Capital Gains Tax in Australia - Operation

Operation

The capital gains tax law is expressed in terms of a set of 52 CGT events (see ITAA 1997 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 index. 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 × 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 × 50% to $25 Net capital Gain)