Capital Gains Tax
A gain which is categorised as capital is not held for income tax purpose under the ordinary concepts of income. The capital gains tax began on 20 September 1985 and brings forward the capital receipts under the tax base. The income tax liability of the tax includes the net capital gains (Barkoczy 2014). Under the capital gains tax, a taxpayer accrues the net capital gains to the taxpayer in the particular income year that gains are included into the taxpayer’s taxable income. While a capital loss is not subjected to deductions from the taxable income instead the same can be off-set against the capital gains for that year or in the future years to ascertain the net capital gains.
Capital gains tax cannot be regarded as the separate tax. It is a set of residual provisions that is designed to understand the amount of the statutory income that can be included into the taxable income of the taxpayer (Grange, Jover-Ledesma and Maydew 2014). The primary step in determining whether transaction is subjected to capital gains tax is to ascertain whether the CGT event has happened. A capital gains or loss originates only when the CGT event takes place involving the CGT assets.
A capital gains tax asset can be defined as the part or interest in any form of property or the legal or equitable right which is not the property (Jover-Ledesma 2014). The CGT assets are divided into the three categories. These are as follows;
- Collectables
- Personal use assets
- Other CGT assets.
In order to determine the cost base or in other words the cost of purchase of collectables and personal use assets, any non-capital cost of ownerships must be ignored.
The definition of Collectables is provided under “section 108-10(2) of the ITAA 1997”. According to the “section 108-10(2) of the ITAA 1997” a collectable can be defined as the assets that are mainly used or kept for the personal enjoyment of the taxpayer or the taxpayers associates private use and enjoyment (Kenny, Blissenden and Villios 2018). The collectables mainly comprises of the below stated following;
- Any form of artwork, jewellery, antique object, medallion or a coin
- A rare type of folio, book or manuscript
- A first day cover or the postage stamp
- Any interest or an option or the right of acquiring the above stated items or the debt that originates from the above listed items.
As defined under “section 118-10(1) of the ITAA 1997”, collectables are acquired for $500 or less must be excluded from the provision of the capital gains tax (McCouat 2018). Where the collectables are normally sold as the assets or in the form of set, the set will be held as the single CGT asset within the purpose of the stated threshold. Under “section 108-10 (1) of the ITAA 1997” an individual tax payer reporting capital loss from the collectables can be only used to offset the capital gains together with the future capital gains originating from the collectables (Sadiq et al. 2018).
CGT Assets
Where the taxpayer has two or greater than two losses from the collectables then it must be applied in an order against the gains that were made. Under “section 108-17 of the ITAA 1997” the costs base of the element does not comprises of the third element of the cost base or the cost that is associated with ownership such as interest (Taylor et al. 2018).
In the present situation it should be noted that a “jewellery costs $5,000”. With reference to “section 118-10(1) of the ITAA 1997” the jewellery should be classified as “collectables” (Woellner et al. 2018). This is because the cost base of the asset or in other words the purchase cost of the assets is greater than $500. As the cost base of asset is greater than $500, any capital gains that is made from the sale of jewellery would be included into the assessable income of the taxpayer.
“Section 108-20 (2) of the ITAA 1997” provides the definition of the personal use assets. According to the “section 108-20 (2) of the ITAA 1997” the personal use assets comprises of the assets that is mainly used or kept by the taxpayer for their personal use or enjoyment but does not comprises of the land or building (Robin 2017). The personal use assets represents the non-collectable assets used by the taxpayer for their private use. The personal use assets comprises of the boats, furniture, electrical goods and household items. Other examples of the personal use assets includes;
- Television at home
- Mobile phone for personal use
- A bicycle
- Yacht owned by the taxpayer for their private use and enjoyment.
However, under “section 108-20(3) of the ITAA 1997” the personal use does not takes into the account land and building given the asset is considered as collectable (Blakelock and King 2017). Furthermore, “section 108-30 of the ITAA 1997” provides that the cost base of the personal use asset does not comprises of the third element of the cost base or the cost associated with the ownership namely an interest.
Under “section 118-10 (3) of the ITAA 1997” any form of capital gains should be ignored where the personal use asset was purchase for $10,000 or less (Martin and Connor 2017). This represents that the taxpayer are only under the obligation of keeping the details of the purchase of personal use assets if the assets are bought or acquired for $10,000 or more. In the event personal use asset that are usually disposed as the set, the set would be taken into the consideration as the single CGT asset within the limit of $10,000 threshold (Kiprotich 2016). Whereas the personal use asset is sold for a loss, then the taxpayer would not be allowed to claim the offset against the capital loss. The losses under “section 108-20 (1) of the ITAA 1997” are simply ignored.
Personal Use Assets
As evident in the present situation, a second hand car is purchased for $3,000. Citing the “section 108-20 (2) of the ITAA 1997” second hand car would be classified as the personal use asset (Miller and Oats 2016). Therefore, in the event of sale of the second hand car, any capital gains from the sale of second hand car should be disregarded since the cost of the asset is less than $10,000.
According to the “section 109-5 (1) of the ITAA 1997”, a CGT asset is acquired when it is owned by the taxpayer (James and Nobes 2016). A CGT asset is usually obtained under “section 109-5 (2) of the ITAA 1997” as the result of happening of CGT event. The examples of the CGT assets includes the following
- Land and buildings
- Shares in the company and units in the unit trust
- Options
- Debts that is owned to the taxpayer
- Goodwill
- Personal use assets with a cost base of greater than $10,000
Shares in the company or units in the unit trust are treated in the identical manner as the other CGT asset for the capital gains tax purpose. For an individual investor, CGT is applicable to the capital gains on the shares or the units when the CGT event takes place, such as when a taxpayer sales them. An individual selling the capital asset, namely the shares, the taxpayer in such a situation makes either the capital loss or a capital gains (Fleurbaey and Maniquet 2015). The capital gains or loss represent the difference between what it costs an individual to purchase the asset and what is received by the taxpayer following the disposal of the asset.
An individual taxpayer is required to report the capital gains and losses in their tax return and pay the tax on capital gains made (Christie 2015). Profits made upon the sale of shares that is made as the part of business of shares trading are treated for taxation as the ordinary income instead of considering the same as the capital gains. A taxpayer might have to pay the tax on any form of capital gains is made on the shares or units when a CGT events takes place.
With reference to “section 108-5 of the ITAA 1997” the “shares in BHP” would be categorised as the CGT asset (Grange, Jover-Ledesma and Maydew 2014). A CGT event might happen when these shares are sold or disposed of. The taxpayer might be required to pay tax on the capital gains that they make on the shares when the CGT events take place, particularly when the shares are sold. The “shares in BHP” would be treated in the similar manner as treated to any other assets for the capital gains tax purpose. For the taxpayer, the capital gains tax will be applicable to the capital gains that would be made when the CGT event takes place.
Shares in BHP
There are certain exemption that might allow an individual taxpayer to reduce the capital gains or loss, deferred or disregarded (Kenny, Blissenden and Villios 2018). Usually, capital gains and loss made from the Pre-CGT that is acquired before 20 September 1985 are considered as exempted from the CGT. The other CGT assets that are not subjected to be included into the capital gains tax is stated below;
- The main residence
- Collectables that are acquired for greater less than $500
- Personal use assets that is purchased for less than $10,000
- A CGT asset that is purchased by the taxpayer entirely for the purpose of producing the exempted income or the non-taxable non-exempted income.
As understood in the current situation “Your Home” in other words the main residence are usually held as exempted from the capital gains tax. For a taxpayer to obtain the exemption, the property should have the dwelling on it and the taxpayer must have lived on that property. If the taxpayer owns two or more than two dwellings then it is essential to understand which is the main residence for the taxpayer and hence eligible for claiming main residence exemption (Sadiq et al. 2016). On noticing that the taxpayer owns the single residence or dwelling, then it would not be considered as sufficient enough to reflect that dwelling as the main residence of the taxpayer. It is noteworthy to denote that whether the dwelling is the main residence for the taxpayer it would be a matter of fact. Usually, a dwelling is regarded as the main residence if;
- The taxpayer and the taxpayer’s family lives in it.
- The taxpayer’s personal belongings are in it.
- It is the main address of the taxpayer where the mail is delivered
- Services relating to gas and power are connected to it.
- The intention of the taxpayer in occupying the dwelling
As it is evident from the above stated explanation, there are certain degree of physical occupancy is required to establish an entitlement for main residence exemption. An additional issue that originates is the amount of time that is required to establish the dwelling as the main residence of the taxpayer. The exemption on “Your Home” is not entirely reliant on one single factor and requires sufficient weightage to each of the varying factors based on the state of affairs for each taxpayers (Blakelock and King 2017). Similarly the amount of time that a taxpayer spend on the dwelling along with the intention of occupying is also regarded as the relevant factor.
An individual is only held eligible for the main residence exemption given the dwelling has been home to the taxpayer along with other dependents for the time that was owned (Miller and Oats 2016). In addition to this, the main residence has not been used to produce the taxable income. In other words the taxpayer has not used the residence to run business from it.
In the present situation “Your Home” is an exempted CGT asset. The residence is not subjected to any CGT since it qualifies as the main residence for the taxpayer.
References:
Barkoczy, S. 2014. Foundations of taxation law.
Blakelock, S. and King, P., 2017. Taxation law: The advance of ATO data matching. Proctor, The, 37(6), p.18.
Christie, M., 2015. Principles of Taxation Law 2015.
Fleurbaey, M. and Maniquet, F., 2015. Optimal taxation theory and fairness principles. CORE Discussion Paper 2015/5 Google Scholar.
Grange, J., Jover-Ledesma, G. and Maydew, G. 2014 principles of business taxation.
James, S.R. and Nobes, C., 2016. Economics of Taxation: Principles, Policy and Practice. Fiscal Publications.
Jover-Ledesma, G. 2014. Principles of business taxation 2015. [Place of publication not identified]: Cch Incorporated.
Kenny, P., Blissenden, M. and Villios, S. 2018. Australian Tax.
Kiprotich, B.A., 2016. Principles of Taxation. governance.
Martin, F. and Connor, M., 2017. Using Blended Learning to Aid Law and Business Students’ Understanding of Taxation Law Problems. J. Australasian Tax Tchrs. Ass’n, 12, p.53.
McCouat, P. 2018. Australian master GST guide.
Miller, A. and Oats, L., 2016. Principles of international taxation. Bloomsbury Publishing.
Robin, H., 2017. Australian taxation law 2017. Oxford University Press.
Sadiq, K., Coleman, C., Hanegbi, R., Jogarajan, S., Krever, R., Obst, W., Teoh, J. and Ting, A. 2018. Principles of taxation law.
Taylor, C., Walpole, M., Burton, M., Ciro, T. and Murray, I. 2018. Understanding taxation law.
Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D. 2018. Australian taxation law.
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