Capital Gains Tax

Australian Treasury
9 September 2020
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Objectives
• What are capital gains and losses
• Why tax capital gains and losses
• A history of the policy development in Australia
• How does CGT contribute to the broader system
• The arrangements for foreign residents
• Some thoughts going forward

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What are Capital Gains and Losses ?
• An entity makes a capital gain (or loss) for tax purposes when they
sell (or dispose of) a capital asset for a profit.

• The difference between the original purchase and the final sale is
considered (generally) to be the capital gain (or loss).

• It is difficult to precisely define a capital asset and the same asset

could be a capital asset in the hands of one taxpayer and a revenue
asset in the hands of a different taxpayer.

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How to work out the net capital gain:

1. Reduce capital gains for the income year by any capital losses made during the
income year.
2. Apply any previously unapplied net capital losses from previous income years (in
the order in which they were made) to reduce current year capital gains.
3. Reduce any discount capital gains by the discount percentage (refer to Division
115 of the ITAA 97).
4. Apply the small business concessions (if applicable).
5. Add up the amounts of capital gains (if any) remaining after step 4. This is the
taxpayer’s net capital gain for the income year.

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 A History of Capital Gains Tax in Australia
• Pre 1985

• Post 1985 – The introduction of CGT

• 1999: A TAX SYSTEM REDESIGNED

• 2009 AUSTRALIA’S FUTURE TAX SYSTEM

• 2015 RE:THINK TAX DISCUSSION PAPER

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The Capital / Revenue Distinction

In Australia taxpayers may generate

income and incur expenditure that is
classified as revenue (that is, expenditure
held on revenue account) or capital (that
is, expenditure held on capital account)

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What is the policy rationale for a CGT regime?

Equity
Supports the progressivity of the tax system
Promotes horizontal equity; and
Supports vertical equity

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Policy Considerations continued

Taxing capital gains seeks to

reduce distortions
Efficiency The introduction of the CGT helped reduce the
distortionary effects of the tax system on individuals’
labour and investment choices.

Simplicity/ Practicality Realisation vs Accruals

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Capital Gains Tax and the Broader System

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Capital Gains Tax and the Broader System

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How does the Australian Tax System treat capital
gains made by foreign residents?
• Where is it in our law? - Division 855 of the Income Tax Assessment Act 1997
• What counts? – Direct and indirect interests in Taxable Australian Real Property
(TARP)
• Other things to note
– Managed Investment Trusts
– Foreign Trusts
– Temporary Residents
– CGT withholding tax on foreign residents

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Integrity Challenges

The concept of ‘Land Rich’

Valuation methodologies

Potential to distort investment in intangibles

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Some Questions for the Future
Could accruals become more feasible?

The impact of technologies

Land Taxes?

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Terima Kasih

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