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PITL brief update: Week 5

• We continue fundamentals of CGT today – will
do SBC (re: assignment Q2) in detail in next
week’s classes.

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MLC703 Top #3 – CGT cont’d
Special Types of CGT Assets
There are 2 types of “CGT Assets” that receive special
treatment:
• Collectables; and
• Personal use assets (PUA);

Collectables Subdivision 108-B 1997:
• What are they?
• s108-10(2): antiques, jewellery, old coins, old stamps,
others;
• (items that collectors tend to collect).

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MLC703 Top #3 – CGT cont’d
Collectables Subdivision 108-B: cont’d
How are they special?
• If they cost $500 or less, exempt (s118-10(1)) –
disregard any capital gain/loss arising on the asset;
• Can only offset Capital Loss on collectable against
capital gain of collectable (s108-10(1));

Eg Yr 1: Buy $2,000 of ANZ shares (non-collectable);
Buy $1,000 antique desk (collectable);
Yr 2: Sell ANZ shares for $2,500: s104-10, event A1
(Disposal of CGT Asset) CG = $500;
Sell antique desk for $500: Event A1, CL = $500.
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MLC703 Top #3 – CGT cont’d
Collectables Subdivision 108-B: cont’d
• NCG for Year 2 is $500;
• Why $500? Why not $500 CG - $500 CL = $nil?
• Because you cannot use CL on collectables (desk) to
offset CG on non-collectables (shares);
• Can only use the CL on collectables against other
collectables;
• However, can carry forward any loss on collectables
and use it to offset CG on collectables in future years;
• Consequently, if you have future CG of collectables,
then you can offset the $500 CL of collectables.


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MLC703 Top #3 – CGT cont’d
Personal Use Assets (PUA) 108-C:
What are they?
• s108-20(2): definition: Asset that is used mainly for
personal/use enjoyment;
• Examples: TV, home cinema, audio systems,
racehorses, boats, private aeroplanes;
• NOTE: definition of PUAs excludes collectables;
• So if something is a collectable, cannot be a PUA.
EG antique desk that is used mainly for personal use, it
will be considered to be a collectable, not a PUA.

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MLC703 Top #3 – CGT cont’d
PUA 108-C: cont’d
How are PUAs special?
• Ignore if cost <=$10,000 (s118-10(3));
EG sell your racehorse that bought for $7,000,
disregard it for CGT purposes;

• Disregard Capital losses on PUA (s108-20(2));

• Cannot use PUA losses to offset capital gains on
PUAs (or any other category).

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MLC703 Top #3 – CGT cont’d
Timing issues
i) Time of Event
ii) Time of acquisition

i) Time of CGT Event
• Every Event has own timing rule;
• See s104-5 (has summary of every CGT event);
• What is the timing rule for Event A1?;
• Time of signing sales contract (if there is one);
• Time of transfer of CGT asset (if no contract exists)
– there will be no contract when you gift an asset.

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MLC703 Top #3 – CGT cont’d
Timing issues: i) Time of CGT Event cont’d
Eg J: Signs contract (both parties signed it) to sell house
on 1 Sep 12 (typically deposit will be paid at this time,
but this depends on contract);
• Settled on 1 Dec 12 (date when seller gets balance of
sale price and takes possession of asset);
• This is Event A1 for J, as J has disposed of CGT Asset;
• Date of Event A1?
• Date contract was signed since there is a contract
ie 1 Sep 12 is date of event A1.
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MLC703 Top #3 – CGT cont’d
Timing issues: i) Time of CGT Event cont’d
Another example:
• Financial year starts on 1 July, ends on 30 June;
• Sign contract to sell house on 1 June 2013;

• Settles on 1 Aug 2013 (ie in new/next financial year);

• Is Event A1 (disposed of CGT Asset);
• Date of Event? 1 June 2013 (when contract entered
into, not at settlement);
• This means it is in the 2012/13 financial year, even
though only get money in the 2013/14 financial year.
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MLC703 Top #3 – CGT cont’d
Timing issues: ii) Time of Acquisition
• General rule in s109-5(1) – acquire an asset when
become its owner;
• But there are 2 sets of specific rules;
• Acquiring an asset isn’t a CGT Event for the acquirer -
acquirer doesn’t pay CGT upon acquisition;

• So why do we care about the date of acquisition,
since acquiring an asset doesn’t trigger CGT for the
acquirer?
• Few reasons, one of them is that if acquired an asset
before 20/9/85, it is exempt from CGT.
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MLC703 Top #3 – CGT cont’d
Timing issues: ii) Time of Acquisition cont’d
2 Specific sets of acquisition timing rules:
• s109-5(2) has a table;
• Most important rule in this table (the first one):
• If asset is acquired by buying, getting it as a gift
(ie asset being transferred to you);
• THEN use s109-5(2);

1st acquisition rule says you have acquired the asset at:
i) Time of signing contract (if there is one);
ii) Time of transfer (if no contract).
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MLC703 Top #3 – CGT cont’d
Timing issues: ii) Time of Acquisition cont’d
Eg A: Signed contract to buy house on 10 Sep 1985,
settlement is on 10 November 1985.
• Date of contract is date of acquisition ie 10 Sep 85;
• NOTE: Since this is before 20 Sep 85, house will
be exempt from CGT;
• So when this TP later sells the house, no CGT.
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MLC703 Top #3 – CGT cont’d
Timing issues: ii) Time of Acquisition cont’d
2
nd
set of acquisition timing rules:
If you have acquired asset by creating it:
• THEN use table in s109-10;
• Usually, if you created it yourself, time of acquisition is
when construction commenced – (s109-10);
Eg start building house in Dec 98 and finish July 99,
will have acquired it Dec 98 (when construction
started).
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MLC703 Top #3 – CGT cont’d
Timing issues cont’d
Summary of timing of acquisitions, 2 sets of rules:
• In general, time of acquisition and event involving
sale = time of making the contract (or at time of
transfer if no contract exists), s109-5(2);
• If you create asset, use table in s109-10, acquisition =
when construction commenced;
• Usually, time of contract is simple –when both parties
have agreed to it;
• But what if not that simple? Let’s look at some
unusual situations:
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MLC703 Top #3 – CGT cont’d
Legal but unenforceable contract:
• Note that under contract law in general, a contract
does not have to be in writing to be valid (it can be
oral), so in most instances both oral and written
contracts are binding;
• BUT in SOME situations, legislation states a contract
has to be in writing to be enforceable (real estate);
• In such an instance an oral contract is still a legal
contract, it is just not enforceable;
• So, say on 1 Jan 2012 you make an oral contract to
sell land, to settle in 1 July 2012 – but don’t make a
written contract at that time – it is not enforceable.
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MLC703 Top #3 – CGT cont’d
Legal but Unenforceable Contract cont’d
• Assume that the transfer of land is conducted and paid
for on 1 July 2012 in accordance with the oral contract;
• What is the Date of CGT Event – date of making the oral
contract (Jan 2012) or date of transfer (Jul 2012)?

McDonalds v FCT (1998):
• In this situation, time of Event = time of making the
contract (ie 1 Jan 2012 - even if unenforceable);
• Just because unenforceable by statute, does not mean
that it is not a contract;
• For CGT purposes, date of making contract determines
time of Event A1 (whether enforceable or not).

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MLC703 Top #3 – CGT cont’d
Legal but Unenforceable Contract cont’d
What if Original Contract is Modified?
• What if there is a subsequent agreement which
modifies the original contract?
• Here, talking about when only 1 contract, which is
later modified;
• Do we go by date of original contract, or do we go by
date of when it was modified?
• FCT v Sara Lee: If subsequent agreement merely
modifies original contract, then go by date of original
contract.
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MLC703 Top #3 – CGT cont’d
How to calculate a capital gain (CL) or capital loss (CL)
• Let’s say you have triggered a CGT Event eg sell asset;
• Now you want to figure out how to calculate your
capital gain or loss;
• Every Event has its own rules!

• See s104-5 (event section) - specifies how to calculate
capital gain & loss for every CGT Event in its table;
• For now, will only look at how to calculate Event A1.
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MLC703 Top #3 – CGT cont’d
How to calculate a CG or CL cont’d
Event A1:
• CG (cap gain) = Capital proceeds (CP) – cost base (CB)
Eg bought shares $1,000, sold for $1,500; CG = $500;

• Capital Loss = Reduced Cost Base (RCB) – CP
Eg bought share $3,500, sold for $2,500; CL = $1,000.

Let’s look in detail at:
• Capital Proceeds (used for both CG & CL)
• Cost base (used for CG)
• Reduced Cost base (used for CL)
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MLC703 Top #3 – CGT cont’d
Capital Proceeds (CP)
s116-20(1):
• CP = what you receive + what you’re entitled to receive
from the CGT event (whether cash or property);
• Usually, the CP will be sales price (but not always);

Eg Sell house for $200K (Event A1), CP = $200K;

• Sell house for $2,000/week for 100 weeks;
• CP = $200K. Why?
• Because CP includes what entitled to receive for CGT
Event.

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MLC703 Top #3 – CGT cont’d
Modifications to CP:
Modifications:
• There are 6 (six) situations where the ‘general rule’ for
the CP can be modified;

• ‘General Rule’, CP = what you receive for the event
under s116-20;

• Usually this will be sales price.

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MLC703 Top #3 – CGT cont’d
Modifications to CP cont’d
A) ‘Market Value Substitution Rule’, s116-30:
• CP = Market Value of the CGT asset time of event if:
• No consideration (gift); OR
• Non-arms length (non-commercial transaction);

• For instance, mother sells daughter house worth
$200K for $50K – this is a non-arms length
transaction – has not been sold on commercial terms
between the buyer & seller;
• Note: transactions between relatives can be arms-
length, if they are on commercial terms.
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MLC703 Top #3 – CGT cont’d
Modifications to CP cont’d
Eg: House has CB of $80K:
• You gift your sister a house (market value $200K);
• This is event A1 ‘disposal of a CGT Asset’;
• This is a gift, the ‘general rule’ of CP = what you got
for Event (zero in this case) doesn’t apply;
• Rather, CP is deemed market value of house ($200K);
• So CG of donor giving the house = $200K–80K = 120K;
• Donor, by giving away house worth $200K, will pay
CGT ‘as if’ sold house for $200K;
• (if we ignore discounting and indexation).

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MLC703 Top #3 – CGT cont’d
Modifications to CP cont’d
B) ‘Apportionment Rule’, s116-40:
• If TP sells more than one thing then they must
reasonably apportion the CP;

Eg TP receives $400K for house and car together, in a
single ‘undissected’ amount;
• Valuer says house worth $390K and car $10K;
• CP for house = $390K;
• CP for car = $10K.

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MLC703 Top #3 – CGT cont’d
Modifications to CP cont’d
C) ‘Non receipt rule’, s116-45:
• If seller unlikely to receive what is owed by purchaser
then CP to be reduced by that amount;
Eg sell house for $200K;
• Under the ‘general rule’ the CP = $200K because it
includes what the seller is entitled to receive;
• Say, at settlement purchaser only pays bal. to $190K;
• If seller accepts $190K as full payment (ie doesn’t
have to); then
• Under s116-45, the CP are modified from $200K
(what seller was entitled to receive) to $190K (what
seller ended up receiving).

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MLC703 Top #3 – CGT cont’d
Modifications to CP cont’d
D) ‘Repaid Rule’, s116-50:
• This rule states that if you have to repay part of the
money you got, then CP reduced by what you repay;
eg sell house for $200K, but then you are sued for
breach of sale contract for $50K ie contract said
house was termite free, but it wasn’t;
• Under ‘general rule’, CP = $200K. However, this is
then modified/reduced under s116-50 by $50K
because you repaid $50K;
• So the CP = $150K, which makes sense because in net
terms that is what you were paid.
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MLC703 Top #3 – CGT cont’d
Modifications to CP cont’d
E) ‘Assumption of Liability Rule’, s116-55:
• This rule states that CP are increased by any debts
taken over by the purchaser;
Eg: A owns business and sells it to B;
• B agrees to buy business for $100K cash; and to ‘take
over’ A’s mortgage of $50K;
• Under ‘general rule’ CP = $100K;
• But this is modified by s116-55, so that CP = $150K;
• This makes sense, as A (the seller) is $150K better off.
Has received $100K cash & has got rid of $50K in
liabilities (usually re: business).
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MLC703 Top #3 – CGT cont’d
Modifications to CP cont’d
F) ‘Misappropriation Rule’, s116-60:
• If your employee/agent misappropriates part/all of
your CP, they are reduced by that amount;

EG sell house for $250K, agent collects money for you,
but steals $100K of it, your CP are reduced to $150K.
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MLC703 Top #3 – CGT cont’d
Cost Base (CB)
What is the CB? see s110-25:
• Has 5 elements;
• A CGT asset’s CB will be the sum of these 5 elements;
• Let’s consider each element in detail:

1
st
element, s110-25(2):
• What was paid for asset (includes non-cash items);
• Usually this is the purchase price;
Eg buy house for $100K;

• Will come under 1st element of cost base.

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MLC703 Top #3 – CGT cont’d
CB cont’d
2
nd
element, s110-25(3):
• Incidental costs, costs associated with the
acquisition or event (buying/selling);

Note: s110-35 has an exhaustive list of incidental costs;
• So to be an incidental cost that comes under 2
nd

element of CB, it needs to come under s110-35 AND
be related to acquisition of asset;
eg buy house – stamp duty (related to acquisition), sell
house – estate agent’s fees (related to event).
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MLC703 Top #3 – CGT cont’d
CB cont’d
• Incidental costs specified in s110-35 - these are:
• Valuer fees, sol’s fees, accountant, broker, agent, etc. Eg
1 buy shares, brokerage fees. Such fees would go in the
2nd element of CB of shares;

Eg 2 buy house and pay sol’s fees (conveyancing) to
transfer it into your name, would also come under this.
• Cost of transfer eg buy house, cost of registering it in
your name;
• Stamp duty – what need to pay government when buy
real estate.
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MLC703 Top #3 – CGT cont’d
CB cont’d
• Cost of advertising/marketing to buy/sell asset
(usually to sell);
• Valuation expenses;
• Search fees eg buy house, pay fee to government
department to make sure that house is owned by
seller and doesn’t have restrictions on it;
• Conveyancing: When buy/sell real estate, usually pay
lawyer to effect transfer, (but can DIY using a
‘conveyancing kit’ - cost of kit is an incidental cost);
• Borrowing expenses eg buy house, pay bank
application fees, valuation fees, for a mortgage;
• Consolidations – don’t worry about this one.


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MLC703 Top #3 – CGT cont’d
CB cont’d
• So ‘incidental’ expenditure (under s110-35) is related
to acquiring an asset or a CGT Event (usually sale), will
fit under 2
nd
element of asset’s CB;
Eg: When buy house, pay $2K in solicitor’s fees, stamp
duty $8K. When sell, pay $5K in advertising & real
estate agent fees. These are all incidental costs
related to acquiring/selling house (CGT Event);
• 2
nd
element = $2K + 8K + 5K = $15K;
• Note: if you spend these costs, but NOT related to
acquisition/event eg own a house for 5 years, get legal
advice on it, unrelated to selling it – NOT in the 2
nd

element of CB.

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MLC703 Top #3 – CGT cont’d
CB cont’d
3
rd
element, s110-25(4):
• Costs of “owning the CGT asset”
• Legislation says this specifically includes (though not
restricted to these):
• Repairs/maintenance/insurance for the asset
• Interest on money that borrow to purchase a CGT
asset – eg interest on mortgage for a house
• Council rates & land tax
• Interest on money that borrow to improve the asset
or to refinance asset eg borrow money to renovate,
interest would potentially come under house’s 3rd
element of CB.

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MLC703 Top #3 – CGT cont’d
CB cont’d
4
th
element, s110-25(5): Capital expenditure that either:
a) Has purpose or is expected to increase/preserve
the asset’s value;

Eg add room to house, Cost $50K;
• Add $50K to 4
th
element of CB of the house
• What if spent $50K on adding room to house – you
thought it would improve its value. Then after did it,
demolished it;
• Could you still add $50K into element 4 of CB?
• YES – capital expenditure that had purpose of
increasing value.
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MLC703 Top #3 – CGT cont’d
CB cont’d
OR
b) Relates to installing/moving asset:

Eg ‘A’ leases land which runs a caravan park on. Buys a
new caravan, costs $5K to move and install it in
caravan park. Could add this into the 4
th
element of
its CB of the caravan park.

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MLC703 Top #3 – CGT cont’d
CB cont’d
5
th
element, s110-25(6):
• Establish, defend or preserve title;

Eg Your neighbour claims that half of your backyard is
really theirs (boundary dispute);

• Ypu spend $10K on legal fees defending title to your
backyard ie proving it belongs to you;
• Can include the $10K in 5
th
element of your property.

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MLC703 Top #3 – CGT cont’d
CB cont’d
CB eg: X buys house in Jan 2001 for $200K;

• 1
st
element (the cost of acquiring asset): $200K;
• 2
nd
element (incidental costs upon acquisition): $10K
for legal fees, stamp duty;
• 4
th
element (capital expenditure): On July 2006, he
builds extension for $50K;
• In March 2012, sells for $500K, pays $15K in estate
agents fees - ($15K is also 2
nd
element, incidental cost
related to a CGT Event).


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MLC703 Top #3 – CGT cont’d
CB cont’d
How much is the CG? Event A1, Disposal of asset:
• CG = CP – CB;
• s116-20: CP = $500K (sales price); s110-25: CB =

1) Cost of acquisition: $200K
2) Incidental costs (to acquire & sell): 10K + 15K: $ 25K
3) Costs of owning the asset eg interest, repairs : $ nil
4) Capital expenditure (extension): $ 50K
5) Costs of defending title: $ nil
TOTAL (CB for house): $275K

• CG = $500K (CP) – $275K (CB) = $225K
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MLC703 Top #3 – CGT cont’d
CB cont’d
• s110-45: If an expenditure is deductible it is
generally excluded from the CB;
• Otherwise it would be double counting;

Eg 1: Let’s examine the CB of the following property:
• Buy rental property for $300K (1
st
element);
• Assume you borrowed money to buy house;
• Total interest for 3 yrs = $50K, after which sell house;
• Would $50K interest be included in 3rd element of CB
(3rd element of CB is costs of owning asset such as
repairs and interest on money borrowed to buy
asset)?

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MLC703 Top #3 – CGT cont’d
CB cont’d
• Could get deduction for interest along the term of the
asset, because you borrowed money to purchase an
income producing asset (ie it produces rent).

• So $50K interest would not go in 3
rd
element of CB
(or any other element). Why?
• Because it was deductible – can’t add to the CB;

• There is no choice here – if expenditure is or could be
deducted then you cannot add it to the CB.
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MLC703 Top #3 – CGT cont’d
CB cont’d
Eg 2: Buy vacant land for $300K (1
st
element);
• Buy land with borrowed money; pay $50K interest on
borrowed money for 3 years and then sell land;
• Is $50K interest part of 3rd element of land CB?
• Yes! Why?
• Interest is not deductible along the term of the asset
in this instance. Why not?
• Because vacant land is not an income producing
asset (cannot collect rent from it);
• So could include interest in 3
rd
element of CB, because
interest is a cost of owning the asset (ie 3
rd
element).
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MLC703 Top #3 – CGT cont’d
CB cont’d
• Due to this principle, for income producing
investment properties, expenditures such as interest,
council and water rates, deductible repairs cannot be
added to the CB of the property because they are
generally deductible.
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MLC703 Top #3 – CGT cont’d
Modifications to CB
• ‘General Rule’ is that CB = total of 5 elements
• This is modified in some instances. Some of these
modifications are “mirror images” of the CP
modifications (Div 112).

• What do we mean by “mirror images”?
• We mean that the CB for the acquirer of the asset is
changed in the same way as the CP is for the person
who disposed of the asset.

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MLC703 Top #3 – CGT cont’d
Modifications to CB cont’d
Firstly, s112-20: If someone gets an asset:
• As a Gift/No consideration; Or
• In a non-arms length transaction
• THEN ‘general rule’ that 1st element of CB = purchase
price is modified to ‘1
st
element = market value
at time of transfer’;
Eg you give your sister your house as a gift. House is
worth $200K at this time;

• Earlier (sl. #23) we learned that CP for person giving
the house is in such an instance 200K.
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MLC703 Top #3 – CGT cont’d
Modifications to CB cont’d
• Now we are learning the mirror image of this - that the
1st element of CB for person receiving the house
is also $200K (at the time of gift, is only donor that
pays CGT – only the seller triggers Event at this time);
• So 1st element of CB for house (sister) = $200K;
• Say, sister then adds room to house - $50K (4th
element of CB – capital improvement);
• Sister then sells house for $400K: is Event A1;
• CP = $400K;
• CB = $200K (1st element – market value at time of gift)
+ $50K (4th element) = $250K;
• CG = $400K – 250K = $150K (disregard discount/index).
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MLC703 Top #3 – CGT cont’d
Modifications to CB cont’d
i) Split Assets, s112-25:
• If an asset is split, then apportion CB between them;
eg 1 piece of land has CB of $1m;
• subdivide it into 10 lots (equal size);
• CB of each = $100K.

ii) Merged assets:
• If merge assets, then CB = total CBs of merged assets;
Eg: 10 pieces of adjacent land, each CB =$100K;
• Amalgamate/merge into one lot (land is now 1 title);
• CB = $1m


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MLC703 Top #3 – CGT cont’d
Modifications to CB cont’d
Third, s112-30:
• If you purchase more than 1 asset in a single
undissected amount, then must apportion money
among assets to determine what is the 1
st
element of
the CB of each one;
• Use a valuer’s certification for values.

Fourth: 112-35: Assumption of Liability:
The mirror image of similar rule for CP;
• If purchase something, take over the liability of the
seller, then 1
st
element of CB includes any liability
taken over (re: slide #48).

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MLC703 Top #3 – CGT cont’d
Reduced Cost Base (RCB):
Reduced cost base, s110-55:
• When have capital loss, don’t use CB, use Reduced CB
(RCB);
• CL = RCB – CP;
• RCB – similar to CB (but used only in CL);

Following differences to CB to make RCB:
• No 3rd element (costs of owning an asset) – so things
like interest, repairs, don’t include in reduced CB.
• Also, cannot index elements of cost base.
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MLC703 Top #3 – CGT cont’d
RCB: cont’d
Example:
• Buy house in Sept 2006 for $200K (1
st
element);
• Extension in Oct 2007 for $100K (4
th
element) – capital
expenditure with aim of improving asset;

• Sell for $250K; is Event A1 (disposed of CGT Asset):

Cap loss = RCB – CP
= ($200K + 100K) - $250K
= $50K
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MLC703 Top #3 – CGT cont’d
Modifications to RCB
For many Events, including A1: CG = CP – CB;
• We learned that CP = what get for Event happening
(s116-20). In the case of A1, this will be sales price;
• Also learned that CB = total of 5 different elements:
– purchase price,
– incidental costs,
– costs of owning asset,
– capital expenditure, and
– protecting title.
• However, these are ‘general rules’ (they usually apply);
• BUT sometimes these ‘general rules’ are subject to
‘modifications’


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MLC703 Top #3 – CGT cont’d
CGT Concessions
Concessions:
• Note: Capital gains can benefit from one of 2 types of
concessions:

i) Indexation
ii) Discounting

• These will lower the tax liability;

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MLC703 Top #3 – CGT cont’d
CGT Concessions cont’d
i) Indexation:
• So that CGT only taxes ‘after inflation’ gains.

Conditions for Indexation:
• s114-10: Must have held asset >12 months; and
• Must have acquired asset on/before 11:45am 21 Sep 99
• Only applies to capital gains (ie not losses);
• s114-5(1): Only applies to events that use a CB in the
calculation (such as A1);
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MLC703 Top #3 – CGT cont’d
CGT Concessions cont’d
How do we index?
• We need to know what indexing is and when it applies
(but do not have to know how to index);
• Basically, indexation raises the CB to reflect the real
(after inflation) cost of the CGT asset;
• Since CG = CP – CB, a higher CB will mean a lower CG;

EG buy house in 1990 for $190K (1
st
element of CB) and
pay stamp duty of $10K (2
nd
element). Assume these
are the only elements of CB that apply to this house.
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MLC703 Top #3 – CGT cont’d
CGT Concessions cont’d
Eg from previous slide cont’d:
• Before indexation, CB = $200K (190K + 10K);
• Sell in 1998 for $350K;
• Between 1990 and 1998, assume prices (inflation) rose
a total of 45%;
• So real cost in 1998: $200K (nominal CB) x 1.45 (allow
for inflation) = $290K (total indexed CB);
• CG (if can use indexation):
CG = $350K (CP) - $290K (after indexation) = $60K
• Without indexation:
CG = $350K (CP) - $200K (no indexation) = $150K
55
MLC703 Top #3 – CGT cont’d
CGT Concessions: 50% Discount
• If the 50% discount applies, then we can reduce the
CG by 50% when calculating the final NCG figure;
Eg: buy house for $200k; buying costs (stamp duty, etc)
of $10K, make improvements worth $30K;
• Then sell for $500K - Event A1;
• CP = 500K, CB = ($200K + 10K + 30K) = $240K;

If 50% concession applies do the following:
• $500K (CP) – $240K (CB) = $260K
• To calc. NCG apply 50% discount = $260K/2 = $130K;
(though if we have an offsetting capital loss it is not as
simple as this – will learn about that later).
56
MLC703 Top #3 – CGT cont’d
CGT Concessions: 50% disc. rules in Div 115
Need to fulfill all following conditions (below):
• NOTE: complying superannuation funds only get 33%
discount, not 50% discount;

a) Certain Entities only, s115-10:
Only the following can benefit from discount:
• Individuals (includes members of partnerships);
• Complying superannuation funds;
• Trusts;
• NOTE: Companies cannot use it;
Eg BHP sells asset, cannot use 50% discount.

57
MLC703 Top #3 – CGT cont’d
CGT Concessions: 50% disc. rules in Div 115 cont’d
b) Event must have occurred after 21 Sept 99, s115-15:
• Timing of Event? See s104-5;

c) No indexation, s115-20:
• If using 50% discount cannot use indexation for the
same gain;

d) Asset held for at least 12 months, s115-25(1):
• Time between date of ‘acquisition’ and CGT Event
must be at least 12 months.

58
MLC703 Top #3 – CGT cont’d
CGT Concessions: 50% disc. rules in Div 115 cont’d
e) Certain events only, :
• Only certain events benefit from the 50% discount;

Unavailable (excluded) events, s115-25(3):
• D1, D2, D3, E9, F1, F2, F5, H2, J2, J5, J6 and K10;
• If make CG from one of these events, cannot
benefit from 50% discount;

• Note: Event A1 is not an excluded event, so can use
discount for Event A1.

59
MLC703 Top #3 – CGT cont’d
CGT Concessions: Indexation and Discount
So the following is possible:

Time of Acquiring and time of Event:
a) If Event is A1: Can only use 50% discount if time of
event when enter into contract to dispose/sell is
after 21 Sept 1999;
• Why? Because indexation only applies to assets
acquired before 21/9/99;
• Must also fulfill a) – e) conditions on prior slides, no
choice.
60
MLC703 Top #3 – CGT cont’d
CGT Concessions: Indexation and Discount
b) Acquire before 21 Sept 1999, but disposal/sale is
after 21 Sept 1999:
Eg buy house in 1990, sell today
• Can use 50% discount or indexation.

• IF fall under option b) and have a choice, which
should you use?
• Depends on facts;
• Choose that method that gives the lower gain – (need
to calculate result under both methods);
• Would use software package in industry.
61
MLC703 Top #3 – CGT cont’d
Implications of Death for CGT
Disregard Capital Gain upon Death, s128-10:
Eg ‘A’ owns NAB shares, dies, ‘B’ inherits them;
• No CGT payable at time of death;
• If s128-10 did not exist, then death would trigger
Event A1, disposal of a CGT Asset, and A’s deceased
estate would have to pay CGT;
• COMPARE WITH: if you give away asset when you are
alive, usually will trigger a CGT liability;
• Would be A1 and deemed to sell it at market value
(re: sl. #23).

62
MLC703 Top #3 – CGT cont’d
Implications of Death for CGT cont’d
Disregarding Capital Gain upon Death, s128-10 cont’d:
• NOTE: when ‘B’ (the beneficiary of ‘A’ who inherited
the shares) sells them, they (‘B’) will have to pay CGT;
• Why? Because it triggers Event A1;

• This raises an important issue: when the beneficiary
sells it and triggers Event A1, what is their CB for the
inherited shares?

63
MLC703 Top #3 – CGT cont’d
Implications of Death for CGT cont’d
CB for Person that Inherits Asset:
• The CB for the beneficiary of the asset depends upon
if they are in ‘1
st
situation’ or ‘2
nd
situation’ below:

1
st
situation: s128-15(4): If Asset was:
• Bought by deceased person before 20/9/85; or
• Bought by deceased person on or after 20/9/85 but it
was their main residence (house owned and lived in);
• Then 1
st
element of CB for beneficiary = Market value
of asset at time of death;
• Any expenditures by beneficiary after inherited asset,
will potentially go into other elements of the CB.
64
MLC703 Top #3 – CGT cont’d
Implications of Death for CGT cont’d
1
st
situation cont’d:
Eg ‘A’ buys house in 1982 for $50K, doesn’t use it as
their main residence, ie they rent it out.
• CB for A = $50K;
• A Dies in 2002;
• ‘B’ inherits (market value = $140K at this time);
• At this point of time (ie at A dying) – no CGT payable;
• So 1
st
element of CB for B is $140K – because the
deceased purchased the asset before 20/9/85, so 1st
element of CB for deceased is market value at time of
death.
65
MLC703 Top #3 – CGT cont’d
Implications of Death for CGT cont’d
1
st
situation cont’d:
• Assume B doesn’t spend any money on the house, so
no other elements of the CB are relevant (if did, then
would potentially add to the CB);

• B sells in 2012 for $200K, this triggers Event A1;

• CG = $200K (CP) - $140K (CB) = $60K (ie disregarding
indexation and discounting for the sake of simplicity –
these can potentially apply).
66
MLC703 Top #3 – CGT cont’d
Implications of Death for CGT cont’d
2
nd
situation s128-15(4): If Asset was:
• Bought by deceased after 20 Sep 1985; AND
• Was not the deceased’s main residence (this covers
everything that isn’t covered by the first situation);
• Then for person who inherited asset, 1st element of
CB = the full CB that deceased had;
Eg: A buys house in 1987, doesn’t use it as their main
residence, ie they rent it out.
• CB for A = $50K;
• A dies in 2002;
• B inherits (market value = $140K at this time).
67
MLC703 Top #3 – CGT cont’d
Implications of Death for CGT cont’d
2
nd
situation cont’d:
• So 1st element of CB for B is $50K because:
• Deceased acquired asset after 20/9/85; and
• Is not their main residence;
• So 1
st
element of CB for beneficiary = full CB of
deceased ($50K);
• Assume B doesn’t spend any money on the house, so
no other elements of the CB are relevant;
• B sells in 2012 for $200K, this is Event A1:
CG = $200K – 50K = $150K;
• (disregarding indexation and discounting for the sake
of simplicity – these do potentially apply).

68
MLC703 Top #3 – CGT cont’d
Implications of Death for CGT cont’d
• Note: If the beneficiary, after inheriting the asset, had
expenditures which goes into any of the elements
of the CB (eg the beneficiary renovated the house at a
cost of $30K) – then this would be added to the
beneficiary’s CB:

• If this occurred here, then total CB = 50K + 30K = $80K;
• CG = $200K – 80K = $120K
69
MLC703 Top #3 – CGT cont’d
Implications of Death for CGT cont’d
• NOTE: 1
st
situation is usually better for beneficiary;

• Why? Because in 1
st
situation:
• The 1st element of beneficiary’s CB = market value at
time of death, whereas
• In 2
nd
situation, 1st element of CB = deceased’s CB;
• That means in 1
st
situation, CB will be higher usually,
so there will be a lower CG;
• NOTE: as mentioned later, there will be a (limited)
number of situations where when beneficiary (person
selling inherited asset) sells asset, they pay NO CGT.
70
MLC703 Top #3 – CGT cont’d
Death and the 50% Discount
• Previously, we learned CG benefit from 50% discount;
• One condition is that TP held the asset for 12 months;
• If you inherit an asset and then sell it – want to know
if can use 50% disc.;
• Same rules of eligibility as if you bought it yourself,
EXCEPT there are special rules as to when the 12
months start running (s115-30):
• IF deceased bought it before 20/9/85, then time
starts running when deceased died – would need to
be 12 months between deceased’s death and
beneficiary triggering Event.
71
MLC703 Top #3 – CGT cont’d
Death and the 50% Discount
• IF deceased bought it on/after 20/9/85, then time
starts running when deceased acquired the asset;

Eg deceased acquired 1/1/12, but dies 1/7/12;
• Beneficiary inherits, sells it on 1/1/13;
• Would fulfil the 12 month requirement for 50%
discount, because time started running when
deceased acquired asset.

72
MLC703 Top #3 – CGT cont’d