Overview of Capital Gains Tax (CGT)
Capital gains are not treated as income based on ordinary concepts and are excluded from income tax. The concept of capital gains was introduced in 20 September 1985 and introduces capital receipts for taxation purpose. The net capital gains form the part of income tax liability (Yagan 2015). The capital gains tax requires the taxpayer to accrue the net amount of capital gains in an income year and the same is included for assessment purpose in the taxable income of taxpayer. A taxpayer cannot claim deductions for the capital loss from their assessable income however the capital loss can be offset against the capital gains for that income year or can be carried forward in future years to determine the net amount of capital gains.
Capital gains are not treated as separate tax rather it is treated as the residual provisions which is created to ascertain the sum of statutory income to be included into the assessable income of taxpayer (Meidner, Hedborg and Fond 2017). The first step in ascertaining whether the transaction give rise to capital gain is to determine whether the CGT event has taken place. Capital gains or loss happens when there is a CGT event comprising of the CGT assets.
Capital gains tax asset can be as the part or interest in property or lawful equitable rights (Auerbach and Hassett 2015). The capital gains assets are divided in three categories for taxation purpose which is stated below;
- Personal use assets
- Collectables
- Other CGT assets
To ascertain the cost base of CGT asset such as collectables and personal use assets, the non-capital cost of ownerships should be excluded.
As defined under “section 108-10(2) of the ITAA 1997” collectables refer to the assets which is kept by the taxpayer for their private use and enjoyment or the associate of the taxpayer personal use and enjoyment (Stantcheva 2017). Collectable largely consists of the following;
- Any rare type of folio, book or manuscript
- A type of artwork, jewellery, antique objects, medallion or the coins
- Postage stamp or the first day cover
- A type of interest or the options or any right of obtaining the above listed items or any form of debt that arises from the items that is stated above.
As stated in “section 118-10(1) of the ITAA 1997”, collectables that is purchase for less than $500 or lower are not taken into the considerations for capital gains tax purpose (Woellner et al. 2016). A collectables that are disposed as the set and or as the assets, those set will be treated as single CGT asset for the purpose of stated threshold. As stated under “section 118-10(1) of the ITAA 1997”, a taxpayer that reports loss from collectables can be only be able to set off the loss against the capital gains from the collectables along with the future capital gains arising from the collectables (Basu 2016).
While a taxpayer reports has more than two losses from collectables then in such situation, the losses should be applied under an order against the gains derived from collectables (Braithwaite 2017). In the current circumstances it is noteworthy to denote that a jewellery costs $5,000. Referring to “section 118-10(1) of the ITAA 1997”, the jewellery must be treated as “collectables” since the cost of purchase for jewellery is greater than $500. Furthermore, the jewellery is mainly held for taxpayer’s personal use and enjoyment. Capital gains from jewellery will be included into the assessable income of taxpayer.
Classification of Assets for CGT Purposes
As defined under “Section 108-20 (2) of the ITAA 1997” the personal use assets refer to the assets which is used by the taxpayer for their private use and enjoyment however it excludes the land and building (Snape and De Souza 2016). The personal use assets are treated as non-collectable assets that are mainly held for personal enjoyment. The private use assets consist of furniture, electrical goods, household items and boats. There are certain other examples of personal use assets which is stated below;
- Television at home
- Bicycle
- Mobile phone for private use
- Yacht held for taxpayers own enjoyment and use.
Most importantly, “section 108-20(3) of the ITAA 1997” states that the personal use assets do not comprises of the land and building if the asset are treated as collectables (Robin 2017). Additionally, “section 108-30 of the ITAA 1997” states that the acquisition cost of private use asset does not consists of third element cost base.
According to “section 118-10 (3) of the ITAA 1997” capital gains derived from the personal assets must be ignored for assets that are purchased below $10,000 (Blakelock and King 2017). The taxpayer should only keep the record of those assets that are purchased for $10,000 or greater than that. As per “section 108-20 (1) of the ITAA 1997” losses made from the personal use assets are basically ignored and are not allowed to claim for tax offset against the capital gains.
In the current situation, it is noticed that a second hand car is bought for $3,000. Referring to the explanation stated under “section 108-20 (2) of the ITAA 1997” second hand car should be categorized as the personal use assets (Maley 2018). Hence, upon the sale of second hand car, capital gains that are made from the second hand must be disregarded since the cost of acquiring the car was below $10,000.
As defined under “section 109-5 (1) of the ITAA 1997”, acquisition of CGT asset happens when the taxpayer owns the asset (Oishi, Kushlev and Schimmack 2018). With reference to “section 109-5 (2) of the ITAA 1997” a CGT asset is generally acquired when the CGT events takes place. The examples of the CGT asset includes the following;
- Land and building
- Options
- Goodwill
- Debts which is owned to a taxpayer
- Shares in corporate companies or units in the unit trusts
- Private use assets that are having the cost base of greater than $10,000
Shares in companies or unit in trust are held in the similar manner just like the other CGT assets for taxation purpose. CGT is applied on the investors relating to the capital gains or loss made from the CGT event (Buenker 2018). A CGT event occurs when there is a sale of assets. An investor generally sells the shares to make either capital gains or loss. The capital gains or the losses constitute the difference between the cost of purchase and the cost of sales after the asset is disposed of.
Capital gains or losses originating from the CGT event must be declared in the tax return by an individual taxpayer (Bankman et al. 2018). Profits from the sale of shares derived as the part of the business of shares are treated as ordinary income for taxation purpose rather than taking into the account as capital gains. Taxpayers are required to pay the taxes for any form of capital gains that is made when a CGT event happens.
Collectibles
In the present situation citing “section 108-5 of the ITAA 1997” the “shares in BHP” must be treated as CGT asset (Miller and Oats 2016). The taxpayer may be under obligation of paying the tax on capital gains that is made upon the sale of shares, especially when the shares are sold. Therefore, the “shares in BHP” should be held asset similar to any other assets for CGT purpose.
There are certain forms of main residence that allows the taxpayer to lower down their capital gains or loss or that are deferred or disregard. Generally, the capital gains and the loss that is made from the Pre-CGT asset purchased before 20 September 1985 are treated as exempted CGT asset (James and Nobes 2016). The other CGT assets which is not included for capital gains tax purpose is given below;
- Collectables purchased for greater than $500
- The main residence
- Private use assets that are acquired for lower than $10,000.
- CGT assets that are bought for generating the exempted income by the taxpayer.
In the present situation “Your Home” is usually exempted from the capital gains tax. To obtain the exemption the property should have the dwelling on it and must have dwelling in it. On noticing that there are more than two residences then it is vital to understand which is the main residence for the taxpayer and would be considered entitled to claim main residence exemption (Miller and Oats 2016). However, if a taxpayer has only one residence then it is vital to understand what forms the main residence for the taxpayer. It is worth mentioning that whether the house forms the main of taxpayer constitute a matter of fact. Generally, a dwelling is treated as the main dwelling if the following is satisfied;
- The taxpayer and the family of the taxpayer had dwelling on it
- There are personal belongings of the taxpayer
- The dwelling is the main address where the main is delivered to the taxpayer
- Services that is related to power and gas of the taxpayer.
- The purpose of the taxpayer in occupying the dwelling.
Therefore, “Your Home” is the main residence is the exempted CGT asset. The dwelling will not be subjected to CGT because it is an eligible main residence exemption.
References:
Auerbach, A.J. and Hassett, K., 2015. Capital taxation in the twenty-first century. American Economic Review, 105(5), pp.38-42.
Bankman, J., Shaviro, D.N., Stark, K.J. and Kleinbard, E.D., 2017. Federal Income Taxation. Wolters Kluwer Law & Business.
Basu, S., 2016. Global perspectives on e-commerce taxation law. Routledge.
Blakelock, S. and King, P., 2017. Taxation law: The advance of ATO data matching. Proctor, The, 37(6), p.18.
Braithwaite, V., 2017. Taxing democracy: Understanding tax avoidance and evasion. Routledge.
Buenker, J.D., 2018. The Income Tax and the Progressive Era. Routledge.
James, S.R. and Nobes, C., 2016. Economics of Taxation: Principles, Policy and Practice. Fiscal Publications.
Maley, M.N., 2018. Australian Taxation Office Guidance on the Diverted Profits Tax.
Meidner, R., Hedborg, A. and Fond, G., 2017. Employee investment funds: An approach to collective capital formation. Routledge.
Miller, A. and Oats, L., 2016. Principles of international taxation. Bloomsbury Publishing.
Oishi, S., Kushlev, K. and Schimmack, U., 2018. Progressive taxation, income inequality, and happiness. American Psychologist, 73(2), p.157.
ROBIN, H., 2017. AUSTRALIAN TAXATION LAW 2017. OXFORD University Press.
Snape, J. and De Souza, J., 2016. Environmental taxation law: policy, contexts and practice. Routledge.
Stantcheva, S., 2017. Optimal taxation and human capital policies over the life cycle. Journal of Political Economy, 125(6), pp.1931-1990.
Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016. Australian Taxation Law 2016. OUP Catalogue.
Yagan, D., 2015. Capital tax reform and the real economy: The effects of the 2003 dividend tax cut. American Economic Review, 105(12), pp.3531-63.
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