TOP I C 3

Taxation of capital receipts

P R E PAR E D BY WE S OBS T AND R AMI HANE GBI F OR T HE UNI T T E AM
Contents
Introduction 1
Learning resources 1
Textbooks 1
Legislative structure of CGT 1
Step 1: Is there a capital gain/loss? 2
Is there a CGT event? 2
Is there a CGT asset? 3
CGT Timing issues 5
Step 2: Determine the amount of capital gain/loss 6
Capital proceeds (Div 116) 6
Cost base 7
Reduced cost base 8
Cost base modification 8
Step 3: Calculate the net capital gain/loss 9
CGT losses 9
50% General discount 9
Exemptions and concessions 10
Roll-over concessions 12
Net capital gains are assessable income 13
Important CGT events 14
CGT Events C1 and C2 14
CGT Event D1 14
CGT Event F1 15
CGT Event H2 15
Record-keeping for CGT 16


Deakin University
P rinciples of I ncome Tax Law
Introducti on
Topic 2 discussed ordinary income as well as some specific types of statutory
income and Topic 3 now looks Capital Gains Tax (CGT) which is also statutory
income made assessable via s 6-10. The CGT provision will now bring to assessable
income some of the gains that were not assessable as ordinary income.
Section 102-5 includes in assessable income any net capital gain making the CGT
provisions a net concept rather than the usual gross concept of other statutory and
ordinary income items. Capital gains are therefore only assessable after allowance
for certain costs.
The structure of the CGT legislation is quite different to other provisions of the Act
and therefore it is necessary to develop an overall appreciation of how the capital
gains provisions operate. This legislation is quite complex and detailed so you may
also find it helpful to make summaries in the form of tables or flow charts to develop
your understanding of how CGT applies (for tips on summaries see Coleman et al.
Ch 2).
As we progress further into the study of tax law it is important to understand that
the knowledge base is accumulative. That is, we cannot look at CGT without
considering its interaction with other assessable income provisions. For example,
when considering the sale of farming land as subdivided housing lots it is
necessary to take the following steps:
1 Is the sale part of a business activity and therefore ordinary income (s. 6-5)?
2 Is the sale subject to the Myer Emporium principle and therefore ordinary
income (s. 6-5)?
3 Is any part of the property pre-CGT and therefore subject to ITAA 36,
s. 25A or ITAA 97, s. 15-15?
4 Does CGT apply?
This illustration highlights the interaction of provisions within the Act and demonstrates
the importance of understanding how to determine the relevant provisions affecting a
particular transaction. In relation to CGT, an important structural aspect of the
legislation is that it is a residual provision, that is, it only operates to tax net gains that
have not been assessable under some other provision of the Act (s. 118-20). In the
above example, CGT will only be applicable if at least part of the proceeds of the sale
is not assessable under any of the other provisions mentioned.
Learni ng resources
Textbooks
Coleman et al. Principles of taxation law 2014, Thomson Reuters, Pyrmont NSW.
Deutsch, RL, Fundamental tax legislation 2014, Thomson Reuters, Pyrmont, NSW,
Legi sl ati ve structure of CGT
A good overview of the structure of the legislation can be gained from Div. 100. The
CGT provisions are divided into Part 3-1 and Part 3-3. Part 3-1 deals with the basic
rules under which CGT applies and Part 3-3 deals with special topics such as
1
TOP I C 3
exceptions to the general rules, clarification for specific transactions and anti-
avoidance rules. Division 100 also summaries the basic rules applicable to CGT
including s. 100-15 which provides a flow chart of the decisions needed to decide
whether a capital gain of loss arises. It is important to note that this division is not
an operative division and must not be cited as authority but it does provide a
convenient summary of how CGT operates.
You should also note Div 103 which sets out some basic rules in relation to
payments made in kind rather than cash, and rules relating to when choices have
to be made.
Section 102-5(1)) states that net capital gains are assessable income, therefore
capital gain is simply another form of statutory income under s. 6-10. However, a
net capital gain will not arise unless the CGT provisions apply to the taxpayers
transaction. As a result the first step is to determine what transactions the CGT
provisions apply to. Once it is established that the CGT provisions apply the
second step is to determine what capital gain/loss resulted and then the final step
is to determine the effect on assessable income. This topic is structured following
these three steps
Step 1 Is there a capital gain/loss?
Step 2 Determine the amount of capital gain/loss.
Step 3 Calculate the net capital gain/loss (this is the amount that effects
assessable income).
Step 1: Is there a capi tal gai n/l oss?
Is there a CGT event?
Section 102-20 state that a capital gain/loss only occurs is a CGT event happens
and s. 104-5 summaries the 50 odd events that need to be considered. The
detailed requirements for each event are set out in Div. 104. The main components
of the legislation relating to each event are:
What causes the event?
When does the event occur?
How is the amount of capital gains or loss calculated?
Are there any specific exclusions?
You will notice from s. 104-5 that all events are identified using a combination of a
letter and number. CGT Events with the same letter indicate a grouping of events
with related circumstances, for example, CGT events C1C3 relate to events that
result from a CGT asset being extinguished. The scope of this unit does not allow
us to explore all of the CGT events described in Div. 104 and consequently we only
cover CGT event A1, C1, C2, D1, F1 & H2 (see later discussion in this topic).

To resolve any conflicts which may arise in determining which CGT event is to be
applied, s. 102-25 describes the steps necessary to make this determination. As a
general rule the most specific event is to be used but there are some exceptions.
The steps for selecting the applicable CGT event can be summarised as follows.
2
P rinciples of I ncome Tax Law
1 Select which of the CGT events apply (ignore D1 and H2 these are left
to last).
2 If more than one event applies select the most specific.
3 If no previously considered CGT event applies consider if D1 applies.
4 If D1 does not apply consider if H2 applies.
5 If none of the above apply there is no CGT.
The most important and broadest CGT event is event A1. Section 104-10(1)
provides that CGT event A1 will occur if you dispose of a CGT asset, raising the
question of definition of the terms disposal and CGT asset. The definition of CGT
asset is therefore critical to the operation of CGT as many of the CGT events are
based on circumstances affecting these assets.
TEXTBOOK
Please read Coleman et al. 2014, 11.00 11.40.
Is there a CGT asset?
You should note that although the actual term CGT asset is not used in all events
the concept of receiving consideration for, or transactions affecting CGT assets,
underlies most of the events. For example, CGT event F1 deals with the granting
of a lease, and although not mentioned, a lease would be a CGT asset as defined
in s. 108-5.
Section 108-5(1), defines a CGT asset in general terms to mean any kind of
property, or a legal or equitable right that is not property, and then s. 108-5(2)
specifically includes certain items. It is also interesting to note that s. 108-5
includes a list of examples of CGT assets which includes foreign currency but does
not include Australian currency.
TEXTBOOK
Please read Coleman et al. 2014, 11.50, 11.170.
The ordi nary meani ng of property
As a CGT asset is defined to mean any kind of property it is necessary to first
consider the ordinary meaning of the term property. Property is a very broad term
and can be used to describe everything that a person may have control over.
Langdale M. R. (Jones v. Skinner, 5 L. J ., ch. 90) said:
Property is the most comprehensive of all terms which can be used, inasmuch as it
is indicative and descriptive of every possible interest that a party may have.

Items of tangible property (have physical existence) such as land, buildings and
chattels do not provide any difficulty when considering the meaning of the term
property. They are capable of possession, ownership may be transferred and the
right of ownership may be defended in a court of law. In contrast, intangible
property may not be so easily identified. For example, the purchase of a share in a
company gives the owner a set of rights (e.g. right to vote, right to share in profits
and the right to a share of the assets on liquidation) which are not physically
identifiable but are nevertheless property. The intangible property in this case is the
right to take legal action to protect your rights if they are breached.
3
TOP I C 3
Conversely, know-how or personal knowledge is not property. You can pass on
your knowledge to another person through training or instruction. However, you still
retain that knowledge, and you have not given anything up. As nothing has been
transferred, there is no property in knowledge. If you create a patent or other
industrial property over your idea or knowledge, property exists in the patent as it is
transferable and may be the subject of legal action. If you sell the patent to another
person, you have given up the right to use that idea and therefore you have
transferred property to a new owner.
Legal and equi tabl e ri ghts that are not propert y
The second part of the definition of a CGT asset includes legal and equitable rights
that are not property. This would include non-proprietary rights.
Non-proprietary rights are rights which are not property and may exist as rights held
by an individual that can only be exercised by that individual and cannot be sold or
transferred. For example, if you were injured at work, the right to compensation is a
non-proprietary right as it may only be exercised by you (in the case of death these
rights may pass to the legal personal representative of your estate). Lack of
transferability is therefore an important distinguishing factor between property and
legal and equitable rights that are not property (non-proprietary rights)
QUESTI ON 3. 1
Consider whether the following are CGT assets:
(a) the right to compensation following an accident at work
(b) the right of an employee to have a safe work environment
(c) the right of a child to an adequate education
(d) the right of a woman engaged to be married to have the promise made to
her fulfilled
(e) the rights of a partner in a marriage to share equally in the wealth
accumulated by the partners on break down of the marriage.
QUESTI ON 3. 2
Name the CGT assets, if any, under s. 108-5 in the following situations.
(a) The creation of a work of art.
(b) Sale of a business as a going concern.
(c) The issue of new shares to a corporate shareholder.
(d) A negligent act that caused a school pupil to become permanently
disabled.
EXERCI SE 3. 1
After reviewing the definition of CGT an asset, identify the CGT events which
would be covered by the definition.
Col l ectabl es and other personal use assets
A broad definition of CGT assets will encompass all assets include personal
assets such as jewellery, clothing and household furniture etc. CGT legislation
does not exclude these personal assets but it does create two specific classes of
4
P rinciples of I ncome Tax Law
assets, collectible and personal use assets, and provides some concessional
treatment for these.
TEXTBOOK
Please read Coleman et al. 2014, 11.180 11.190.
QUESTI ON 3. 3
Coleman et al. 2014, Question 11.3.
QUESTI ON 3. 4
Ms Shrood invested $4000 (3 May 2000) in a gold ingot as a hedge against
inflation and as a provision for her retirement. Will she be subject to CGT when
the ingot of gold is sold? Would your answer be different if she purchased a
painting, shares or a new lounge suite for her pri vate use?
CGT Ti mi ng i ssues
Ti mi ng of the CGT event
Each CGT event contains rules for determining the date of the event. Generally
these rules depend upon when the contract is entered into, or when the change in
ownership took place. For example, in FCT v Sara Lee Household & Body Care
(Australia) Pty Ltd (2000) 44 ATR 370 it was held that it is the date of the contract
that resulted in the change in ownership that is relevant, and not the date of
subsequent agreements that may alter the terms of the contract.
Ti mi ng of acqui si ti on
The time of acquisition of a CGT asset is critical because asset acquired before the
introduction of CGT (20/9/1985) are not normally subject to CGT (see for example
s. 104-10(5)(a)).
Section 109-5 provides, that as a general rule a CGT asset is acquired when you
become its owner. However, clarification of the operation of this general rule for
specific CGT events is also given. Where there is no CGT event there still may be
an acquisition and s. 109-10 outlines the rules governing these situations.
TEXTBOOK
Please read Coleman et al. 2014, 11.50 (re-read), 11.210.
QUESTI ON 3. 5
When are the following CGT Assets acquired (for each question please state the
relevant section)?
(a) You enter into an oral contract to buy a house on 1 October 2012, and
then subsequently sign a written agreement confirming your contract on
25 October 2012.
(b) On 1 January 2012 you contract with a builder to build and construct a
new building on land you already own. The builder begins work on
1 February 2012. You are handed the keys on 1 March 2012.
5
TOP I C 3
Step 2: Determi ne the amount of capi tal gai n/l oss
Continuing to use CGT event A1 as an example, each event contains rules
governing the method of calculating the capital gain or loss. In the case of CGT
event A1 a capital gain or loss is determined according to the following rules
(s. 104-10(4)):
A capital gain exists if capital proceeds are more than cost base.
a capital loss exists if capital proceeds are less than reduced cost base.
It is important to realise that a negative result from either of these calculations is
meaningless. If you use the capital gain equation and the result is negative it does
not mean that there is a capital loss. To determine if there is a capital loss, the loss
equation must be used. If the loss equation also shows a negative result, it means
that there is neither a loss nor a gain.
These equations determine the capital gain/loss for CGT event A1 but it is the NET
capital gain that is assessable not the capital gain. Determining the capital
gain/loss is only the first step in calculating the amount of assessable income (see
later in this topic).
The definitions of capital proceeds, cost base and reduced cost base are therefore
important for the determination of the gain or loss. Division 116 defines capital
proceeds and Divisions 110114 define the elements needed to determine the cost
base and reduced cost base.
TEXTBOOK
Please read Coleman et al. 2014, 11.440 11.460.
Capi tal proceeds (Di v 116)
The approach of Div. 116 in defining capital proceeds is to provide a general rule in
s. 116-20, and then add six modifications that may alter the general rule. The
general rule is that the capital proceeds will consist of any money or property
received as a result of the CGT event. However, this amount will be reduced by
any GST included in the price (s 116-25(5)).

The general rule in s. 116-20 includes amount received and entitled to be receive.
This approach mean that CGT may arise even though no actual funds have been
received. For example, if land is sold for $200 000 and is to be paid for in four
equal annual payments, then the full amount of the gain will be assessable in year
one even though only one quarter of the amount has been received.
Modifications to the general rule are summarised in s. 116-10, and s. 116-25 shows
the events that the modifications are relevant to.
TEXTBOOK
Please read Coleman et al. 2014, 11.470.

6
P rinciples of I ncome Tax Law
QUESTI ON 3. 6
What is the amount of capital proceeds for CGT in each of the following cases:
(a) $4000 owing on the sale of land, but the purchaser cannot be located
even though the contract of sale has been executed.
(b) During the last winter a dam on your property flooded a neighbours
paddock and the neighbour is suing you for $20 000 damages. To avoid
this legal action you enter an agreement with the neighbour that he can
remove the timber from 2 ha of your land if he agrees not to proceed with
the claim for damages. The agreement is signed and the neighbour cuts
the timber.
(c) As part of a wedding gift to his daughter a father transferred ownership
of shares valued at $10 000 into his daughters name.
(d) When selling his manufacturing business for $200 000 cash the taxpayer
also reached an agreement that the purchaser would in addition take
over the mortgage on the property of $50 000.
Cost base
Division 110 defines cost base by first providing a general definition (s. 110-25)
which may be subject to modification rules in certain circumstances. The general
definition of cost base in s.110-25 defines cost base as consisting of five elements:
1 Acquisition cost.
2 Incidental costs of acquisition and the CGT event (see s. 110-35).
3 Costs of owning the CGT Asset.
4 Capital expenditure relating to the asset.
5 Capital expenditure of establishing, preserving or defending title to the
property.
Please note that for assets acquired after 7.30 pm on 13 May 1997 s. 110-45
makes it clear that an expense that is deductible under another provision of the Act
cannot be included in any of the cost base elements. Expenses that can be added
to the cost base must also be reduced by any GST credit that has or would be
allowed against the expense (s. 103-30).
Cost base i ndexati on
Indexation of the cost base was introduced so that capital gains tax would not be a
tax on inflation (Div 114). However, indexation is only applicable for the
determination of capital gains and not capital losses (s. 114-1), and indexation is
also not available if the asset was acquired after 11.45 am 21 September 1999.
For an asset purchased before 21 September 1999 that is sold after that date the
taxpayer has a choice of applying indexation or the general discount of 50% (see
later in this topic).
Note: As it is some years since the indexation factor was frozen, indexation is
less likely to provide a lower taxable income than the general discount. As a
result, you are not required to do index calculations for this unit. However, you
are required to be able to recognise when indexation is applicable.
7
TOP I C 3
Reduced cost base
Capital losses are determined by comparing the capital proceeds with the reduced
cost base. In essence, the definition of reduced cost base in s. 110-55 is similar to
the definition of cost base, but with the following important differences:
reduced cost base is not indexed (s. 110-55(1))
Element 3 of the reduced cost base does not include costs of ownership
and is very limited.
Cost base modi fi cati on
The general definition of cost base and reduced cost base may be modified
through the operation of Div. 112. The most important of the Div. 112 modifications
are:
replacement of actual cost with market value (s. 112-20)
split, changed or merged assets (s. 112-25)
apportionment rules (s. 112-30)
assumption of liabilities (s. 112-35).
Section 112-20 is very important when determining the cost base of an asset that is
gifted or is a non-arms length transaction made when restructuring a business or
transferring assets within a family situation. In s. 112-20(2) the issue arises as to
what constitutes not dealing at arms length (this same issue also arises with
capital proceeds). One of the most important aspect to appreciate here is that
s. 112-20(2) is not a test of whether the two parties are at arms length or not
(e.g. a husband and wife), but it is a test of whether the parties are dealing at arms
length (Elmslie & Ors v. FCT (1993) 26 ATR 611; 93 ATC 4964). For this reason it is
possible for non-arms length taxpayers to deal at arms length and vice versa. The
test of an arms length transaction is whether the price agreed is similar to an open
market price. In Granby Pty Ltd v. FCT (1995) 30 ATR 400; 95 ATC 4240 Lee J
stated, What is asked is whether the parties behaved in the manner in which
parties at arms length would be expected to behave in conducting their affairs.
Dealing at arms length can therefore be equated to a test of market value.
TEXTBOOK
Please read Coleman et al. 2014, 11.480 11.500.
QUESTI ON 3. 7
Calculate any capital gain/loss from the following transactions. Where the year is
not mentioned, assume the current tax year.
Frank entered into a contract to purchase a shoe store on 8 January 2000 for
$200 000. Solicitors fees payable on 10 January 2000 were $5000. Settlement
took place on 18 April 2000.
A few years later, Frank decided to build an extension to the shoe store. The
contract with the builder was signed on 5 August 2005. The cost of the extension
was $250 000 and the building was completed on 18 December 2005.
During January 2007, a severe hailstorm damaged some of the windows of the
store. $5000 was spent on new windows which was fully deductible under s. 25-10.
8
P rinciples of I ncome Tax Law
Frank entered into a contract to sell the shoe store on 14 March of the current
year, for $880 000 (including GST). Settlement was on 17 July.
QUESTI ON 3. 8
Discuss the CGT implications of the following. Where the year is not mentioned,
assume the current tax year.
Alan entered into a contract to purchase a hardware shop on 23 April 1987 for
$300 000. Solicitors fees and stamp duty payable on 10 May 1987 were $5000.
Settlement took place on 18 June 1987.
During June 2001, Alan spent $22 000 (including GST) in legal fees when the
owners of the shop next door claimed that half of Alans shop was really theirs
because it was partly build on their land.
Alan entered into a contract to sell the hardware shop on 14 February for
$600 000 (excluding GST). Settlement was on 17 June.
Does your answer depend on whether Alan is an individual running a business or
whether he operates through a company? If so, why? If not, why not?
Step 3: Cal cul ate the net capi tal gai n/l oss
This final step will bring together:
the gains/losses for any CGT event during the year (this is what we have
already been discussing in this topic)
past year carry forward CGT losses
any exemptions or concessions provided under the Act
the 50% general discount under Div 115
the application of the rollover provisions.
All the above elements will be used to calculate the net capital gain/loss under s.
102-5 to determine the amount of assessable income arising from CGT that will
finally affect the amount of taxable income.
CGT l osses
Current year capital losses can only be used to reduce net capital gains and s.
102-10(2) provides that net capital losses are not deductible against assessable
income. However, these losses can be carried forward indefinitely to be used to
reduce net capital gains in the future.
50% General di scount
Legislation introduced in 1999 allows a 50% discount on some capital gains, and
eligibility for this discount is set out in Div 115. The 50% discount is available if:
the CGT event occurred after 11.45 a.m., 21 September 1999
(the announcement date)
the taxpayer is an entity specified in s. 115-10
the gain was not be due to an event listed in s. 115-25(3)
the asset has been held for at least 12 months.
9
TOP I C 3
From the above list it can be seen that to qualify for this discount, the CGT event
triggering the liability must have occurred after the announcement date 21
September 1999 (s. 115-15). In addition, only individuals, trusts and some
superannuation funds are entitled to the discount (s. 115-10), but companies are
not eligible. Note that unlike other eligible entities, superannuation funds get a
33%, rather than a 50% discount.
Not all capital gains can benefit from this discount. If the gains are due to events
D1, D2, D3, E9, F1, F2, F5, H2, J 2, J 5, J 6 or K10 then the discount is unavailable
(s. 115-25(3)). In general, the inapplicable events are ones that have a limited cost
base to calculate the capital gain or loss.
The 50% discount is also only available for assets held by the taxpayer for more
than 12 months (s. 115-25). The legislation also contains some provisions to
ensure that taxpayers do not try to artificially extend their ownership of assets to
12 months. For example, s. 115-40 states that even if an asset is held for at least
12 months, the CGT discount will not be available unless the agreement giving rise
to the CGT event is also entered into 12 months or more from the date of
acquisition of the asset.
Effect on i ndexati on
To avoid adverse retrospectively, taxpayers with assets acquired before the
announcement date, but disposed of after it, have a choice as to the concession
available. They can either participate in the 50% discount, or they can index the
cost base. However, if the latter option is chosen indexation is only available till the
September 1999 quarter. In other words, even if indexation is chosen, no account
will be taken of inflation that occurs after 30 September 1999.
TEXTBOOK
Please read Coleman et al. 2014, 11.510 11.570.

Exempti ons and concessi ons
Division 118 contains a range of exemptions and concessions which exempt
certain gains/losses from being included in the capital gain and also aim to avoid
double taxation. Use the table of sections for Div. 118 to familiarise yourself with
the type of exemptions that are included such as:
Motor vehicles
Assets that have been depreciated under Div 40
Trading stock
Gains assessable elsewhere in the Act
Some collectibles and personal use asset gains
Compensation for personal injury and damages.
It is important to note that the Act does not exempt any asset or CGT event but
instead expresses the exemptions as disregarding the capital gain/loss. The effect
of this approach is that the asset and the event remain subject to the CGT
provisions but the gain/loss is not included in the net capital gain and therefore has
no effect on taxable income.
10
P rinciples of I ncome Tax Law
Most significant of these concessions are the exemption of the taxpayers private
home (main residence), items which have been depreciated under Div 40, trading
stock, certain exemptions for small businesses (Div. 152) and exemptions applicable
to the transfer of assets resulting from the death of the taxpayer (Div. 128).
Please note that in this unit we do not cover the small business concessions
contained in Div 152 (these are covered in MLC305 Business Taxation Law).
TEXTBOOK
Please read Coleman et al. 2014, 11.220 11.310.
Mai n resi dence exempt i on
Subdivision 118-B primarily aims to exempt capital gain realised on one private
home per family. This is achieved by disregarding any capital gain/loss realised on
the disposal of the taxpayers main residence (s. 118-110), and not by making the
asset exempt. This distinction is important because if the asset was exempt there
would be no possible application of CGT, and no need to keep the necessary
records. However, as it is only the gain on disposal that is exempt (in some cases
only partly exempt), CGT legislation still applies to the main residence and other
provisions such as the requirements to keep records will still apply.
The specific requirements for the application of Subdiv. 118-B are quite complex as
they need to deal with situations where the taxpayer uses his or her main residence
for business or to earn income; two residences are owned because of relocation;
there is land associated with the home; joint ownership and temporary absence from
the home. Despite the complexity of this provision, the basic objectives are to
exempt the gain on one personally owned family home including a small amount of
land, to the extent that the house is used for private purposes. This exemption is also
extended to houses that are constructed or improved by the owner.
TEXTBOOK
Please read Coleman et al. 2014, 11.380 11.420.
Di sposal s resul ti ng from death
The policy principle underlying Div. 128 is that capital gains should not be levied on
assets that are transferred as a result of death. As a result, s. 128-10 states that a
CGT event resulting from the death of the owner of an asset is to be disregarded.
In addition, capital gains and losses are also disregarded for assets passed from
the legal personal representative (executor) to a beneficiary (s. 128-15).
However, it is important to appreciate that although there is no CGT on assets
transferred on death, the resulting transfer to the legal personal representative, and
ultimately the beneficiary, are an acquisition for CGT purposes. As a result, if the
legal personal representative (LPR) or the beneficiary sells the asset acquired from
the deceased, then they will be subject to CGT if there is a CGT event. Rules
establishing the cost base of the assets acquired by the LPR and beneficiaries are
set out in s. 128-15(4). These rules follow the basic principle that pre-CGT assets
of the deceased will be acquired at market value on the date of death, and post-
CGT assets of the deceased will be acquired at the cost base at the date of death
(indexation may apply). In both cases the asset will be a post-CGT asset in the
hands of the beneficiary.
11
TOP I C 3
TEXTBOOK
Please read Coleman et al. 2014, 11.425.
QUESTI ON 3. 9
Alicia signed a contract to buy an investment property on 1 September 1985 for
$50 000. Stamp duty and legal fees were $1000 and were paid on 1 September
1985. Settlement was on 1 October 1985.
Tragically, Alicia died on 1 October 2004. The market value of the house at this
time was $180 000. Her daughter Betty inherited the house.
Betty decided to rent out the property rather than live in it.
Betty entered into a contract to build an extension for the house on 1 January
2005. This cost $50 000. Construction finished on 1 June 2005.
Betty signed a contract to sell the property on 1 November 2014 for $600 000.
Settlement was on 1 December.

i. Discuss the CGT consequences of these facts.
ii. If Betty had sold the house before 1 October 2004, what difference would
it have made?
QUESTI ON 3. 10
Discuss the CGT implications of the following.
i. Anthony bought a house in August 2003 for $250 000. He li ved in it till
September of the current tax year at which time he sold it for $600 000.
ii. Jill bought a house in August 2007 for $250 000. She li ved in it for 2
years. She then moved to Adelaide for 2 years. At that time she rented a
house in Adelaide, and rented out her Melbourne premises to a tenant.
She then moved back to her Melbourne house to live and sold it in
September 2014 $750 000.
QUESTI ON 3. 11

Cynthia entered into a contract to purchase a house in September 2007 for $300
000. Settlement was in November 2007, and there was $10 000 of stamp duty
payable.

Cynthia li ved in the house till November 2009. At this time its market value was
$400 000. She bought an apartment in November 2009 and immediately moved
into it. She continued to own her original house and rented it out. In July 2013
she spent $20 000 on renovating the rental propertys kitchen. However, by
November 2014 she got tired of being a landlord and signed a contract to sell her
original rental property for $550 000. Settlement was on December of the current
tax year.

i. Discuss the CGT consequences of the above facts; and
12
P rinciples of I ncome Tax Law
ii. Discuss whether the conclusion would be different if during November
2009, instead of buying an apartment to move into, Cynthia became the
tenant of the apartment she moved into?
Rol l -over concessi ons
Divisions 122126 provide for deferral of the realisation of a capital gain in
circumstances where the legislature has judged that the CGT event is not a taxable
realisation. For example, a CGT event will occur when business assets are
transferred from a partnership to a company, yet there may be no real change in
ownership. Similarly a CGT event will occur on the destruction of a building by fire
and the insurance received would be the capital proceeds. If the taxpayer intended
to use the insurance to replace the lost asset, then the imposition of CGT would
reduce the taxpayers ability to replace the asset. The roll-over provisions have
been included to reduce the impact of this type of problem.
The basic purpose of the roll-over provisions is to postpone the assessability of
capital gains until the asset is disposed of in a way not eligible for the roll-over
concession.
To achieve this effect, the cost base, or pre-CGT status, of the original asset is
usually maintained for determining any future capital gain. For example, assets of a
partnership that are rolled over into a wholly owned company retain their original
cost base or their pre-CGT nature after the disposal to the company. CGT will then
only apply if the company disposes of the assets as a normal CGT event.
Roll-overs are allowed in a number of specific situations but the most important are:
compensation for compulsory loss or destruction, or compensation under
an insurance contract (Subdiv. 124-B)
transfer of assets between spouses upon the breakdown of their marriage
(Subdiv. 126-A)
transfer of assets to wholly-owned companies (Div. 122)
Note that for the purposes of this unit we do not cover the specific
requirements for these rollovers and only require that you are aware that
they are available (these provisions are covered in MLC305 Business
Taxation Law).
TEXTBOOK
Please read Coleman et al. 2014, 11.430.
Net capi tal gai ns are assessabl e i ncome
Section 102-5 is the main taxing provision for CGT as it brings to assessable
income any net capital gain for the year. The calculation of net capital gain is a
function of:
capital gains for the current year (accounting for any exemption or
concession)
capital losses for the current year
net capital losses carried forward from previous years.
50% general discount
any small business concession.
13
TOP I C 3
It is important to note that the 50% general discount is not applied until all current
or carried forward losses have been applied to any capital gain.
QUESTI ON 3. 12
Consider the following situations and discuss their effect on assessable income,
if any. Note: Where no dates are gi ven, the current tax year is to be assumed.
The taxpayer li ves and works in Warrnambool but she has been offered a
promotion in her job which requires moving to Sydney. As a result of the move
and the need to raise money for the higher cost of housing in Sydney, she sells
the following items:
Her Warrnambool home for $435 000 (3 October) which she purchased
for $85 000 (24 May 1986). This house was sold before she purchased a
home in Sydney.
A leather lounge suite that was too large to move to Sydney was sold for
$10 100 (2 December). This lounge had been purchased for $6000
(21 April 2007).
An old dining table that she had purchased at a garage sale for $560
(16 July 2000) and spent considerable time restoring. However, as she
recei ved a lot of interest in the sale of the table, she decided to ask an
antique dealer what its value was. The antique dealer valued it at $4000
and she sold it for $3700 (19 November).
A diamond ring which she was given by her previous husband (1 January
1997 market value $800) was sold for $300 (12 November).
A large fridge/freezer which she had only purchased a few months ago
(8 September) for $1500 was sold for $800 (1 December).
Important CGT events
Having looked at the basic structure and operation of the CGT provisions applying
CGT event A1, it is now necessary to review several other of the more important
CGT events.
CGT Events C1 and C2
CGT events C1 to C2 deal with the ending of a CGT asset and generally do not
provide any significant difference to the general approach except to note that these
events occur without the CGT asset being transferred to a new owner. CGT event
C1 relates to the loss or destruction of a tangible asset and CGT event C2 relates
to intangible assets.
CGT Event D1
CGT event D1 (s. 104-35) deems a capital gain to arise where payment is received
for the creation of a contractual right in another entity. For example, an amount
received for entering into a restrictive covenant will be subject to event D1.
An important difference with event D1 to most other events is that the cost base is
limited to incidental costs only (s. 140-35(3)). The other point that should be noted
with event D1 is that all other events (except H2) need to be excluded before it is
14
P rinciples of I ncome Tax Law
applied. In effect it is a residual provision that is only considered after the other
events are excluded.
CGT Event F1
CGT event F1 (s. 104-110) occurs when a lease is granted, renewed or extended.
Event F1 is aimed at taxing lease premiums (lump sum payments to the lessor).
For instance, CGT event F1 will occur if a lessor enters into a three year lease, and
the lessee agrees to pay an upfront premium of $20 000 as well as rent of $1000
per month. In this case, the $20 000 premium will be subject to event F1, and the
$1000 rent per month will constitute ordinary income.
CGT Event H2
CGT event H2 is important because it is quite different from all other CGT events.
Firstly, it is only to be considered once all other events, including D1, have been
excluded. Secondly, it does not require the disposal or creation of an asset. CGT
event H2 (s. 104-155) arises if an act or transaction occurs in relation to a CGT
asset, and as a result of the act or transaction, capital proceeds are received. This
event is designed to bring into assessable income amounts received because of
the ownership of assets but where the asset is not transferred or lost (see the
example given in s 104-155(1)). Despite the importance of CGT event H2, it is
reasonable to conclude that its application will be very rare as all other CGT event
must be considered for this event is applied.
TEXTBOOK
Please read Coleman et al. 2014, 11.50 11.160 (read in relation to only CGT
events A1, C1, C2, D1, F1, H2).
QUESTI ON 3. 13
Coleman et al. 2014, Question 11.5
QUESTI ON 3. 14
Discuss the CGT implications of the following. Where the year is not mentioned,
assume the current tax year.
(a) Richard was the star batsman in the Australian cricket team. On 1 March,
an official from another country paid him $40 000 in exchange for him
agreeing not to play for Australia for the next 3 years.
(b) Arthur Pty Ltd entered into a contract to purchase a convenience store
(called 7-Plus) on 29 October 1999 for $250 000. Solicitor fees were
$10 000.
On 1 September a customer, tired of excessi ve prices charged by such
stores, burnt down the shop. It was worthless afterwards. Arthur recei ved
$300 000 from insurance on 1 January.

15
TOP I C 3
Smal l busi ness concessi ons
All the small business concession is contained in Division 152 of ITAA 97.
Prerequi si tes
Subdi vi si on 152A
Subdivision 152A does not in itself grant any concession. However, the criteria set
out in subdivision 152A must be fulfilled before any of the small business
concessions apply.
If the assets disposed of are not shares in a company or units in a unit trust, the
criteria are as follows (s 15210):
The taxpayer claiming the concession must have either fulfilled the Net
Asset Value test OR be a small business entity. The Net Asset Value test
involves the taxpayer having less than $6 million dollars in assets. A small
business entity is defined in subdivision 328-C ITAA 97.and is based on the
business having a turnover of less than $2m.
The assets being sold must have fulfilled the active asset test. This
requirement ensures that the concessions only apply to genuine businesses,
and not to passive investments. For instance, a factory or shop would be
considered active assets. However, an investment property would be a
passive investment.
If the assets disposed of are shares in a company or units in a unit trust, then in
addition to the above two tests, the following test must also be fulfilled:
the CGT concession stakeholder test. To fulfil this test, it must be shown
that either the taxpayer or the taxpayers spouse is a significant individual of
the trust or company.
Net asset val ue test (s. 152-15)
The total value of the taxpayers net assets (not just the ones the exemption is
being claimed on) must not exceed $6m (s. 152-15). Net assets means the value
of assets less any liabilities connected with those assets (s. 152-20(1)).
The assets included in this test are as follows:
1 The taxpayers own assets,
2 The net assets of any entities connected with the taxpayer. This means any
assets of a company or trust which the taxpayer effectively controls (see
s 328-125 for rules which explain when entities are connected with a
taxpayer),
3 The assets of a taxpayers affiliates, as well as any entities connected with
the taxpayers affiliate. A taxpayers affiliate is a person or company who acts
in accordance with a taxpayers wishes in relation to that affiliates business
(s 328-130). However, note that:
Assets counted in the second category are not to be counted in this
category. This is required because the same entity might be connected
to both the taxpayer (and so appear in the second category) as well as
16
P rinciples of I ncome Tax Law
the taxpayers small business affiliate (and so also appear in the third
category) s 15220(2)(a).
Assets will only be counted in the third category if they are used for
carrying on a business either by:
the taxpayer
or
an entity connected with the taxpayer (s 15220 (3) & (4)).
To avoid double counting, any assets included in the second or third category are
not counted in the first category (s 15220(2)(a).
In working out the net assets of any of the categories, assets used for a taxpayers
personal use and enjoyment are disregarded (such as a caravan or residential
property), as are some dwellings, annuities, and life insurance policies (s 152
20(2)(b)&(2A).
EXAMPLE 3. 1
A has a factory worth $1.5m. He also holds a 60% interest in a company, X Ltd. X
Ltd has assets worth $2m, so As interest is worth $1.2m. As wife also has a shop
worth $500 000. This shop is independent to As factory.
As total assets for the asset test are as follows:
As assets: $1.5m
Assets of entity connected with A: $2m. The full amount of this is counted,
not only As interest. However, these shares would not be counted in the first
category (to avoid double counting)
Assets of As small business affiliate are nil. This is because the shop
owned by As wife is independent of As factory.
So the total assets would be $3.5m and A would pass the net asset value test.
In addition to the above test, if a taxpayer is a partner and the asset sold is a
partnership asset, then the taxpayer must show that the net assets of the
partnership are worth no more than $6m (s. 152-15(b)).
Small Business Entity s 328-110
An alternative to fulfilling the Net Asset Value test is for the taxpayer to fulfil the
requirements of a Small Business Entity under s 328-110. In general, the taxpayer
will be a Small Business Entity if either the aggregate turnover for the previous
financial year or the expected aggregate turnover for the current financial year is
less than $2 million.
Acti ve assets test (s. 152-35)
The taxpayer must show that the assets on which the CGT concession is being
claimed are active assets during the time periods specified in s. 152-35.

17
TOP I C 3
According to s. 152-40(1), if the assets sold are not shares or interests in a trust,
then for them to be active they must be either:
used in the course of the business (e.g. factory)
or
an intangible asset inherently connected with the business (e.g. the name
Toms Shoe Store).
According to s. 152-40(3), if the asset on which the concession is being claimed is
a share in a company or an interest in a trust, then the test is as follows: 80% of
the market value of the companys or trusts assets must be either:
active assets
or
money from the proceeds of the sale of active assets which it will use to
purchase new active assets.
When the capital gain in question is a result of event D1, the requirements of this
test are different. In such an instance, the taxpayer has to show that the right
created is inherently connected with a CGT asset that passes the active asset test
(s. 152-12).
For instance, if the taxpayer promises to not compete with the purchaser of his
shop, this would fulfil s. 152-12, as the restraint of trade is connected with an active
asset (the shop).
Section 152-40(4) specifically excludes some assets from being active assets.
CGT concession stakeholders 15260
The taxpayer who has sold their shares/units must have been the CGT concession
stakeholder at the time of sale. This means that either:
the taxpayer was one of the significant individuals of the company or trust;
or
the taxpayers spouse was one of the significant individuals in the company
or trust.
A significant individual of the company or trust is someone whose interest is at
least 20% (152-55).
Speci fi c concessi ons
Once the taxpayer has satisfied Subdivision 152-A, one or more of the following
concessions will apply to the capital gain.

18
P rinciples of I ncome Tax Law
Exempti on for 15 year ownershi p (Subdi vi si on 152-B)
According to s. 152-105, if the taxpayer is an individual and the asset sold is not an
interest in a company or trust, then the taxpayer will pay no CGT if:
the conditions in Subdivision 152-A are filled
the taxpayer has continuously owned the asset disposed of for 15 years
the taxpayer is either at least 55 and retiring, or permanently incapacitated.
If the taxpayer is an individual and the asset is an interest in a company or trust,
then the concession will apply if the taxpayer fulfils the above conditions AND:
during the whole period the taxpayer has owned the asset, it passes the
controlling individual test. In other words, the company or trust was
controlled by at least one person (not necessarily the taxpayer).
EXAMPLE 3. 2
X the taxpayer is 60 years old, and has $2m in assets. $1m of the taxpayers
assets is due to her owning a company, Z Ltd. X is currently the only shareholder
of this company. The companys only asset is a factory. X has owned 100% of the
company for 20 years. For the 10 years prior to that, Xs friend Q owned 90% of
the company, and X owned 10% of it. X sells the company for $1m.
The exemption would apply, as:
the conditions in subdivision 152A are fulfilled
X owned the shares for over 15 years
X is over 55 and retiring
Z Ltd had at least one significant individual (X) for more than 15 years.
If the taxpayer is a company or trust, then to get the exemption, it must be shown
that (s 152-110):
the conditions in subdivision 152-A are fulfilled
the taxpayer has continuously owned the asset disposed of for 15 years
the individual who was a significant indi vidual just before the event was:
at least 55 years old and retiring
or
permanently incapacitated
for at least 15 of the years the taxpayer company or trust owned the asset, it
had a significant individual .
50% concessi on on sal e (Subdi vi si on 152-C)
If the 15 year concession is unavailable, then the taxpayer will be eligible for a 50%
concession as long as the conditions in Subdivision 152A are filled. This is on top
of any other concession the taxpayer may be entitled to, such as the 50% discount
available to most taxpayers. The result is that often only 25% of the capital gain
made from the sale of small business assets will be taxed.
19
TOP I C 3
Smal l busi ness reti rement exempti on (Subdi vi si on 152-D)
This concession allows a taxpayer to avoid paying CGT by using the proceeds of
the sale of small business assets to fund their retirement. To do this, the individual
taxpayer must (s. 152-305):
fill the conditions in subdivision 152-A
rollover the funds as an Eligible Termination Payment if the taxpayer is less
than 55 years old. This ensures that they will be unable to access the funds
until they reach retirement age.
Furthermore, this exemption can only apply to a maximum of $500 000 (s. 152-
320).
Rol l over (Subdi vi si on 152-E)
If a small business owner sells some of their small business assets and purchases
replacement ones, then there will be no capital gains tax payable at the time the
original assets are sold.
To be eligible, the taxpayer must show (s. 152-410):
the conditions in subdivision 152-A are filled
replacement assets are bought between 1 year before and 2 years after the
relevant CGT Event
the replacement asset/s are active assets.
When the rollover applies, the taxpayer should first figure out the Capital Gain
made on the disposed asset and then apply any relevant discounts (such as the
ones in Div. 115 and Subdivision 152-C). The taxpayer should only then reduce this
discounted capital gain by the first and second element of the replacement assets
cost base (s. 152-415).
EXAMPLE 3. 3
A (an individual who fulfils the requirements of subdi vision 152-A) sells her shop
for $400 000. It had a cost base of $200 000. She is eligible for the 50% discount
in Di vision 115, as well as the 50% concession available in subdivision in 152-C.
She purchases a new factory for $300 000.
As net capital gain (before the rollover) is as follows:
400 000 200 000 = 200 000
Applying the discounts:
200 000 50% 50% = $50 000
As the first and second elements of the cost base of the factory are more than
$50 000, there is no CGT payable.
TEXTBOOK
Please read Coleman et al. 2014, 11.320 11.370 & further online references to be
announced.
20
P rinciples of I ncome Tax Law
QUESTI ON 3. 15
On 1 November 1999 A purchased for $80,000, 80% of X Pty Ltd. B (a person who
was not related to A) owned the other 20% of X Pty Ltd. X Pty Ltd was valued at a
total of $100,000
The main asset of X Pty Ltd was a large piece of land that had a car workshop on
it. The portion of the land unused by the workshop was rented out to someone
who wished to use it as a car park.
During the current financial year, X Pty Ltd made $30,000 profit from the car
repair workshop and $10,000 from renting out the vacant section of the land.
During November of the current financial year, A &B sold the shares in X Ltd for a
total of $400,000. At the time of the sale, As assets were as follows:
A:
80% of X Pty Ltd
50% of own residence which was worth a total of $1m
Telstra shares worth $500,000, which were bought with a loan of which
$400,000 is still outstanding
A BMW worth $150,000
10% interest in Y Ltd, a small pri vate company, total value of which = $1m
As spouse:
50% of own residence which was worth a total of $1m
$2m of BHP shares
25% interest in Y Ltd, a small private company, total value of which =$1m
A decided to use part of the proceeds to purchase a $50,000 shoe store.
Describe the CGT consequences for A regarding the above transaction.
Record-keepi ng for CGT
The capital gains tax provisions make it imperative that taxpayers keep accurate
and complete records in relation to transactions involving property. Division 121
requires any person to keep records that make it possible to ascertain:
the date on which the asset was acquired
any amount that would form part of the cost base of the asset
the date of disposal
the capital proceeds received.
Although it may appear that records need not be kept if capital gains do not apply
on the disposal of an asset, there are many circumstances where you cannot be
certain that capital gains will never apply. For instance, gains realised on the sale
of a main residence may cease to be exempt if the property is retained and is no
longer used as the main residence. In these circumstances, it will have been
necessary to have complete records even though at the time of the original
acquisition it may have been thought that there would be no CGT and therefore no
records would be needed.
Records must therefore be kept for all possible CGT events even though the gain
may ultimately not be assessable. The main assets for which records are not
required are collectibles costing $500 or less and personal use assets costing $10
21
TOP I C 3
000 or less. The reason that records are not required for these assets is because it
is know at the time of purchase that CGT will not apply at some future date.
QUESTI ON 3. 15
Coleman et al. 2014, Question 11.6
22