Capital gains tax in Australia
Encyclopedia
Capital gains tax
(CGT) in the context of the Australian taxation system
applies to the capital gain made on disposal of any asset, except for specific exemptions. The most significant exemption is the family home. Rollover provisions apply to some disposals, one of the most significant is transfers to beneficiaries on death, so that the CGT is not a quasi death duty.
CGT operates by having net gains treated as taxable income
in the tax year an asset is sold or otherwise disposed of. If an asset is held for at least 1 year then any gain is first discounted by 50% for individual taxpayers, or by 33.3% for superannuation funds. Net losses in a tax year may be carried forward, but not offset against income.
Personal use assets and collectables are treated as separate categories and losses on those are quarantined so they can only be applied against gains in the same category, not other gains. This works to stop taxpayers subsidising hobbies from their investment earnings.
/Keating
government. The tax applies only to assets acquired on or after that date. Gains (or losses) on earlier assets, called pre-CGT assets are ignored.
The rules introduced initially allowed the cost of assets held for 1 year to be indexed by the consumer price index
(CPI) before calculating a gain (calculation of a loss used only the unindexed cost though). This meant the part of a price rise due only to inflation
was not taxed. This rule was only current between 1985 and 1999 when it was then frozen.
Also, initially an averaging process was used to calculate the tax on gains. 20% of one's net capital gain was included as income, and the amount of extra tax it caused was multiplied by 5. So instead of a big capital gain pushing the taxpayer into higher tax brackets immediately, the brackets were stretched out, allowing more to be taxed at one's existing marginal rate.
From 20 September 1999 indexing of the cost base was discontinued, and instead the present 50% discount on the plain gain above the cost base was introduced. For assets acquired before that date the taxpayer can choose between indexing (up to the CPI at 30 September 1999) or discount.
Also from 21 September 1999, small business CGT concessions were introduced (below), reducing tax on small business owners retiring, and on active assets being sold, and allowing a rollover when selling one active asset to buy another
Trading stock is not regarded as an asset and instead comes under ordinary income tax. Items of plant being depreciated are subject to CGT, but only in the unusual case that they're sold for more than original cost (see Depreciating assets below)
section 104-5). Each event specifies results such as gain, loss, or cost base adjustment are to be made, and how to determine the date to use for the transaction.
The most common event is A1, the disposal of an asset. On disposal a capital gain arises if the proceeds are greater than the cost base, a capital loss arises if less than the reduced cost base. The date to be used is the date of the contract of sale (even if payment is not until later), or if no such contract exists then the date the taxpayer stopped being the owner (e.g. if an asset is lost).
The cost base of an asset is the amount paid for it, including associated costs such as agent's commissions. But there are three forms, from lowest to highest amount,
On disposal then,
Capital gains and losses in a given tax year are totalled, but in three separate categories according to the class of the asset,
The existence of separate categories for collectables and personal items works to prevent losses from them being offset against other gains such as from investments. In effect it prevents hobbies being subsidised.
Net losses in each category can be carried forward to future years, in their respective categories, but can't be offset ordinary income, or each other.
Also note that Capital Losses are applied before the Capital Gains discount. (e.g. An individual makes a Capital Gain of $100 eligible for discount x 50%= $50 Net Capital Gain. If the person also had Capital Losses of $50, the losses would apply first then there would be $50 Capital Gains leftover eligible for discount x 50% to $25 Net capital Gain)
Prior to 1 July 2001, distributions from property trusts commonly included a so-called "tax free" portion which was subtracted from the reduced cost base but not the cost base, in a similar way. (See Property trust distributions below.)
The taxpayer can use whichever method results in the least tax.
As capital losses are applied before the Capital Gains discount - Those with capital losses (in the same or previous years)with a few different share sales using the Indexation method can result in a better outcome.
For example: Individual with Capital Losses of $4,000
With only Capital Gains - the discount method is usually better (note Indexation is better for small (perhaps only very small) gains). The choice is essentially between reducing one's gain by the CPI rise of the cost base, or halving it outright. The CPI indexing may be small, but if one's proceeds are below it then there's no tax. When the gain gets above twice what indexation can knock off then the discount method is better.
Testamentary gifts, i.e. made upon death under a will or under the laws of intestacy
, are instead subject to rollover provisions in most cases (see Death below).
its shares, for instance 2 shares for every 1 previously held there's no immediate CGT effect. The taxpayer's date of acquisition and cost base for the holding are unchanged, only it's for the new number of shares. Likewise for a consolidation (reverse split).
Bonus units from a unit trust are similar to bonus shares. Fully paid units with no amount to include in one's accessible income (as advised by the trust), merely change the number of shares in one's holding, otherwise a set of rules apply.
Such a plan is treated as if the shareholder received the dividend and then used the money to buy shares. The dividend is taxed like any other dividend (including with any dividend imputation
), and the shares are taken to be acquired for the cash one didn't receive.
Incidentally, record-keeping for dividend reinvestment plans can be annoying for the shareholder, because it creates lots of little parcels of shares with different acquisition dates and costs.
If share certificates or similar are used then clearly the ones transferred are the parcel. But when shares are held aggregated in bank account style such as in the CHESS
system used by the Australian Stock Exchange
, then the taxpayer can nominate which of the original purchases it is that are sold.
In both cases the taxpayer can choose to their advantage, such as selling a parcel with a capital loss to realize that immediately, or keeping particular parcels until they reach 1 year old to get the 50% discount on gains.
A further option is available for parcels of the same shares acquired all on one day. If desired they can be aggregated to make one parcel with the total of the costs, i.e. averaging out the prices paid. This reduces paperwork if for example shares are bought at a range of prices through the course of a day.
Taxpayers treat each part of a stapled security separately for capital gains tax purposes, i.e. calculate a gain or loss on each separately. But since stapled securities trade with only a price for the bundle, the taxpayer must use some "reasonable" method for apportioning the price across the parts. The Westfield Group for example recommends on their securities using the ratios of the net tangible asset backing (NTA) of each part.
Building allowance works as a kind of depreciation, representing progressive decline over the lifetime of a building. But unlike the way depreciation has a final balancing adjustment against income, the building allowance instead gets that as capital gain (or loss) through it lowering the cost base.
As an example, if it's assuming a building is worth nothing at the end of the 40 years implied by the 2.5% a year allowance, the owner has had deductions progressively over those years instead of only realizing the whole lot in one big capital loss at the end.
The investor subtracts the tax deferred part of a distribution from their cost base (and reduced cost base). It's called tax deferred because the investor pays no tax on the amount immediately, but will pay capital gains tax on it when they later sell the units, because it's lowered their cost base.
Tax deferred amounts generally arise from building allowances, the same as for direct property ownership (see above). At its simplest it works as follows. Suppose a trust earns rental income of $100 and has building allowance deductions of $20. Then the net taxable income is $80 and that amount is distributed to unitholders to be included in their income. The remaining $20 of cash is distributed to the unitholders too, but it's regarded as a return of capital.
An investor's cost base cannot go below zero. If tax deferred amounts have reduced it to zero, then any excess must be declared as a capital gain in the year received. This is an unusual situation, generally it can't occur unless an investor has been able to get trust units for much less than the value of the buildings.
Capital gains distributed by a trust arise from the trust selling assets. They're taxed in the investor's hands the same as other gains. When there's a choice of discount or indexation method, the trust manager makes that choice.
Discount capital gains are distributed in already discounted form, i.e. already reduced by 50% for assets held at least 1 year. The investor must gross it up by doubling, apply any capital losses, then re-discount the remainder. (If one has no capital losses to apply then there's no change and the amount received is the amount taxed.)
For the option writer, i.e. grantor,
If the rights are exercised then the new shares are taken to be acquired for the amount paid and on the date exercised. If the shares were pre-CGT then the market value of the rights at the time of exercise must be added to the cost base of the new shares too.
Company issued rights or options bought from someone else (i.e. not issued direct from the company) are treated like options above.
and Insurance Australia Group
. When shares are later sold a capital gain or loss occurs in the usual way.
, receiver or administrator may make a formal declaration that they expect no residual distribution to shareholders (all money being exhausted paying creditors first). Shareholders may then, if they wish, claim a capital loss on the shares as if they disposed of them for nil consideration. If a subsequent liquidation distribution does occur then it's treated as a capital gain.
Liquidators were granted the power to make such declarations from 11 November 1991, and other insolvency practitioners from 11 May 1991. Of course a shareholder may always sell apparently worthless shares to a third party for a nominal sum to realize a loss.
is covered under ordinary income tax, not capital gains tax. The reason for this is that in the first leg, i.e. the sale, the investor is not disposing of an asset they own.
If however, the proceeds are greater than the original cost, then the amount between the written-down value and the original cost is income, and the proceeds above that are a capital gain. Effectively deductions allowed in past years are reversed then the usual CGT applies.
There's no specific law on share traders, but the ATO publishes a fact sheet with guidelines based on court rulings http://www.ato.gov.au/businesses/content.asp?doc=/content/21749.htm. It includes examples of definitely trading, and definitely not. Factors include whether the intention is to profit, the repetition and regularity of the activity, and whether organised in a businesslike manner. (At worst a taxpayer can use the system of private rulings to get an ATO determination on particular circumstances they're in or are contemplating.)
A trader has the advantage that losses can be offset against other income (dividends for instance), and has a choice of valuing each share at either cost price or market price each year, so unrealized losses can be booked immediately but unrealized gains held back. The disadvantage for a trader is that the 50% discount on CGT gains for assets held 1 year or more is not available.
Prior to the introduction of capital gains tax in 1985, section 52 of the ITAA 1936
required taxpayers to declare (on their next return) assets they had acquired for trading. This was known as declaring oneself a share trader, but now there's no such election.
Bold text
This rollover doesn't apply if the beneficiary is not an Australian resident, or is a tax-advantaged entity such as a superannuation fund. In such cases the deceased is taken to have sold to the beneficiary at market value at the date of death, and the usual capital gains tax applies. Churches and charities are regarded as tax-advantaged too, but bequests to registered "Deductible Gift Recipients" are not taxed. Gifts under the Cultural Bequests Program are not subject to tax either.
Also, this rollover doesn't apply to pre-CGT assets (i.e. acquired by the deceased before 20 September 1985), in that case assets are taken to be disposed of at market value to the beneficiary, at the deceased's date of death. Being pre-CGT, there's no capital gains tax to the estate, but the pre-CGT status of the asset is lost.
Notice that for both pre and post CGT assets there are no tax liabilities to the deceased's estate for the usual case of transferring to an individual Australian beneficiary. This means in the majority of cases capital gains tax doesn't operate as a proxy for death duties or estate tax.
Unused net capital losses carried forward by the deceased from past tax years are lost with their death. These losses cannot be recouped by the estate or the beneficiaries (TD 95/47).
Transfers not made under court approval are not subject to rollover, the normal CGT rules apply to any disposals. And if assets are not transferred at market value and not in an "arms length" transaction then for CGT purposes the transfer will be treated as having been made at market value.
The shareholder can elect not to utilize scrip for scrip rollover, and instead treat it as a disposal of their original holding for the value of the new shares, realizing a capital gain. Or the shareholder can choose rollover on just a portion of their holding.
Under Australian companies law, if a bidder gains 90% acceptance it may force remaining holders to take the bid. Such holders are in the same position as those who voluntarily accepted (in particular note that the "compulsory acquisition" rollover below doesn't apply).
In certain eligible demergers rollover relief may be available, the company will generally advise of that. If available and if the taxpayer elects to use it, the new holding is taken to have been acquired at the same date as the original holding, and that includes being pre-CGT if the original was pre-CGT.
Usually rollover relief (when available) is an advantage, it preserves pre-CGT status and helps an individual meet the 1 year time period for the 50% discount on gains. However, on pre-CGT assets where the market value of the new holding is below its cost base, the taxpayer is better off not using the rollover but instead let the new holding be a CGT asset so the capital loss there can be utilized.
by a government agency, or is destroyed and insurance or compensation is received, the taxpayer may choose between,
When rolling-over there are rules to use when the compensation differs from the replacement or repair cost. And in particular there's a limit of 120% of market value if replacing a pre-CGT asset (so it's not possible to get a substantially bigger asset into pre-CGT status).
Note that these provisions apply only to capital assets, not to trading stock, nor to plant being depreciated.
Check ATO Website for further details.
Four capital gains tax concessions for small businesses presently exist, introduced 21 September 1999.
There are rules to apply for what constitutes a small business. The key elements are,
The exemption for gains paid into a superannuation fund is similar to what employees may do with an eligible termination payment (accumulated unused long service leave etc.) on leaving a job. But the small business case it's only the net gain after applying the CGT discounts which needs to be paid into the fund to escape CGT liability, the remainder can be kept in cash.
Capital gains tax
A capital gains tax is a tax charged on capital gains, the profit realized on the sale of a non-inventory asset that was purchased at a lower price. The most common capital gains are realized from the sale of stocks, bonds, precious metals and property...
(CGT) in the context of the Australian taxation system
Taxation in Australia
There are many forms of taxation in Australia. Individuals and companies in Australia may be required to pay taxes or charges to all levels of government: local, state, and federal governments...
applies to the capital gain made on disposal of any asset, except for specific exemptions. The most significant exemption is the family home. Rollover provisions apply to some disposals, one of the most significant is transfers to beneficiaries on death, so that the CGT is not a quasi death duty.
CGT operates by having net gains treated as taxable income
Income
Income is the consumption and savings opportunity gained by an entity within a specified time frame, which is generally expressed in monetary terms. However, for households and individuals, "income is the sum of all the wages, salaries, profits, interests payments, rents and other forms of earnings...
in the tax year an asset is sold or otherwise disposed of. If an asset is held for at least 1 year then any gain is first discounted by 50% for individual taxpayers, or by 33.3% for superannuation funds. Net losses in a tax year may be carried forward, but not offset against income.
Personal use assets and collectables are treated as separate categories and losses on those are quarantined so they can only be applied against gains in the same category, not other gains. This works to stop taxpayers subsidising hobbies from their investment earnings.
History
Capital gains tax was introduced in Australia on 20th September 1985, one of a number of tax reforms by the HawkeBob Hawke
Robert James Lee "Bob" Hawke AC GCL was the 23rd Prime Minister of Australia from March 1983 to December 1991 and therefore longest serving Australian Labor Party Prime Minister....
/Keating
Paul Keating
Paul John Keating was the 24th Prime Minister of Australia, serving from 1991 to 1996. Keating was elected as the federal Labor member for Blaxland in 1969 and came to prominence as the reformist treasurer of the Hawke Labor government, which came to power at the 1983 election...
government. The tax applies only to assets acquired on or after that date. Gains (or losses) on earlier assets, called pre-CGT assets are ignored.
The rules introduced initially allowed the cost of assets held for 1 year to be indexed by the consumer price index
Consumer price index
A consumer price index measures changes in the price level of consumer goods and services purchased by households. The CPI, in the United States is defined by the Bureau of Labor Statistics as "a measure of the average change over time in the prices paid by urban consumers for a market basket of...
(CPI) before calculating a gain (calculation of a loss used only the unindexed cost though). This meant the part of a price rise due only to inflation
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
was not taxed. This rule was only current between 1985 and 1999 when it was then frozen.
Also, initially an averaging process was used to calculate the tax on gains. 20% of one's net capital gain was included as income, and the amount of extra tax it caused was multiplied by 5. So instead of a big capital gain pushing the taxpayer into higher tax brackets immediately, the brackets were stretched out, allowing more to be taxed at one's existing marginal rate.
From 20 September 1999 indexing of the cost base was discontinued, and instead the present 50% discount on the plain gain above the cost base was introduced. For assets acquired before that date the taxpayer can choose between indexing (up to the CPI at 30 September 1999) or discount.
Also from 21 September 1999, small business CGT concessions were introduced (below), reducing tax on small business owners retiring, and on active assets being sold, and allowing a rollover when selling one active asset to buy another
Exemptions
The law is framed so as to apply to all assets, except those specifically exempted. It applies both to assets owned outright and to a partial interest in an asset, and to both tangible and intangible assets. The current exemptions are, in approximate order of significance,- Any asset acquired before 20 September 1985, known as a pre-CGT asset. But an asset loses its pre-CGT status if substantial changes are made to it (e.g. major additions to a building), or on the death of the original owner.
- The house, unit, etc., which is the taxpayer's main residence, and up to the first 2 hectareHectareThe hectare is a metric unit of area defined as 10,000 square metres , and primarily used in the measurement of land. In 1795, when the metric system was introduced, the are was defined as being 100 square metres and the hectare was thus 100 ares or 1/100 km2...
s of adjacent land used for domestic purposes. This exemption is generally viewed as being for politically popular reasons, rather than economic reasons (e.g. author and actuary Nicholas Renton takes that view).
- Personal use assets, acquired for up to $10,000. This includes boats, furniture, electrical equipment, etc., which are for personal use. Items normally sold as a set must be treated together for the $10,000 limit.
- Capital loss made from a personal use asset (s108-20(1)ITAA1997…any capital loss you make from a personal use asset is disregarded)
- Collectables acquired for up to $500. This includes art, jewellery, stamps, etc., held for personal enjoyment. Items normally sold as a set must be treated as a set for the $500 limit. If collectables sometimes rise in value then this exemption can be an advantage to a taxpayer collecting small items.
- Cars and other small motor vehicles such as motorcycles ("small" being a carrying capacity less than 1 tonne and less than 9 passengers). Since cars normally decline in value this exemption is actually a disadvantage. But the exemption applies even to antique or collectible vehicles, if they rise in value then the exemption is an advantage.
- Compensation for an occupational injury, or for personal injury or illness of oneself or a relative. (But compensation for breach of contract is subject to CGT.)
- Life insurance policies surrendered or sold by the original holder. Such gains are instead taxed as ordinary income (when held for less than 10 years). A third party who buys such a policy will be subject to CGT as on an ordinary investment though.
- Winnings or losses from gamblingGamblingGambling is the wagering of money or something of material value on an event with an uncertain outcome with the primary intent of winning additional money and/or material goods...
(which are free of income tax too).
- BondsBond (finance)In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
and notes sold at a discount (including zero-coupon bonds) and "traditional securities" (certain interest bearing notes convertible to shares). Gains and losses from these come under ordinary income tax.
- Medals and decorations for bravery and valour, provided they're acquired for no cost.
- Shares in a pooled development fund. A pooled development fund is a special structure with rules facilitating venture financingVenture capitalVenture capital is financial capital provided to early-stage, high-potential, high risk, growth startup companies. The venture capital fund makes money by owning equity in the companies it invests in, which usually have a novel technology or business model in high technology industries, such as...
. Certain other eligible venture capital investments are exempt from CGT too.
- Payments under particular designated government schemes, for example various industry restructuring schemes.
Trading stock is not regarded as an asset and instead comes under ordinary income tax. Items of plant being depreciated are subject to CGT, but only in the unusual case that they're sold for more than original cost (see Depreciating assets below)
Operation
The capital gains tax law is expressed in terms of a set of 52 CGT events (see ITAA 1997Income Tax Assessment Act 1997
Income Tax Assessment Act 1997 is an act of the Parliament of Australia. It's one of the main statutes under which income tax is calculated. The act is a rewrite in plain English of the prior Income Tax Assessment Act 1936...
section 104-5). Each event specifies results such as gain, loss, or cost base adjustment are to be made, and how to determine the date to use for the transaction.
The most common event is A1, the disposal of an asset. On disposal a capital gain arises if the proceeds are greater than the cost base, a capital loss arises if less than the reduced cost base. The date to be used is the date of the contract of sale (even if payment is not until later), or if no such contract exists then the date the taxpayer stopped being the owner (e.g. if an asset is lost).
The cost base of an asset is the amount paid for it, including associated costs such as agent's commissions. But there are three forms, from lowest to highest amount,
- Reduced cost base. This is the cost base, but with certain costs excluded, or certain extra reductions applied.
- Cost base. Being money paid, and associated expenses of the transaction, plus later capital costs of additions, or defending one's ownership.
- Indexed cost base. The elements of the cost base each indexed by changes in the consumer price indexConsumer price indexA consumer price index measures changes in the price level of consumer goods and services purchased by households. The CPI, in the United States is defined by the Bureau of Labor Statistics as "a measure of the average change over time in the prices paid by urban consumers for a market basket of...
. Each element is indexed according to the date the cost was incurred. This is relevant only for assets acquired before 21 September 1999.
On disposal then,
- If the proceeds are below the reduced cost base, the difference is a capital loss.
- If the proceeds are above the plain cost base, the difference is the capital gain.
- If the proceeds are in between the reduced cost base and plain cost base there's neither a gain nor loss. (Quite often the reduced cost base is the same as the plain cost base and this doesn't arise.)
Capital gains and losses in a given tax year are totalled, but in three separate categories according to the class of the asset,
- Collectables (those above the $500 exemption described above).
- Personal use items (those above the $10,000 exemption described above).
- All other assets.
The existence of separate categories for collectables and personal items works to prevent losses from them being offset against other gains such as from investments. In effect it prevents hobbies being subsidised.
Net losses in each category can be carried forward to future years, in their respective categories, but can't be offset ordinary income, or each other.
Also note that Capital Losses are applied before the Capital Gains discount. (e.g. An individual makes a Capital Gain of $100 eligible for discount x 50%= $50 Net Capital Gain. If the person also had Capital Losses of $50, the losses would apply first then there would be $50 Capital Gains leftover eligible for discount x 50% to $25 Net capital Gain)
Reduced cost base
The most common difference between cost base and reduced cost base are non tax deductible costs associated with maintaining ownership of the asset. For example the cost of defending one's title to a non income producing asset. Such costs are added to the cost base (having the effect of reducing a subsequent capital gain), but are not be added to the reduced cost base (and therefore don't give the benefit of a greater capital loss).Prior to 1 July 2001, distributions from property trusts commonly included a so-called "tax free" portion which was subtracted from the reduced cost base but not the cost base, in a similar way. (See Property trust distributions below.)
Indexed cost base
For assets acquired before 20 September 1999 the taxpayer may choose between two methods of calculating a capital gain. Either the discount method described above, or the indexation method,- Discount method. The gain is the difference between the proceeds and the cost base, as described above. When the asset was held for 1 year or more a discount of 50% for individuals or 33 1/3% for superannuation funds is applied before including in one's taxable income.
- Indexation method. The gain is the difference between proceeds and the indexed cost base, but with indexation stopped at the CPI as of the quarter ending 30 September 1999. The gain in included in taxable income with no discount factor.
The taxpayer can use whichever method results in the least tax.
As capital losses are applied before the Capital Gains discount - Those with capital losses (in the same or previous years)with a few different share sales using the Indexation method can result in a better outcome.
For example: Individual with Capital Losses of $4,000
- Shares purchased in 1987 have made either: Indexed Gain of $5,000 or Discounted Gross Gain of $7,500.
- $5,000 Indexed Gain Outcome: Losses of $4,000 applied = $1,000 Net Capital Gain
- $7,500 Discounted Gain Outcome: Losses of $4,000 applied gives a Balance of $3,500, which multiplied by 50% discount = $1,750 Net Capital Gain
With only Capital Gains - the discount method is usually better (note Indexation is better for small (perhaps only very small) gains). The choice is essentially between reducing one's gain by the CPI rise of the cost base, or halving it outright. The CPI indexing may be small, but if one's proceeds are below it then there's no tax. When the gain gets above twice what indexation can knock off then the discount method is better.
Gifts
A gift made by a living person is treated as a disposal at current market value. The giver is taxed for a disposal at that price, the receiver gets that as their cost base.Testamentary gifts, i.e. made upon death under a will or under the laws of intestacy
Intestacy
Intestacy is the condition of the estate of a person who dies owning property greater than the sum of their enforceable debts and funeral expenses without having made a valid will or other binding declaration; alternatively where such a will or declaration has been made, but only applies to part of...
, are instead subject to rollover provisions in most cases (see Death below).
Part paid shares
When a shareholder is called to pay a further installment on part-paid shares, the amount paid is added to the cost base and reduced cost base. The date of acquisition of the shares remains unchanged.Splits
When a company splitsStock split
A stock split or stock divide increases the number of shares in a public company. The price is adjusted such that the before and after market capitalization of the company remains the same and dilution does not occur. Options and warrants are included....
its shares, for instance 2 shares for every 1 previously held there's no immediate CGT effect. The taxpayer's date of acquisition and cost base for the holding are unchanged, only it's for the new number of shares. Likewise for a consolidation (reverse split).
Bonus issues
Bonus shares issued by a company from its share capital account are treated the same as splits (above), they only change the number of shares in the holding. However there are complicated rules to apply when bonus shares are offered in lieu of dividends, or when they're part-paid shares.Bonus units from a unit trust are similar to bonus shares. Fully paid units with no amount to include in one's accessible income (as advised by the trust), merely change the number of shares in one's holding, otherwise a set of rules apply.
Dividend reinvestment
Various companies offer dividend reinvestment plans whereby a shareholder can elect to receive newly issued shares instead of a dividend, often at a small discount to the prevailing market price.Such a plan is treated as if the shareholder received the dividend and then used the money to buy shares. The dividend is taxed like any other dividend (including with any dividend imputation
Dividend imputation
Dividend imputation is a corporate tax system in which some or all of the tax paid by a company may be attributed, or imputed, to the shareholders by way of a tax credit to reduce the income tax payable on a distribution...
), and the shares are taken to be acquired for the cash one didn't receive.
Incidentally, record-keeping for dividend reinvestment plans can be annoying for the shareholder, because it creates lots of little parcels of shares with different acquisition dates and costs.
Identification of shares
When different parcels of shares (etc.) have been acquired at different times or for different prices, it's necessary to identify which ones are disposed of in a sale, since the capital gain or loss may be different for each.If share certificates or similar are used then clearly the ones transferred are the parcel. But when shares are held aggregated in bank account style such as in the CHESS
Australian Clearing House and Electronic Sub-register System
The Australian Clearing House Electronic Subregister System is an electronic book-entry register of holdings of approved securities that facilitates the transfer and settlement of market transactions between the Australian Securities Exchange and the ASX Settlement and Transfer Corporation Pty...
system used by the Australian Stock Exchange
Australian Stock Exchange
The Australian Securities Exchange was created by the merger of the Australian Stock Exchange and the Sydney Futures Exchange in July 2006. It is the primary stock exchange group in Australia....
, then the taxpayer can nominate which of the original purchases it is that are sold.
In both cases the taxpayer can choose to their advantage, such as selling a parcel with a capital loss to realize that immediately, or keeping particular parcels until they reach 1 year old to get the 50% discount on gains.
A further option is available for parcels of the same shares acquired all on one day. If desired they can be aggregated to make one parcel with the total of the costs, i.e. averaging out the prices paid. This reduces paperwork if for example shares are bought at a range of prices through the course of a day.
Stapled shares
Some listed companies are set up so that their securities are "stapled" together. For example each unit of the Westfield Group is three parts, a share in Westfield Limited, a unit in the Westfield Australia Trust, and a unit in the Westfield America Trust.Taxpayers treat each part of a stapled security separately for capital gains tax purposes, i.e. calculate a gain or loss on each separately. But since stapled securities trade with only a price for the bundle, the taxpayer must use some "reasonable" method for apportioning the price across the parts. The Westfield Group for example recommends on their securities using the ratios of the net tangible asset backing (NTA) of each part.
Building allowances
A building allowance of 2.5% (or 4% in certain cases) of the original construction cost of a building is allowed as a deduction against income each year (until the original cost is exhausted). The amounts claimed as a deduction are subtracted from the cost base and reduced cost base of the building. (Note the allowance is calculated on the original construction cost, not a price later paid, and note also a building is a separate CGT asset from the land it stands on, and only the building cost base is affected.)Building allowance works as a kind of depreciation, representing progressive decline over the lifetime of a building. But unlike the way depreciation has a final balancing adjustment against income, the building allowance instead gets that as capital gain (or loss) through it lowering the cost base.
As an example, if it's assuming a building is worth nothing at the end of the 40 years implied by the 2.5% a year allowance, the owner has had deductions progressively over those years instead of only realizing the whole lot in one big capital loss at the end.
Property trust distributions
Distributions from property trusts (both listed and unlisted) commonly include two amounts which affect capital gains tax,- "Tax deferred" portion of the distribution.
- Capital gains distributed, some under the discount method, some under the indexation method.
The investor subtracts the tax deferred part of a distribution from their cost base (and reduced cost base). It's called tax deferred because the investor pays no tax on the amount immediately, but will pay capital gains tax on it when they later sell the units, because it's lowered their cost base.
Tax deferred amounts generally arise from building allowances, the same as for direct property ownership (see above). At its simplest it works as follows. Suppose a trust earns rental income of $100 and has building allowance deductions of $20. Then the net taxable income is $80 and that amount is distributed to unitholders to be included in their income. The remaining $20 of cash is distributed to the unitholders too, but it's regarded as a return of capital.
An investor's cost base cannot go below zero. If tax deferred amounts have reduced it to zero, then any excess must be declared as a capital gain in the year received. This is an unusual situation, generally it can't occur unless an investor has been able to get trust units for much less than the value of the buildings.
Capital gains distributed by a trust arise from the trust selling assets. They're taxed in the investor's hands the same as other gains. When there's a choice of discount or indexation method, the trust manager makes that choice.
Discount capital gains are distributed in already discounted form, i.e. already reduced by 50% for assets held at least 1 year. The investor must gross it up by doubling, apply any capital losses, then re-discount the remainder. (If one has no capital losses to apply then there's no change and the amount received is the amount taxed.)
Options
For the option holder, i.e. the taker,- An option which is bought and then sold is subject to CGT like any other asset. If it expires instead of being sold then it's taken to have been disposed of at expiry for nil proceeds.
- When a call option is exercised, the shares (or other assets) acquired have a cost base which is the option premium paid plus the amount paid to exercise. The acquisition date of the shares is the date you exercise the rights or options to acquire the shares.
- When a put option is exercised, the proceeds for shares sold are the amount received in the exercise, less the option premium previously paid.
For the option writer, i.e. grantor,
- When an option is written, the premium received by the writer is an immediate capital gain. (This is the same as when selling other newly created intangible assets.)
- When a call option is exercised, the writer sells shares to the option holder. The capital gain from writing the option is reversed and the proceeds for the shares sold are the exercise price received plus the option premium received.
- When a put option is exercised, the writer buys shares from the option holder. The capital gain from writing the option is reversed and the cost base for the shares is the exercise price paid less the option premium received.
Share rights
Rights or options issued by the company allowing existing shareholders to buy new shares are treated as being acquired for nil cost at the same time as the shares were acquired. If sold then the proceeds are a capital gain (or not a capital gain if those shares were pre-CGT).If the rights are exercised then the new shares are taken to be acquired for the amount paid and on the date exercised. If the shares were pre-CGT then the market value of the rights at the time of exercise must be added to the cost base of the new shares too.
Company issued rights or options bought from someone else (i.e. not issued direct from the company) are treated like options above.
Demutualization
When a mutual society such as an insurance company demutualizes by converting memberships to shareholdings, the company advises members of a cost base and reduced cost base for their new shares. That cost base represents "embedded value". The ATO publishes cost bases for significant recent demutualizations, such as AMP LimitedAMP Limited
AMP Limited is an Australian financial corporation. It operates primarily in Australia and New Zealand. AMP formed in 1849 as the Australian Mutual Provident Society, a non-profit life insurance company. In 1998 it was demutualised and listed on the Australian and New Zealand stock exchanges...
and Insurance Australia Group
Insurance Australia Group
Insurance Australia Group Limited is an Australian publicly-listed company with its shares traded on the Australian Stock Exchange as ....
. When shares are later sold a capital gain or loss occurs in the usual way.
Worthless shares
When a company is being wound up or goes into administration, the liquidatorLiquidator (law)
In law, a liquidator is the officer appointed when a company goes into winding-up or liquidation who has responsibility for collecting in all of the assets of the company and settling all claims against the company before putting the company into dissolution....
, receiver or administrator may make a formal declaration that they expect no residual distribution to shareholders (all money being exhausted paying creditors first). Shareholders may then, if they wish, claim a capital loss on the shares as if they disposed of them for nil consideration. If a subsequent liquidation distribution does occur then it's treated as a capital gain.
Liquidators were granted the power to make such declarations from 11 November 1991, and other insolvency practitioners from 11 May 1991. Of course a shareholder may always sell apparently worthless shares to a third party for a nominal sum to realize a loss.
Short selling
Short sellingShort selling
In finance, short selling is the practice of selling assets, usually securities, that have been borrowed from a third party with the intention of buying identical assets back at a later date to return to that third party...
is covered under ordinary income tax, not capital gains tax. The reason for this is that in the first leg, i.e. the sale, the investor is not disposing of an asset they own.
Depreciating assets
When deductions are claimed for depreciation of an asset, and it's later sold, there a balancing adjustment to be made for the proceeds versus the written-down value. In the usual case that the proceeds are less than the original cost, then any difference between proceeds and written-down value is income or further deduction and CGT does not apply.If however, the proceeds are greater than the original cost, then the amount between the written-down value and the original cost is income, and the proceeds above that are a capital gain. Effectively deductions allowed in past years are reversed then the usual CGT applies.
Share traders
A person for whom buying and selling shares or other assets is a business treats those assets as trading stock, and gains or losses on them are ordinary income rather than capital gains. The taxpayer needs to determine whether they fall into the category of a share trader or not.There's no specific law on share traders, but the ATO publishes a fact sheet with guidelines based on court rulings http://www.ato.gov.au/businesses/content.asp?doc=/content/21749.htm. It includes examples of definitely trading, and definitely not. Factors include whether the intention is to profit, the repetition and regularity of the activity, and whether organised in a businesslike manner. (At worst a taxpayer can use the system of private rulings to get an ATO determination on particular circumstances they're in or are contemplating.)
A trader has the advantage that losses can be offset against other income (dividends for instance), and has a choice of valuing each share at either cost price or market price each year, so unrealized losses can be booked immediately but unrealized gains held back. The disadvantage for a trader is that the 50% discount on CGT gains for assets held 1 year or more is not available.
Prior to the introduction of capital gains tax in 1985, section 52 of the ITAA 1936
Income Tax Assessment Act 1936
Income Tax Assessment Act 1936 is an act of the Parliament of Australia. It's one of the main statutes under which income tax is calculated. The act is gradually being rewritten into the Income Tax Assessment Act 1997, and new matters are generally now added to the 1997 act.The reason for...
required taxpayers to declare (on their next return) assets they had acquired for trading. This was known as declaring oneself a share trader, but now there's no such election.
Rollovers
The following sections are various special provisions for deferring capital gains tax liability, either by letting a new owner keep the previous owner's cost base, or by letting an owner switch to a new similar asset and keep the old cost base.Bold text
Death
On death, CGT assets transferred to beneficiaries (either directly or first to an executor) are not treated as disposed of by the deceased, but instead the beneficiaries are taken to have acquired them at the deceased's date of death and with cost base and reduced cost base as at that date.This rollover doesn't apply if the beneficiary is not an Australian resident, or is a tax-advantaged entity such as a superannuation fund. In such cases the deceased is taken to have sold to the beneficiary at market value at the date of death, and the usual capital gains tax applies. Churches and charities are regarded as tax-advantaged too, but bequests to registered "Deductible Gift Recipients" are not taxed. Gifts under the Cultural Bequests Program are not subject to tax either.
Also, this rollover doesn't apply to pre-CGT assets (i.e. acquired by the deceased before 20 September 1985), in that case assets are taken to be disposed of at market value to the beneficiary, at the deceased's date of death. Being pre-CGT, there's no capital gains tax to the estate, but the pre-CGT status of the asset is lost.
Notice that for both pre and post CGT assets there are no tax liabilities to the deceased's estate for the usual case of transferring to an individual Australian beneficiary. This means in the majority of cases capital gains tax doesn't operate as a proxy for death duties or estate tax.
Unused net capital losses carried forward by the deceased from past tax years are lost with their death. These losses cannot be recouped by the estate or the beneficiaries (TD 95/47).
Marriage breakdown
When assets are transferred between spouses under a court approved settlement following marriage breakdown, certain rollover provisions automatically apply. Essentially the spouse receiving the asset keeps the original cost base and acquisition date. Newly created intanglible assets like rights or options have a cost base of only what was actually spent in creating them (solicitor's fees for instance).Transfers not made under court approval are not subject to rollover, the normal CGT rules apply to any disposals. And if assets are not transferred at market value and not in an "arms length" transaction then for CGT purposes the transfer will be treated as having been made at market value.
Takeovers
"Scrip for scrip" rollover may be available for a takeover or merger where a shareholder receives new shares or new trust units rather than cash. When rollover is available the new shareholding is treated as a continuation of the old, with the same cost base and date of acquisition. Scrip for scrip rollover is available when,- The original shares are CGT assets. Rollover is not available on pre-CGT shares.
- The value of the bid is high enough that a capital gain would arise if treated as a disposal of the original shares. Rollover doesn't apply to a capital loss, that must be realized instead.
- The swap is shares for shares, or trust units for trust units. It doesn't apply to a change of structure.
- The takeover occurs on or after 10 December 1999, the introduction of this rollover provision.
- The bidder has made its bid available to all voting shareholders, and becomes the owner of 80% of the voting shares. This works to restrict rollover to genuine takeovers.
- Certain other anti-tax-avoidance rules are not triggered. These apply to a target company or trust with just a small number of shareholders or where there's a significant common stakeholder.
The shareholder can elect not to utilize scrip for scrip rollover, and instead treat it as a disposal of their original holding for the value of the new shares, realizing a capital gain. Or the shareholder can choose rollover on just a portion of their holding.
Under Australian companies law, if a bidder gains 90% acceptance it may force remaining holders to take the bid. Such holders are in the same position as those who voluntarily accepted (in particular note that the "compulsory acquisition" rollover below doesn't apply).
Demergers
When a company spins off part of its business as a new separate company and gives shareholders new shares in that new company, the taxpayer's cost base of the original shares is split between the original and the new holding. The company advises the appropriate proportions and the new holding is taken to be acquired at the date of demerger.In certain eligible demergers rollover relief may be available, the company will generally advise of that. If available and if the taxpayer elects to use it, the new holding is taken to have been acquired at the same date as the original holding, and that includes being pre-CGT if the original was pre-CGT.
Usually rollover relief (when available) is an advantage, it preserves pre-CGT status and helps an individual meet the 1 year time period for the 50% discount on gains. However, on pre-CGT assets where the market value of the new holding is below its cost base, the taxpayer is better off not using the rollover but instead let the new holding be a CGT asset so the capital loss there can be utilized.
Destruction or compulsory acquisition
When an asset is compusorily acquiredEminent domain
Eminent domain , compulsory purchase , resumption/compulsory acquisition , or expropriation is an action of the state to seize a citizen's private property, expropriate property, or seize a citizen's rights in property with due monetary compensation, but without the owner's consent...
by a government agency, or is destroyed and insurance or compensation is received, the taxpayer may choose between,
- Regarding it as a sale at that price.
- Rollover whereby the compensation is used to replace or repair the asset and it's considered a continuation of the original. The original date of acquisition is not changed, in particular a pre-CGT asset continues to be pre-CGT.
When rolling-over there are rules to use when the compensation differs from the replacement or repair cost. And in particular there's a limit of 120% of market value if replacing a pre-CGT asset (so it's not possible to get a substantially bigger asset into pre-CGT status).
Note that these provisions apply only to capital assets, not to trading stock, nor to plant being depreciated.
Small business
Changes have been made by ATO to relax some of the provisions listed below.Check ATO Website for further details.
Four capital gains tax concessions for small businesses presently exist, introduced 21 September 1999.
- 15-year exemption. Exemption from CGT for an owner who had a small business for 15 years and is selling due to retirement (must be over 55 years old) or due to permanent incapacitation.
- 50% active asset reduction. Capital gains are reduced by 50% for assets actively used in the business (including intangibles). The normal 50% discount rule for assets held at least 1 year applies too, in that case it's 50% off then 50% off the remainder, for an overall 75% discount.
- Small business retirement exemption. When selling a small business and not over 55, CGT is not payable on net capital gains paid into a superannuation fund. There's a lifetime limit of $500,000 on this exemption.
- Small business rollover. The net capital gain resulting from the sale of an active asset can be reduced by the amount spent on a nominated replacement asset. This is only a deferral of the gain, it's crystallized if the replacement is sold or its use changes (but a new further rollover can then be made if desired).
There are rules to apply for what constitutes a small business. The key elements are,
- Up to $6,000,000 net assets. "Related entities" are counted against this limit too.
- One "controlling individual" having 50% or more voting plus 50% or more economic interest. Or two such individuals if they own half each. But notice three individuals with equal stakes would fail the test, because none of them is in a controlling position.
The exemption for gains paid into a superannuation fund is similar to what employees may do with an eligible termination payment (accumulated unused long service leave etc.) on leaving a job. But the small business case it's only the net gain after applying the CGT discounts which needs to be paid into the fund to escape CGT liability, the remainder can be kept in cash.
External links
- Changes to the small business capital gains tax (CGT) concessions - Australian Taxation OfficeAustralian Taxation OfficeThe Australian Taxation Office is an Australian Government statutory agency and the principal revenue collection body for the Australian Government. The ATO has responsibility for administering the Australian federal taxation system and superannuation legislation...
fact sheet