If a non-assessable recoupment is receivable in respect of the asset (compensation received for
permanent damage to an asset).

Modification of cost base rules & reduced cost base rules

Division 112 MTG 12-570
Market value s.112-20
Use for 1st element of cost base & reduced cost base if no expenditure was incurred to acquire asset (eg. a
gift or donation) or it was a non- arm's length transaction or the expenditure cannot be valued.
Apportionment rule s112-30
If only part of the expenditure incurred in relation to a CGT asset relates to the asset, the relevant element
of the cost base and reduced cost base of the asset only includes that part of the expenditure reasonably
attributable to the acquisition of the asset.
Assumption of liability rule s.112-35
If a CGT asset is acquired from another entity and it is subject to a liability, the first element of the cost
base and the reduced cost base of the asset includes the amount of the assumed liability.
Indexation of cost base elements
Division 114 MTG para 12-610
Choice of indexation or discount.
12 months ownership of asset usually required s. 114-10(1)

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Indexation and discounting

CGT asset acquired and disposed of before11.45am, EST 21 September 1999
Generally index for inflation (except 3rd element) if taxpayer acquired the asset at least 12 months before a
CGT event in relation to the asset - s.114-10
CGT asset acquired before - 11.45am EST 21 September 1999 and disposed of before 11.45am EST
21 September 1999
Indexation only
CGT asset acquired before - 11.45am EST 21 September 1999 and disposed of after 11.45am EST
21 September 1999 choice:
(1) index up to September 1999 quarter (except 3rd element); or
(2) apply CGT discount to the capital gain instead of indexation
Acquisition and disposal after 11.45am 21 September 1999
Discount method only provided taxpayer acquired the asset at least 12 months before a CGT event in
relation to the asset.
Discount method is available to individuals and trusts (50%) and complying superannuation funds (33.3%)

Not available to companies - only indexing up to 30 September 1999.

Capital proceeds from a CGT event Division 116
see MTG para 12-500
General rule - s.116-20(1)
The amount of the capital proceeds from a CGT event is generally the sum of the money received or are
entitle to receive and the market value of any other property received or receivable as a result of a CGT
event.
Modifications to general rule
summary s.116-10, MTG para 12-510
Five modifications to the general capital proceeds rule that may be relevant to a CGT event
(1) Market value substitution s.116-30
Example - if you received no proceeds because you gifted or donated the asset or some of the proceeds
cannot be valued or it was not an arm's length transaction}

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(2) Apportionment rule - s.116.40

If payments are received in connection with a transaction that relates to more than one CGT event or to a
CGT event and something else
(3) Non -receipt rule - s.116-45
Capital proceeds from a CGT event reduced if unlikely that the taxpayer will receive all of the proceeds.
(4) Repaid rule -s. 116-50
Capital proceeds reduced to extent that repaid or compensation is paid by the taxpayer in relation to the
CGT event.
(5) Assumption of liability rule - s. 116-55
Capital proceeds increased to the extent that the taxpayer acquires the CGT asset subject to a liability by
way of security over the asset.

Amount of capital gain or loss s.102

MTG para 12-170 & 12-180
In order to calculate a net capital gain or loss for an income year it is necessary to:
combine capital gains and capital losses from all CGT events during the income year
if a net capital gain arises any unabsorbed capital losses from previous income years can be applied, and
then
any CGT discounts that are available are applied ( eg, 12 month discount)
if a net capital gain for the income year arises it is included in the taxpayers assessable income as
statutory income pursuant to s. 6-10 and combined with the taxpayers s. 6-5 ordinary income to form
the taxpayers total assessable income.
A net capital loss cannot be deducted from taxpayers s.6-5 ordinary income, eg, salary, business income,
but is carried forward to the next income year and may be deducted against future capital gains s. 10210(2).
On the other hand, a net income loss, eg, from business or property can be deducted against a capital gain.
For most capital gain events, the amount of a capital gain or capital loss is the difference between the
two amounts referred to in the section dealing with the relevant capital gain event.
The general rule is that:
(1) capital gain = capital proceeds less cost base
(2) capital loss = reduced cost base less capital proceeds
Calculation of net capital gain

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General rules - Division 102. MTG 12-030

Steps in calculating net capital gain - see s.102-5
Step 1: reduce the capital gains made during the income year by the capital losses made during the income
year, subject to the special rules for collectables and personal use assets. Taxpayer can choose the order in
which any current year capital gains are reduced.
Losses are applied to the full amount of a capital gain before any available discount is applied.
WBME at 7-905 suggest applying capital losses against capital gains in the following order in order to
maximise their value:
first against capital gains that do not attract either the CGT discount or indexation (maximises benefit of
loss)
second against capital gains that attract indexation
finally against capital gains that attract the CGT discount.
Students should consider the examples in WBME at 7-905 which illustrate the principle that capital losses
should be first applied against non-discountable capital gains and also the restrictions that apply in regard
to capital losses in respect of collectables and personal
use assets.
Step 2: if the capital gains are more than the capital losses for the current income year - apply any
previously undeducted net capital losses from earlier income years (before applying available discounts)
to reduce any remaining capital gains under step 1.
Although taxpayer can choose the order in which any current year capital gains are reduced, net capital
losses from previous income years are applied in the order in which they were made s. 102-15.
Students should consider the example in s. 102-15.
Step 3: to calculate the net capital gain - each amount of a discount capital gain remaining after step 2 is
reduced by the discount percentage provided taxpayer held the asset for 12 months - 50% - if capital gain
is made by an individual or a trust; - 33.33% by a complying superannuation fund (discount percentage not
available to companies).
In certain circumstances the twelve month requirement is relaxed. This occurs where the taxpayer acquired
the asset as a result of a same-asset or replacement asset rollover provision or under the rules
relating to deceased persons where the taxpayer is treated for the purposes of claiming the CGT discount
as having owned the asset for at least twelve months provided the collective period of ownership is at least
twelve months.
A capital gain from a CGT event is specifically stated not to be a discount capital gain where the CGT
event that gives rise to the capital gain occurs as a result of an agreement that was entered into within
twelve months of acquiring the asset s. 115-40.
This prevents taxpayers artificially extending the period of ownership beyond the time of the agreement to
dispose of the asset to the time of the actual disposal.

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An earlier grant of an option to sell is likely to be regarded as a separate agreement distinct from the
agreement to actually dispose of the asset.
Step 4: if the capital gain (including discount capital gains) qualifies, apply the small business concessions
(not examinable) to the capital gain
Step 5: add up the amounts of capital gains remaining after step 4. The sum is the net capital gain for the
income year.
Steps in calculating net capital loss - s.102-10
Step 1: add up the capital losses made during the income year. Also add up the capital gains made.
Step 2: subtract capital gains from capital losses.
Step 3. if capital losses exceed capital gains - it is the net capital loss for the income year.
Net capital losses can be carried forward s. 102-15(3)}
s.102-5 - current year losses are applied in any order and then apply prior year net capital losses in order
they were made - see s.102-15
See example MTG para 12-030
Exceptions and modifications
See s.102-30 items 1 & 2, see MTG para 12-050
You can only subtract collectable capital losses from collectable capital gains. On the other hand, net
capital gains from collectables are added to any other net capital gain and therefore may have ordinary
capital losses deducted against them.
Disregard capital losses you make from personal use assets. On the other hand, net capital gains from
personal use assets are added to any other net capital gain and therefore may have ordinary capital losses
deducted against them.
Companies can only offset a net capital loss against a capital gain if they pass either: (1) the continuity of
ownership test; or, (2) the same business test in relation to capital loss year, capital gain year and any
intervening years (discussed later under Company Taxation)
CGT consequences of death
General rule when a taxpayer dies, a capital gain or loss from a CGT event relating to a capital asset that
the taxpayer owned just before death is ignored s. 128-10
Assets that pass to the legal personal representative or beneficiary are acquired by them on the day of
death (transmission) at:

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 pre-CGT asset market value at date of death

post-CGT asset cost base (or reduced cost base) of deceased.
However, if asset is a dwelling that was the deceased taxpayers main residence before death and was not
used for income-producing purposes at that time, the cost base (or reduced cost base) is the market value
at the date of death s. 128-15(4)
The 12 month rule relating to the CGT discount and cost base indexation is modified for assets acquired
from deceased estates.
When a CGT asset devolves to a legal personal representative or beneficiary on death, the 12 month rule
applies as long as the collective period of ownership (deceased and beneficiary is 12 months, ie the asset is
treated as if it was acquired by the deceased
s. 115(30), s. 114-10(6).
Rates and calculation of tax payable
Discounted capital gain -see s.100-50 and s.115-5 to s.115-100 (50% for individual, trusts; 33.33%
complying superannuation funds)
see MTG para 12-030 to para 12-038
Exemptions - Division 118
Cars, motor cycles, valour decorations & cultural bequests - s.118-5
Gains or losses from collectables provided the market value of the collectable is $500 or less at the time
you acquired it - s.118-10
A capital gain from a personal use asset is disregarded if you acquired it for $10000 or less- s.118-10
{note : a capital loss from a personal use asset is disregarded - see s.108-20]
Certain compensation receipts, prizes and gambling winnings and losses - read s.118-37(1)(c)
Trading stock - s.118-25
see MTG paras 12-640, 12-650 & 12-660
Main residence - general exemption s.118-110,
MTG paras 12-730, 12-740, 12-750 & 12-760
Meaning of dwelling -s.118-115
Extends to adjacent land up to 2 hectares s. 118-20
Income-earning use limits the exemption where part of dwelling is used for income-earning use
Rules extending exemption Moving in to a dwelling if a dwelling becomes a taxpayers main residence by the time it was first
practicable for the taxpayer to move in after it was acquired, the dwelling is treated as the taxpayers main

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residence from when it was acquired until it actually became the taxpayers main residence - s.118-135
Example moving in to a property after renting it out for 2 years the 2 year period would not be
exempt as taxpayer has not moved into property when it was first practicable upon disposal property
would only qualify for a partial exemption.
Changing residence - both exempt for 6 months
If a taxpayer acquires a dwelling that is to become the taxpayers main residence and the taxpayer still
owns an existing main residence, both dwellings are treated as the taxpayers main residence for up to 6
months s. 118-140.
If taxpayer takes 8 months to move in to the new main residence or takes 8 months to sell the old main
residence, the taxpayer is liable for CGT upon the extra 2 months above the 6 month exemption.
Rule only applies if taxpayers main existing residence was taxpayers main residence for continuous
period of at least 3 months in the 12 months before disposed of and was not used for income-producing
purposes in the 12 months it was not taxpayers main residence.
Building, renovating or repairing main residence
Main residence exemption on land owned by the taxpayer can be extended for an additional period of up
to 4 years from the time the land was acquired if the taxpayer builds, or repairs or renovates a building on
the land s. 118.150(1)
If the land was acquired more than 4 years before the dwelling became the taxpayers main residence, the
exemption period starts 4 years before the dwelling became the taxpayers main residence s. 118.150(3)
For the exemption to apply the dwelling on the land that is constructed must become the taxpayers main
residence as soon as practicable after the work is finished and must continue to be the taxpayers main
residence for at least 3 months s. 118.150(3)
A taxpayer who makes use of the additional 4 year exemption cannot claim a main residence exemption for
any other dwelling during that period except for the 6 month double exemption allowed when changing
main residences s. 118.150(6)
Main residence accidentally destroyed s. 118-160
If a dwelling that is the taxpayers main residence is accidentally destroyed and another dwelling is not
built on the land, the taxpayer can choose to apply the main residence exemption to the land, as if, from
the time of the destruction until the time of disposal, the dwelling had not been destroyed and continued to
be the taxpayers main residence.
No other dwelling can be treated as the taxpayers main residence during this period - s. 118-160(1)(2)(3)
Partial exemption
Where a dwelling is used as a main residence for only part of the

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ownership period, a partial exemption is available on a proportionate basis (subject to 6 years exemption
rule) s. 118-185.
Example - taxpayer purchases a dwelling and immediately rents it to a tenant and at a later date uses it as
a main residence. The capital gain will be apportioned between the exempt period and the taxable period.
Note that in the above example the six year exemption under s. 118-145(1) is not available as it requires
that the dwelling be first used as a main residence before the taxpayer moves out ( see 6 year rule below).
Absences from main residence - s.118-145
If a dwelling that was a taxpayers main residence stops being his/her main residence the taxpayer may
choose to continue to treat it as a main residence indefinitely provided it was not used for income
producing purposes and the taxpayer has not acquired a new main residence s. 118-145(1)(3)
If the dwelling is used for income-producing purposes while the taxpayer is absent the maximum period
that the dwelling can be treated as a main residence is 6 years - s. 118-145(2).
In order to be entitled to the 6 year absence exemption, the dwelling be first used by the taxpayer as a main
residence before the taxpayer moves out.
If the taxpayer returns to the dwelling as a main residence the taxpayer is entitled to another maximum
period of 6 years each time the dwelling again becomes and ceases to be the taxpayers main residence - s.
118-145(2)
The taxpayer cannot treat any other residence as a main residence except where the six month extension
rule under s. 118-140 applies in respect of the acquisition of a new main residence.
If the dwelling was partly used for income-producing purposes at the time it stopped being the taxpayers
main residence, only a partial exemption will apply.
Example taxpayer purchases a dwelling and uses it as a main residence for one year and then rents it to a
tenant for 7 years and then lives in property as main residence for 2 years and then sells property
- apportion between main residence days and non-main residence days
- 6 year exemption applies property is exempt for 9 years out of ten.
Special rule in relation to absences.
In order to obtain the benefit of the 6 year absence exemption the taxpayer must first use the dwelling as a
main residence immediately prior to the period when the dwelling is first used for income-producing
purposes.
- if a full main residence exemption would have been available if a CGT event happened just before the
first time the dwelling was used for income-producing purposes - a partial main residence exemption
becomes available where main residence is first used for income-producing purposes (1) before 7.30pm EST 20 August 1996 The capital gain is determined on the basis of the original cost base and will be calculated on a
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proportionate basis in respect of the period of income production that exceeds six year over a period of
actual ownership commencing at the time the dwelling is acquired and used as a main residence.
Example - dwelling acquired 19 August 1995 for $100,000 and used as a main residence for one year
when its market value is $200,000. The dwelling is rented out for 9 years on 19 August 1996 (s. 118-145,
6 year exemption applies) and then becomes owners main residence again in 2005. It is sold after 2 years
in 2007 for $580,000.
Capital gain is determined on the basis of original cost = $580,000 less original cost $100,000.
Capital gain = $480,000.
Taxable capital gain = $480,000 x 3/12 = $120,000.
(2) After 7.30pm EST on 20 August 1996
if a full exemption would have been available if a CGT event happened just before the first time it was
used for income producing purposes (income time),
the dwelling is treated as if it had been acquired at the income time at its market value.
If the taxpayer rents the dwelling for longer than six years the capital gain will be calculated in respect of
the excess of the capital proceeds above the market value at the time the dwelling was first used for
income producing purposes.
Capital gain will be calculated on a proportionate basis in respect of the period of income produce that
exceeds six year over a period of deemed ownership commencing at the time the dwelling is first used
for income producing purposes.
Example - dwelling acquired 21 August 1995 for $100,000 and used main residence for two years when
its market value is $200,000. After two years the dwelling is rented out for 9 years on 21 August 1997 (s.
118-145, 6 year exemption applies) and then becomes owners main residence again in 2006. It is sold after
one year in 2007 for $600,000.
Capital gain is determined on the basis of market value = $400,000.
Taxable capital gain = $400,000 x 3/10 = $120,000.

CGT and Residency

Statutory income s. 6-10(4)
If you are an Australian resident, your assessable income includes your statutory income from all
sources, whether in or out of Australia.
Section 6-10(5)
If you are not an Australian resident, your assessable income includes:
(a) your statutory income from all Australian sources
Although s. 6-10(5)(a) includes all Australian source statutory income in the assessable income of a non-

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resident a foreign resident is taxable only where a CGT event happens in relation to certain specified
assets.
A non -resident can only make a capital gain or capital loss if a CGT event happens:
before 12 December 2006 to a CGT asset that has the necessary connection with Australia
on or after 12 December 2006 to a CGT asset that is taxable Australian property
Assets that have the necessary connection to Australia or are taxable Australian property are taxable
only when actually disposed of.
CGT assets having the necessary connection to Australia include: MTG 13-730
land and buildings in Australia
shares in Australian private companies for the income year in which the CGT event happens
an interest in a trust that is a resident trust for CGT purposes for the income year in which the CGT
event happens
shares in a resident public company where the
taxpayer owns at least 10% of the shares during the
5 years prior to the CGT event
a unit in a unit trust that is a resident trust for CGT purposes for the income year in which the CGT
event happens and in which the taxpayer and associates beneficially owned at least 10% of the issued
units at any time during the 5 years before the CGT event happens
an asset that the taxpayer has used in carrying on a business through a permanent establishment in
Australia
After 12 December 2006, non-residents will be subject to CGT only where they make a capital gain or a
capital loss as a result of a CGT event happening in relation to taxable Australian property MTG 13725
CGT assets that are taxable Australian property: are:
direct or indirect interests in Australian real property where more than 50% of the value of the
interposed entities assets is attributable directly or indirectly through one or more interposed
entities to Australian real property
business assets of a non residents permanent establishment in Australia.

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