Capital gains tax and asset disposals
This domain tests CGT event identification, cost base construction, the discount, main residence relief and the small business concessions. Most marks hinge on the order of operations and cost base adjustments.
Events and cost base
- CGT event A1 arises on disposal of a CGT asset; the five-element cost base covers acquisition cost, incidental costs, non-capital holding costs, enhancement costs and title costs.
- The reduced cost base applies for loss calculations and differs in its treatment of non-assessable amounts.
- Market value substitution applies where consideration is not arms-length or the asset was not acquired at arm's length.
Discount and losses
- Individuals and trusts obtain a 50% discount; complying superannuation funds 33⅓%; the asset must be held at least 12 months.
- Capital losses are applied before the discount, so a $30,000 loss on a $355,000 gain leaves $325,000, discounted to $162,500. Applying the discount first overstates the gain.
Main residence relief
- The full exemption requires the dwelling to be the main residence; partial exemption applies for periods of income production or business use.
- The six-year absence rule preserves the exemption while the dwelling is rented, and the market value at first income use is used for the exempt portion.
Small business concessions
- Basic conditions: a CGT asset, small business status ($2 million turnover or $6 million net assets) and the active asset test.
- Concessions are the 15-year exemption, the 50% active asset reduction, the $500,000 lifetime retirement exemption and the small business rollover, applied in that order.
Worked example
An individual sells a rental property bought in 2010 for $500,000, with $25,000 stamp duty and legal costs and $20,000 selling costs, for $900,000, and has $30,000 carry-forward capital losses. Gain = $900,000 − $545,000 = $355,000. Apply losses: $325,000. Apply the 50% discount: net capital gain $162,500.
Traps
- Discounting before offsetting losses.
- Including capital works deductions in the cost base when they are excluded.
- Forgetting foreign residents lost the main residence exemption for dwellings sold after 30 June 2020.
- Assuming the retirement exemption is available without meeting the active asset test.