capital gains tax (cgt) and property

CGT AND PROPERTY www.ato.gov.au

Presented by:Australian Taxation Office

SEGMENT AUDIENCE DATE

BAR ASSOCIATION SEPTEMBER 2005INDIVIDUALS

Capital gains tax (CGT) and property


Objective

The aim of today's session is to provide you with an

overview of capital gains tax (CGT) and property

The intention is to provide you with general information,

and you should seek professional advice in relation to

your specific circumstances


Outline of session

Fundamentals of CGT

Main residence exemption

Marriage breakdown

Deceased estates

Compliance focus 2005-06


Fundamentals of CGT


What is capital gains tax?

Tax paid on capital gains you make during the income

year

Forms part of your income tax

Declared in your income tax return

Taxed at marginal tax rate



Capital gains or losses arise when certain types of

transactions or events occur

This is known as a capital gains tax (CGT) event

CGT events commonly involve a CGT asset


Examples of CGT events

You sell an investment property

Your investment property is destroyed by fire

You give someone a right to reside in a house

You grant an option to a person to purchase your land

within 12 months for a set price


Examples of CGT assets

Land and buildings

Shares, options, etc

Depreciating assets

Paintings, sculptures, etc

Jewellery, books, antiques

Boats, furniture etc

Leases

Goodwill

Licences

Contractual rights.



Capital gains tax can still apply even if:

you did not buy the CGT asset

you disposed of the CGT asset without selling it.



Capital gains tax generally does not apply to the sale of

your main residence

To be exempt:

- the dwelling must have been your home

- the dwelling must not be used to produce income

- the land must be 2 hectares or less.

No exemption for land sold separately from the dwelling


Example – main residence

Frank purchased his house in 1999

He used the house as his main residence

The house and land are situated on less than 2 hectares

He sold the house in 2005

The capital gain can be ignored under the main residence

exemption


Part exemption

Home not your main residence during the whole time it

was owned

Part of the home was used to produce assessable

income

Special rules apply which may still allow full exemption


Example – part exemption

Thomas acquired a home in July 1997 and used it as his

main residence

He rented out one bedroom which is 20% of home

Thomas and the tenant also used the living room,

kitchen, bathroom and laundry which is 30% of the home

Sold home in June 2005 and made $120,000 capital gain

$42,000 capital gain is not exempt


Moving from one main residence to another

Purchase a new home before selling the old home

Both homes treated as main residence if:

- the old residence was your main residence for at least 3

months in the12 months before selling it

- you did not use your old home to produce income in the 12

months it was not your main residence

- your new home becomes your main residence.


Example – moving from one main residence to another

Jill and Norman bought a house on 1 January 2005

They moved into the home immediately

They sold the old home on 15 April 2005

Both homes are treated as their main residence from 1

January to 15 April 2005


Continuing main residence status

You can choose to treat a home as your main residence

after it ceased being your main residence

The period of time it can be treated as your main

residence is:

- unlimited if your home is not used to produce income

- for a maximum of 6 years if your home is used to produce

income.


Example – continuing main residence status

Lisa bought a house in 1992 and moved in

She moved out in 1995

She rented out the house for 3 years

Left the house vacant for 2 years

Rented out again for next 3 years

Sold the house


Constructing, renovating or repairing a home

If you build, renovate or repair your home, you can treat

the land as your main residence for up to 4 years before

the home becomes main residence

Must move into the home as soon as practicable

Must continue to use the home as your main residence

for at least 3 months


Having a different home from your spouse or child

If you and a dependent child have different homes for a

period, you must choose one home as your main

residence for both of you for the period

If you and your spouse have different homes for a period:

- you must choose one home as your main residence for

both of you for the period, or

- nominate different homes as main residence for the period.


Major improvements to pre-CGT assets

Major capital improvements made to a dwelling bought

before 20 September 1985 may be taxable

Capital gain relates only to the improvements and not the

entire property


Example - major improvements to pre-CGT assets

Martin bought a home in 1984

Undertook major capital improvements worth $100,000

(indexed cost base is $112,200) on 1 December 1993

Sold home for $500,000 on 1 December 2004

$120,000 of the proceeds attributed to improvements

Is cost base of improvements > 5% of $500,000?

Is cost base of improvements > threshold of $106,882?


Inherited main residence – full exemption

Any dwelling deceased acquired before 20 September 1985,

or a dwelling acquired by the deceased on or after 20

September 1985 that was their main residence just before

they died and was not being used for income producing

purposes at that time if:

sold within 2 years of death, or

occupied by spouse or someone with a right to occupy

under the deceased’s will.


Example – inherited main residence

Rodrigo bought a house in April 1990 and lived in it

Rodrigo passed away in January 2004

Petro (Rodrigo’s son) inherited the house

Petro rented out the house

Sold the house in March 2005

Capital gain can be ignored


Marriage breakdown


Marriage breakdown

Conditions for marriage breakdown rollover

Consequences of rollover

If there is no court approval


Deceased estates


Deceased estates

Capital gain or loss on death is disregarded for assets

which pass to the beneficiary or legal personal

representative

Choosing the indexation or discount method

Joint tenants

Unapplied net capital losses


Compliance focus for 2005-06


Compliance program for 2005-06

Capital gains tax continues to be a priority

Non-compliance still a concern

Refining data matching capabilities

Letters to be sent to certain taxpayers

Will continue to help and educate

Review and audit program continues


Compliance program for 2005-06

Data matching residential property and share sales

Undisclosed capital gains

Claims for CGT discount and CGT SB concessions

Reviewing SB retirement exemption claims

Reviewing significant capital losses


Compliance problems

Incomplete records of cost base and capital loss calculations

Using unsubstantiated capital losses to offset a capital gain

Asset valuations - not using market values

Complete omission of a gain or CGT event

Not meeting thresholds for small business CGT concessions

Pre-CGT status


Tips for capital gains tax

Report net capital losses carried forward from earlier

income years

Keep comprehensive records

Know which costs are deductible and which are included

in the cost base

Report capital gains and losses from inherited assets

Declare your share of capital gains on jointly-owned

assets


Tips for capital gains tax

Deduct any capital losses before applying a discount

Calculate a capital gain or loss when giving away

property

Use the contract date not the settlement date for

acquisition and disposal

Overseas investment

Capital gain from non-assessable distribution


Summary

Capital gains tax is tax paid on capital gains you include

on your income tax return

Capital gains arise when a CGT event happens

There are three methods to work out your capital gain

Keep good records


Where to get help


For more information

www.ato.gov.au Website

13 28 61 Personal tax enquiries

13 28 60 Order a fax

1300 720 092 Publications distribution service


Questions


Our commitment to you

The information in this presentation is current at November, 2005.

If you feel this information does not fully cover your circumstances,

please seek help from the Tax Office or a professional adviser.

Since we regularly revise our information to take account of any changes

to the law, you should make sure this information is still current before

relying on it. The easiest way to do this is by checking with us.

capital gains tax (cgt) and property

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