Commissioner’s Guide 

 

 
Guide to capital gains tax 2003-04

 

Copies of this publication

This publication can be obtained from Tax Office shopfronts.

To order a printed copy, please take note of the NAT number – NAT 4151 - and select Online publications ordering service or phone the Publications Distribution Service 1300 720 092 for the cost of a local call.

The Publications Distribution Service operates 24 hours a day every day.

This publication can be downloaded in portable document format (PDF): download the Guide to capital gains tax here [1.7MB].

An error was identified on page 37 of the paper publication: the correct text is shown in the table Treatment of convertible notes acquired after 10 May 1989.

Our commitment to you

The information in this publication is current at May 2004 and we have made every effort to ensure it is accurate. However, if something in the publication is wrong or misleading and you make a mistake as a result, you will not be charged a penalty. You may have to pay interest, depending on the circumstances of your case.

You are protected under GST law if you have acted on any GST information in this publication. If you have relied on GST advice in this Tax Office publication and that advice has later changed, you will not have to pay any extra GST for the period up to the date of the change. Similarly, you will not have to pay any penalties or interest.

If you feel this publication does not fully cover your circumstances, please seek help from the Tax Office or a recognised tax adviser. Since we regularly revise our publications to take account of any changes to the law, you should make sure this edition is the latest. The easiest way to do this is by checking for a more recent version on our website at www.ato.gov.au.

Your rights

It is important that you are aware of your rights and obligations when dealing with the Tax Office. These are explained in the taxpayer’s charter, along with the service and other standards you can expect from the Tax Office. To view the taxpayers’ charter, visit our website at www.ato.gov.au.To get a printed copy of the Taxpayers’ Charter – what you need to know (NAT 2548), phone our distribution service on 1300 720 092.

How self-assessment affects you

Self-assessment means the Tax Office uses the information you give on your tax return to work out your refund or tax debt. You are required by law to make sure you have shown all your assessable income and claimed only the deductions and tax offsets to which you are entitled. The Tax Office does not take any responsibility for checking the accuracy of the details you provide in your tax return. However, at a later date the Tax Office may examine the details contained in your tax return more thoroughly by reviewing specific parts, or by conducting an audit on your tax affairs.

What are your responsibilities?

It is your responsibility to lodge a tax return that is signed, complete and correct. Even if someone else – including a tax agent – helps you to prepare your tax return, you are still legally responsible for the accuracy of your information.

What if you lodge an incorrect tax return?

Our audit programs are designed to continually check for missing, inaccurate or incomplete information. If you become aware that your tax return is incorrect, you must contact us straight away.

Initiatives to complement self-assessment

There are a number of initiatives administered by the Tax Office which complement self-assessment. Examples include:

Do you need to ask for a private ruling?

If you have a concern about the way a tax law applies to your personal tax affairs, you may want to ask for a private ruling.

A private ruling will relate just to your situation. Write to the Tax Office describing your situation in detail and ask for advice. To do this, complete an Application for a private ruling for individuals (NAT 4106 – 3.2001). You should lodge your tax return by the due date, even if you are waiting for the reply to your private ruling. You may need to request an amendment to your tax return once you have received the private ruling.

The Tax Office publishes on its website all private rulings issued. What we publish will not contain anything which could identify you.

You can ask for a review of a private ruling decision if you disagree with it, even if you have not received your assessment. Details of the review procedures are sent to you when the private ruling decision is made. For more information on private rulings, visit the Tax Office website at www.ato.gov.au.

About this guide

This guide is designed for individuals, companies, trusts and funds completing paper-based income tax returns. It explains how capital gains tax works and will help you calculate your net capital gain or net capital loss for 2003–04 so you can meet your capital gains tax obligations. There are worksheets at the back of the guide to help you do this.

If you are an individual and prefer to prepare and lodge your tax return electronically, you can use the e-tax 2004 software package developed by the Tax Office. The capital gains tax module includes a calculator for capital gains and capital losses and can be downloaded from the internet at www.ato.gov.au/etax.

Companies, trusts and superannuation funds with capital gains tax obligations over a certain threshold must complete a Capital gains tax (CGT) schedule 2004.

Use part C of this guide to find out how to complete your worksheets, tax return labels and (if you are over the threshold) the CGT schedule.

If you are a small business taxpayer, you should get the publication Guide to capital gains tax concessions for small business.

If you have an enquiry relating to your circumstances which this publication does not cover, phone the Personal Tax Infoline on 13 28 61 or get help from a recognised tax adviser.

Individuals may prefer to use the shorter, simpler Personal investors guide to capital gains tax 2003–04 if, during 2003–04, they only:

Introduction

This guide is designed to help you work out whether any of the assets you own (or may own in the future), and any events that happen to you are subject to capital gains tax (CGT). Where they are, it tells you how to work out your capital gain or capital loss. It also covers what records you need to keep.

Consolidated income taxation of corporate groups

The rules that apply to members of a consolidated group modify the application of the capital gains tax rules. Consolidation is explained in detail in the Consolidation reference manual. To get other consolidation products, or if you have technical tax enquiries, phone the Tax Reform Infoline on 13 24 78 or visit www.ato.gov.au.

Unfamiliar terms

We may use some terms that you are not familiar with. These words are printed in red the first time they are used and explained in Explanation of terms. Generally they are also explained in more detail in the section where they first appear.

While we have sometimes used the word ‘bought’ rather than ‘acquired’, you may have acquired an asset subject to capital gains tax (a CGT asset) without paying for it (for example, as a gift or through an inheritance). Similarly, we refer to ‘selling’ such an asset when you may have disposed of it in some other way (for example, by giving it away or transferring it to someone else). Whether by sale or by any other means, all of these disposals are CGT events.

Your tax return

If you have a capital gain or capital loss for 2003–04, this guide will help you – whether you are an individual or an entity (company, trust or fund) – to complete the capital gains item on a tax return.

Worksheets

You may wish to use the two CGT worksheets to help you keep track of your records and make sure you pay no more CGT than necessary.

There is a:

Capital gains tax schedule

If you are a company, trust or fund with total capital gains or capital losses of more than $10,000 this income year, you must complete a Capital gains tax (CGT) schedule 2004. Partnerships and individual paper tax preparers are not required to lodge a schedule.

The CGT schedule is explained in detail in part C.

What’s new

There are a number of recent and proposed CGT changes to bear in mind when calculating your capital gain or capital loss.

Convertible notes

There has been a change to the tax treatment of convertible notes issued by a company after 14 May 2002 if the notes are traditional securities. Under the change:

For more information, get the publication You and your shares.

Foreign exchange gains and losses

New legislation dealing with foreign exchange (forex) gains and losses generally applies from 1 July 2003. The legislation introduces CGT events K10 and K11. The new CGT events mean that short-term forex gains or losses arising under a transaction for the acquisition or disposal of certain capital assets are integrated into the tax treatment of the capital asset or are matched to the character of the gain or loss that would arise from the disposal of the asset. For the new rules to apply, the due date for payment must be within 12 months of acquiring the asset or disposing of it. Taxpayers could choose, generally by 16 January 2004, not to have this rule apply so forex gains and losses were instead assessable or deductible. For more information, refer to ‘Forex – the 12 month rule’ on our website at www.ato.gov.au.

GST input tax credits

The Government has introduced legislation into Parliament to ensure that GST net input tax credits are excluded from the cost base, reduced cost base and other relevant amounts used for the purposes of working out the amount of a capital gain or capital loss. The amendments will apply to CGT events that happen after 19 February 2004. (The existing law provides for input tax credits to be excluded only from the first, second and third elements of the cost base of assets acquired after 7.30pm – by legal time in the ACT – on 13 May 1997.)

If you have excluded certain GST input tax credits when calculating a capital gain or capital loss for a CGT event which happened on or before 19 February 2004, you may be entitled to apply for an amended assessment – refer to Draft Taxation Determination TD 2004/D3 – Capital gains: are input tax credits excluded from a CGT asset’s cost base and reduced cost base worked out under sections 110-25 and 110-55 of the Income Tax Assessment Act and from other equivalent amounts used in working out a capital gain or loss? and other information on our website at www.ato.gov.au.

Rollover for financial service providers

The Government has introduced legislation into Parliament to provide automatic CGT rollover for financial service providers on transition to the financial services reform (FSR) regime when, during the FSR transitional period (11 March 2002 to 10 March 2004):

The legislation is expected to apply to CGT events happening on or after 11 March 2002.

Exemption for certain Second World War payments

The Government has introduced legislation into Parliament to exempt Australian residents from income tax and CGT on all Second World War compensation payments received on or after 1 July 2001 where the payment relates to suffering from a wrong or injury and/or property loss through persecution (or flight from persecution).

Sugar exit grants

Legislation has been passed to exempt any capital gain or capital loss you make from a CGT event relating directly to a sugar industry exit grant paid under the Sugar Industry Reform Program.

Foreign hybrids

If you have an investment in a foreign hybrid, the Government has introduced legislation into Parliament which will change the tax treatment from 1 July 2003 or optionally from 1 July 2002. A foreign hybrid is an entity that is taxed in Australia as a company but taxed overseas as a partnership. This can include a limited partnership, a limited liability partnership and a US limited liability company. Investors in these entities are now treated for Australian tax purposes as having a partnership interest. Previously, the investors were treated as shareholders and distributions they received were taxed as dividends. When the change becomes law, more information will be available on our website at www.ato.gov.au.

Shares in foreign companies

The Government has introduced legislation into Parliament to disregard capital gains and capital losses made on certain disposals by Australian companies of their shares in foreign companies with underlying active businesses. The proposed legislation will also reduce attributable income arising from certain CGT events happening to shares owned by a controlled foreign company (CFC) in a foreign company.

The changes will only apply if:

It is intended that the changes apply to CGT events happening on or after 1 April 2004. For more information call the Tax Reform Infoline on 13 24 78.

Budget announcements

Worthless shares

On 11 May 2004, as part of the Budget, the Government announced proposed changes to the law allowing shareholders to choose to make a capital loss where any insolvency practitioner (not just a liquidator) declares in writing that shares are worthless. The new law would also apply to securities other than shares. The Government’s intention is that the change will apply to declarations made after the date the amending law receives royal assent.

Testamentary gifts

On 11 May 2004, as part of the Budget, the Government announced that it proposes to remove the condition that a testamentary gift of property to a deductible gift recipient must be independently valued at greater than $5,000 before a CGT exemption can apply to the gift. The Government’s intention is that the change will apply to gifts made after the date the amending law receives royal assent.

Part A - About capital gains tax

Chapter 1 - Does capital gains tax apply to you?

Chapter 2 - How to work out your capital gain or capital loss

Chapter 3 - Keeping records

Chapter 4 - Trust distributions

Chapter 5 - Investment in shares and units

Chapter 6 - Real estate and main residence

Chapter 7 - Loss, destruction or compulsory acquisition of an asset

Chapter 8 - Marriage breakdown

Chapter 9 - Deceased estates

Do you need to read this part of the guide?

To find out, answer the following questions. If you answer NO to all questions, you don’t need to read part A. Go to part B.

Do you need information about the three methods of calculating a capital gain?

YES

Read part A chapter 2.

 

 

Have you received a distribution of a capital gain from a managed fund or other unit trust in 2003–04?

YES

Read part A chapter 4

 

 

Have you sold shares or units in a unit trust in 2003–04?

YES

Read part A chapter 5.

 

 

Did you sell real estate or your home (main residence) in 2003–04?

YES

Read part A chapter 6.

 

 

Do you need help completing the capital gains item on your individual tax return?

YES

Read the relevant chapters in part A, then work through part B.

 

 

Do you need help completing the capital gains item on your entity’s tax return?

YES

Read the relevant chapters in part A, then work through part C.

 

 

Chapter 1 - Does capital gains tax apply to you?

This chapter provides general background information about capital gains tax and whether and how it applies to you.

Unfamiliar terms

We may use some terms that you are not familiar with. These words are explained in Explanation of terms. They are also explained in more detail later in the section where they first appear.

What is capital gains tax and what rate of tax do you pay?

Capital gains tax (CGT) is the tax that you pay on any capital gain you include on your annual income tax return. It is not a separate tax, merely a component of your income tax. You are taxed on your net capital gain at your marginal tax rate.

Your net capital gain is:

minus

minus

You make a capital gain or capital loss if a CGT event happens. You can also make a capital gain if a managed fund or other trust distributes a capital gain to you.

For most CGT events, your capital gain is the difference between your capital proceeds and the cost base of your CGT asset – for example, if you sell an asset for more than you paid for it, the difference is your capital gain. You make a capital loss if your reduced cost base of your CGT asset is greater than the capital proceeds.

Generally, you can disregard any capital gain or capital loss you make on an asset if you acquired it before 20 September 1985 (pre-CGT). For details of some other exemptions, see Exemptions and rollovers.

There are special rules that apply when working out gains and losses from depreciating assets. A depreciating asset is a tangible asset (other than land or trading stock) that has a limited effective life and can reasonably be expected to decline in value over the time it is used. Certain intangible assets are also depreciating assets.

If a depreciating asset is used for a taxable purpose (for example, in a business) any gain you make on it is treated as ordinary income and any loss as a deduction. It is only when a depreciating asset has been used for a non-taxable purpose (for example, used privately) that you can make a capital gain or capital loss on it. For details on the CGT treatment of depreciating assets, see CGT and depreciating assets.

To work out whether you have to pay tax on your capital gains, you need to know:

What is a CGT event?

CGT events are the different types of transactions or events that may result in a capital gain or capital loss. Many CGT events involve a CGT asset; some relate directly to capital receipts (capital proceeds).

You need to know which type of CGT event applies in your situation because it affects how you calculate your capital gain or capital loss and when you include it in your net capital gain or net capital loss.

The range of CGT events is wide. Some happen often and affect many people while others are rare and affect only a few people. There is a summary of the various types of CGT events at appendix 1.

The most common CGT event happens if you dispose of a CGT asset to someone else – for example, if you sell it or give it away. A CGT event also happens when:

Subdividing land does not result in a CGT event if you retain ownership of the subdivided blocks. Therefore, you do not make a capital gain or a capital loss at the time of the subdivision.

Australian residents make a capital gain or capital loss if a CGT event happens to any of their assets anywhere in the world. As a general rule, non-residents make a capital gain or capital loss only if a CGT event happens to a CGT asset that has a ‘necessary connection with Australia’.

Non-Australian residents may also make a capital gain or capital loss where CGT events create:

Order in which CGT events apply

If more than one CGT event could apply to your transaction or circumstances, the most relevant CGT event applies.

Time of the CGT event

The timing of a CGT event is important because it determines in which income year you report your capital gain or capital loss.

If you dispose of a CGT asset to someone else, the CGT event happens when you enter into the contract for disposal. If there is no contract, the CGT event generally happens when you stop being the asset’s owner.

Example
Contract

In June 2004, Sue enters into a contract to sell land. The contract is settled in October 2004.

Sue makes the capital gain in the 2003–04 income year (the year she enters into the contract), not the 2004–05 income year (the year settlement takes place).

If a CGT asset you own is lost or destroyed, the CGT event happens when you first receive compensation for the loss or destruction. If you do not receive any compensation, the CGT event happens when the loss is discovered or the destruction occurred.

Example
Insurance policy

Laurie owned a rental property that was destroyed by fire in June 2003. He received a payment under an insurance policy in October 2003. The CGT event happened in October 2003.

The CGT events relating to shares and units, and the times of the events, are dealt with in chapter 5.

What is a CGT asset?

Many CGT assets are easily recognisable – for example, land, shares in a company, and units in a unit trust. Other CGT assets are not so well understood – for example, contractual rights, options, foreign currency and goodwill. All assets are subject to the CGT rules unless they are specifically excluded.

CGT assets fall into three categories:

Collectables

Collectables include the following items that are used or kept mainly for the personal use or enjoyment of you or your associate(s):

A collectable is also:

 

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