Capital Gains Tax and Depreciation
CGT mechanics
CGT applies to CGT events, most commonly A1 (disposal of a CGT asset). The gain is capital proceeds less cost base (five elements including acquisition cost, incidental costs, and non-capital costs) or reduced cost base for losses. The net capital gain is included in assessable income. Key concessions include the 50% discount for individuals and trusts (and complying superannuation funds at 33⅓%), the small business concessions, and the main residence exemption. Candidates must know the 12-month ownership requirement for the discount and the ordering rules for applying capital losses.
Cost base adjustments and rollover
The cost base can be adjusted for improvements and for amounts that were deductible. Rollover relief applies to certain mergers, demergers and involuntary disposals. The CGT date of acquisition matters for pre-CGT assets (acquired before 20 September 1985), which are generally exempt.
Depreciation
Decline in value deductions apply to depreciating assets used to produce assessable income. The diminishing value method uses a rate of 200% divided by effective life; the prime cost method uses 100% divided by effective life. The instant asset write-off and small business simplified depreciation rules apply within thresholds. Balancing adjustments arise on disposal.
Traps
A frequent trap is applying the 50% discount to a company (not available) or to a non-resident's taxable Australian property gain without checking eligibility. Another is forgetting to reduce the cost base by depreciation previously claimed. Questions also test whether an asset is pre-CGT and whether the main residence exemption applies to a period of absence.
Worked example
An individual buys shares for $10,000, sells for $30,000 after 18 months, with $500 costs. Gain = $19,500; 50% discount applies; net capital gain = $9,750 included in assessable income.