Capital gains tax

A taxpayer is assessed on their net capital gain for the income year by including this amount in their assessable income.  CGT is not a separate tax.

A capital gain is calculated as the difference between the cost base of the asset (generally the costs of acquisition plus incidental costs) and the capital proceeds (generally the cash or property received on disposal).  A capital gain will arise to the extent the capital proceeds exceed the cost base.  A capital loss will arise to the extent the reduced cost base exceeds the capital proceeds.

Broadly, the cost base of an asset is the amount paid to acquire it plus any incidental costs of ownership that are incurred in connection with purchasing and holding the asset (e.g. stamp duty and brokerage fees).

Capital proceeds are the total the investor receives as a result of a CGT event (e.g. a disposal).  For most CGT events, the capital proceeds are an amount of money and/or the market value of any property received in respect of the disposal.

A CGT event happens where a CGT asset ends or is disposed of. Common examples include:

  • Where assets such as shares or trust units are sold
  • Where assets such as shares or trust units are cancelled or redeemed by the company or trust
  • Where a company undertakes a return of capital.
  • Where a liquidator or administrator declares shares or financial instruments worthless.

To be a discounted capital gain the capital gain must:

  • be made by a resident individual, trust or complying superannuation fund   
  • result from a CGT event happening after 11.45am on 21 September 1999
  • be calculated with reference to an unindexed cost base; and
  • result from a CGT event happening to a CGT asset owned by the taxpayer for at least 12 months.

For resident individuals and trusts the CGT discount is 50% and for superannuation funds the discount is 33⅓%. Companies and non-residents are not entitled to receive any discount.

The discount can only be applied where assets have been held for at least 12 months and the investor is either an Australian resident individual, superannuation entity, or a trust.

Indexation is another means of reducing an investor’s capital gain and applies to assets that have been acquired prior to 21 September 1999. In this situation, the cost base of the asset has an index factor (based on the Consumer Price Index) applied to it prior to calculating the gain.

For assets acquired on or before 21 September 1999 and held for at least 12 months, any capital gain on disposal may be calculated using either the indexation method or the discount method. The method chosen will depend upon the individual circumstances of each investor.

An other capital gain (also known as a short or nominal capital gain) arises on assets held for less than 12 months.

There are three main components which may reduce the cost base of an asset.

  1. Tax deferred amounts
  2. Return of capital amounts, and
  3. Tax free amounts

These amounts are typically distributed through unlisted managed funds and unit trusts (although in rare cases they may be distributed through listed securities such as exchange traded fund units or shares). These amounts are non-assessable income for investors. Tax deferred amounts, for example, may arise from amounts associated with building allowances.   Returns of capital may arise when a company or trust wishes to reduce the capital on the balance sheet.

Note that tax free amounts will only reduce the reduced cost base of an asset when the asset is sold and the investor is in a capital loss position as a result of the sale

The CGT concession amount represents the non-assessable CGT discount component distributed to investors by listed trusts or unlisted managed funds. Such amounts are made through the sale of assets held for at least 12 months. Investors are not required to adjust the cost base of their units for such amounts paid on or after 1 July 2001

No. The CGT concession amount is the amount that the relevant product issuer has distributed. We are advised by the product issuer as to whether or not 50% of the gross discountable gain is distributed as the non-assessable CGT concession amount. This amount may not be 50% of the gross discountable gain because, for example, of the way in which the product issuer has allocated expenses.

Generally, a capital loss is made as a result of a CGT event where the capital proceeds received by the taxpayer are less than the reduced cost base of the asset (i.e. broadly, what was paid for the asset).  The capital loss will be equal to the difference between the reduced cost base and the capital proceeds.

A capital loss must be offset against a capital gain before the 50% discount can be applied. The capital loss must therefore be offset against the gross capital gain.

 Investors would generally get the greatest benefit by deducting capital losses (in the following order) against:

  1. capital gains for which neither the indexation method nor the discount method applies (i.e. gains from assets held for less than 12 months)
  2. capital gains calculated using the indexation method; and then
  3. capital gains to which the CGT discount can apply.

Current year capital losses should be deducted from capital gains in the first instance. After all such losses have been utilised, if capital gains remain and there are prior year capital losses that have not previously been utilised, these unapplied prior year capital losses may then be offset against the remaining current year capital gains in the order in which they were incurred.

Note that capital losses can only be offset against capital gains (not revenue gains).

An investor can carry forward a capital loss indefinitely.

No. Given that we do not prepare investors’ income tax returns and hence cannot be certain what capital losses have been applied by investors against capital gains, we are not able to accurately maintain such a history. This is the responsibility of investors and their tax agents/advisers.

Yes. The same discount percentages apply as for Australian sourced capital gains. Capital gains and losses are not quarantined according to source. That is, both Australian and foreign sourced capital gains are treated in the same manner and are not separately identified for tax purposes.

Investors are required to keep records of all matters that could result in them making a capital gain or loss. Those records must be kept for a minimum of five years after the relevant CGT event has happened.

We strongly recommend that independent taxation advice be sought so as to ensure that an investor’s underlying cost bases are correct.

Since December 2006, the above capital gain categories have been further sub-classified as Taxable Australian Real Property (TARP) capital gains or Non-Taxable Australian Real Property (NTARP) capital gains.

TARP capital gains refer to capital gains made upon the disposal of interests in Australian real property. TARP capital gains may arise from a direct or indirect interest in real property.

A direct interest in real property is simply a direct ownership interest in Australian real property, for example, an interest in an investment property. Broadly, an indirect interest in Australian real property is an interest in an entity which passes BOTH the non-portfolio interest test and the principal asset test.

  • The non-portfolio interest test is satisfied where the taxpayer (and any associates) holds an interest of 10% or more in another entity.
  • Broadly, the principal asset test is satisfied if the sum (by way of market value) of the entity’s TARP assets is greater than the sum (by way of market value) of the entity’s NTARP assets.

An Australian resident investor pays tax on both TARP and NTARP capital gains that it receives.

Where the Australian investor is considered to be an intermediary for non-residents, the TARP and NTARP capital gains distinction may be important as this may impact its withholding tax (WHT) obligations in respect of its non-resident beneficiaries/investors. Broadly, an entity will be considered an intermediary, where it is an Australian resident and it is in the business of predominantly providing custodial or depository services under an Australian Financial Services Licence.

A non-resident investor is subject to Australian tax on the TARP capital gains that it derives and is not subject to Australian tax on any NTARP capital gains that it derives.

We disclose the breakdown of TARP and NTARP capital gains on the Tax Report – Summary.

  • For distributions received through unlisted managed funds and listed securities, we rely on the TARP and NTARP breakdown information provided by the product issuer at the time of a distribution.
  • Where an investor has disposed of any asset during the year, we assume that any resulting capital gain realised is an NTARP capital gain on the basis that the investor did not pass the non-portfolio interest test.

We do not separate any distributed capital gains on the Tax Report – Detailed into TARP and NTARP capital gains.

Please note that we do not identify any investor as an intermediary for tax purposes but do provide sufficient information for intermediaries to meet their WHT obligations, if any.

For a full list of the withholding rates that may be applicable, please see the distribution schedule.

Any assets acquired before 20 September 1985 will generally be treated as pre-CGT assets.  This means any capital gain or loss arising will be disregarded and no gains or losses will be reported in respect of these assets on the Tax Reports.