Capital Gains the Road to Reform

1
Capital Gains the Road to Reform

• 1915 tax on income , few other specified
  items
• 1930 once off deals declared to produce
  income in Jones v Leeming, Sec 26(a) enacted as
  result
• 1970s weaknesses of s 26(a) apparent Mc
  Clelland, Tikva
• 1973 s 26AAA short term (1 yr or less)
  ownership taxable

2
Road to Reform - 2

• 1974 Asprey recommends CGT, ALP govt introduces
  own version, then abandons it
• 1983 After Holmes ACourt/Elders fiasco attempt
  to shore up s 26(a) re-enacted as s 25A
• 1985 tax summit CGT as part of reform package
  applies from 20 September 1985

3
Road to Reform - 3

• 1992 after incoherent high court decision in
  Hepples ss 160M (6) and M(7) amended
• 1997 CGT provisions recast in more
  user-friendly terms in 1997 act as Divisions
  100-149
• 1999 changes as result of Ralph review End of
  indexation, half gain inclusion for individuals

4
CGT Overview

• Based in concepts of assets (s 108-5) and
  events (disposals, etc Div 104)
• Market value consideration deemed to be received
  (s 103-10 s 116-30)
• Tax is on net capital gain at income tax rates
  (Div 102) but note 50 inclusion rule for assets
  held for 12 months or more by individuals, trusts
  super funds (Div 115)

5
CGT Overview

• Only available deductions are for cost base
  (Div 110)
• A number of rollovers and exemptions
• Significant and long-lived transitional
  provisions (Div 149, s 104-185)
• Capital losses can be offset only against capital
  gains (Div 102)

6
CGT- Div 104 The Main Events

• A1 Disposal of CGT Asset (s 104-10)
• B1 Use Enjoyment before title passes (s
  104-15
• C1 to 3 Loss or destruction (104-20)
• D1 to 3 Creating rights (s 104-35)
• E1 to 7 Creating trusts etc (s 104-55)
• F1 to 5 Leases (s 104-110)

7
CGT Main Events 2

• G1 to 3 - Shares (s 104-135
• H1 Forfeiture of deposit (s 104-50)
• H2 Event relating to CGT asset (s 104-55)
• I TP ceases to be resident (s 104 160)
• K Sundry other CGT events
• K6 transitional underlying assets test (s
  104- 230)
• Div 149 transitional underlying ownership test

8
CGT- Other Key Provisions

• CGT Assets Div 108
• Timing. See Div 109
• Cost Base. Div 110
• Modifying cost base Div 112
• Discount gains for individuals and trusts Div 115
• Calculation of gains and losses Div 116
• Exemptions Div 118 Special topics Div 122-152

9
CGT Assets Div 108

• Defined as any kind of property or a legal or
  equitable right that is not property (s 108-5)
• Includes goodwill, an interest in partnership
  asset, any other interest in partnership
• Includes foreign currency, but Australian cash
  not mentioned
• Joint tenants treated as owning tenancy in common
  in equal shares (s 108-7)

10
CGT Personal Use Assets

• Collectibles (Subdiv 108-B)
• Definition
• Threshold value 500 on acquistion (s 118-10)
• Quarantined losses
• Other personal use assets (Subdiv 108-C)
• Definition
• Threshold 10,000 on acquisition
• No losses allowed
• Motor cars exempt altogether s 118-5

11
Acquiring CGT Assets Div 109

• Assets are generally acquired when TP becomes the
  owner, not when payment is made.
• A number of specific rules on when asset acquired
  eg created asset acquired when work started (s
  109-10)
• Possible to acquire asset before obtaining
  ownership eg when TP gains use and enjoyment of
  it and title will or may pass under agreement.

12
CGT Cost Base Div 110

• Rules are restrictive many black hole expenses
  excluded.
• Cost base has five elements (s110-25)
• Acquisition cost
• incidental costs (professional costs, stamp
  duty, advertising s110-35)
• Non-capital costs of ownership (interest, repairs
  rates, land tax (but only when not otherwise
  deductible)
• Capital expend. To increase value
• Capital expense to maintain title to property

13
CGT Cost Base -2

• Reduction of cost base to adjust for capital
  allowances given reduced cost base (Subdiv
  110-B)
• Market value substitution rule where full
  consideration not given (s 112-20)
• Special rules in some cases eg death, other
  rollovers (Subdivs 112-B, 112-C)

14
CGT Major concessions exemptions

• Pre 1985 assets exemption (Div 104) but subject
  to transitional provisions
• Death rollover (Div 128)
• personal damages and gaming profits (s 118-37)
• Marriage breakdown rollover (Subdiv 126-A)
• Main residence exemption (Subdiv 118-B)

15
CGT- Major concessions exemptions 2

• Corporate rollovers Div 122 126-B
• Replacement asset rollovers Div 124 including
  compulsory acquisition
• Small business relief Div 152

16
CGT Main residence exemption (Subdiv 118-B)

• Dwelling plus adjacent land used primarily for
  private or domestic purposes
• Limit of 2 hectares
• 6 months to change houses, up to 4 years to build
• Temporary cessation up to 6 years allowed
• No capital gain, but no capital loss either
• Use for business purposes reduces value of
  exemption

17
CGT - Small Business Relief

• Rules apply from 21 September 1999
• TPs net business asset value lt 5 million
• Assets to be active business assets
• Four concessions
• 15 year ownership total exemption (conditional on
  retirement). Takes
• 50 reduction of gain
• Proceeds used for retirement (counts as ETP)
• Small business rollover (defers recognition of
  gain)

18
CGT Practical Points

• Need for good record-keeping, especially personal
  use assets (see Div 121)
• Desirability of pre assets
• Dangers presented by transitional provisions
• Devolution of deceased estate assets in specie
  where possible
• Departure tax concession questions

19
CGT- Practical Points 2

• Main residence exemption its limits
• Use for partial incomeproducing purposes and
  claiming of tax deductions
• Pre assets and substantial capital expenditure
  (Subdiv 108-B)