Capital Gains Tax: Events, Exemptions and Calculation
The CGT framework
CGT applies to the disposal of CGT assets by CGT events. A capital gain arises when the capital proceeds exceed the cost base; a capital loss arises when proceeds are less than the reduced cost base. The cost base has five elements: acquisition costs, incidental costs, ownership costs, capital expenditure to increase value, and capital expenditure to preserve title.
Key concepts
Know the CGT events (A1 disposal, D1 creation of contractual rights, and others), the treatment of collectables and personal use assets, and the main residence exemption. Understand the 50% CGT discount for individuals and trusts (and 33⅓% for complying superannuation funds), the indexation alternative for pre-1999 assets, and the small business CGT concessions.
Traps
A frequent trap is applying the discount to a company (not available) or forgetting that the discount applies to the net gain after offsetting losses. Another is ignoring the market value substitution rule where consideration is not arm's length, or the apportionment required where an asset is used partly for private purposes.
Worked example
An individual buys shares for $10,000 (cost base including brokerage) and sells for $30,000 after holding 18 months. Capital gain = $20,000. Apply the 50% discount = $10,000 net capital gain, included in assessable income. If a prior capital loss of $4,000 existed, the gain is reduced to $16,000 before the discount, giving $8,000. Rule of thumb: offset losses first, then discount, then include in assessable income.