Principles of Taxation Law Part 2.

10
Principles of compensation
Key points.................................................................................................... [10.00]
Introduction................................................................................................ [10.10]
Compensation for losses incurred by individuals.................................... [10.40]
Compensation for loss of salary or wages.......................................... [10.60]
Loss of earnings vs loss of earning capacity...................................... [10.80]
Compensation received by way of insurance or indemnity.............. [10.90]
Compensation for loss of physical abilities...................................... [10.100]
Compensation for pain, suffering or medical expenses.................. [10.110]
Compensation under anti-discrimination legislation........................ [10.120]
Compensation paid by financial institutions..................................... [10.130]
Structured settlements...................................................................... [10.140]
Compensation for business losses.......................................................... [10.150]
Copyright © 2020. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
Compensation for breach of contract –ordinary

trading contracts......................................................................... [10.170]
Compensation for breach of contract going to fundamental
structure of business.................................................................. [10.190]
Compensation for loss of asset –depreciable assets...................... [10.200]
Compensation for loss of asset –capital assets............................... [10.210]
Compensation for loss of asset –trading stock................................ [10.220]
Compensation by way of insurance proceeds................................. [10.230]
Composite claims..................................................................................... [10.240]
Reimbursement of previously deducted expenses................................ [10.260]
Questions................................................................................................... [10.300]

Key points
[10.00]
• Generally, a compensation receipt or damages award takes on the
character of the item it replaces. This is known as the “replacement
principle”.
Sadiq, E. A. (2020). Principles of taxation law 2021. ProQuest Ebook Central <a
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Created from unimelb on 2021-07-19 00:55:28.
306 [10.10] PRINCIPLES OF TAXATION LAW 2021
•
The common law “replacement principle” may be supplemented or
overridden by statutory provisions of the Income Tax Assessment Act
1936 (Cth) or the Income Tax Assessment Act 1997 (Cth) (ITAA 1997).
•
Compensation for loss of salary or wages will generally be assessed as
ordinary income.
•
Compensation for loss of physical abilities, pain, suffering or medical
expenses will generally be a capital receipt and exempt from income
tax consequences.
•
Compensation under anti-discrimination legislation may be assessable
income depending on the circumstances.
•
Division 54 of the ITAA 1997 provides that certain annuities and
lump sums provided under structured settlements and structured
orders to persons who have suffered personal injury are exempt from
income tax.
•
Compensation payments or damages received for breach of an
ordinary trading contract will be assessed as ordinary income.
•
Compensation payments or damages received for a breach of contract
going to the fundamental structure of the business will be assessed as
a capital gain.
•
The taxation consequences of compensation received for the loss of
an asset depends on the type of underlying asset; depreciable assets
will be dealt with under the depreciation provisions, trading stock will
be dealt with under the trading stock provisions and capital assets will
be subject to common law principles.
•
Compensation received under an insurance or indemnity policy may
be assessable under s 15-30 of the ITAA 1997.
•
Where a composite claim cannot be dissected into its component parts,
the whole amount will be treated as capital and assessed as such.
•
The “replacement principle” does not apply to the reimbursement of
previously deducted expenses. Rather, the reimbursement itself is
considered to determine whether the receipt is income or capital.
Introduction
[10.10] Compensation or damages may be received by a taxpayer for a variety
of reasons. This chapter divides compensation and damages receipts into two
categories: compensation or damages received by individual taxpayers outside
the ordinary course of a business and compensation or damages received by
taxpayers during the ordinary course of a business.
The first category includes compensation or damages received by an employee,

as well as those received in a private or personal capacity. Compensation or
damages may be received from an employer, through workers’ compensation
or a private insurance policy, or directly from another party.
Often compensation or damages that replace income will be in the form of a

lump-sum payment. The fact that the compensation is paid as a lump sum will
not alter its character where the substituted item is income in nature.
Prima facie, the replacement principle applies to all compensation or damages

receipts. However, this principle is not extended to apply to the reimbursement
or refund of previously deducted expenses, as a receipt to compensate or
reimburse deductible outgoings is not characterised as income simply because
it is a reimbursement of expenses previously deducted. Where a taxpayer
receives a reimbursement of previously deducted expenses, the taxation
consequences of that receipt are determined by reference to the character of
the receipt itself, rather than the item it replaces.
[10.30] The rest of the chapter considers the individual types of compensation
or damages receipts within specific categories. While the replacement principle
generally applies to these categories, there are circumstances where specific
rules have been developed and statutory provisions need to be considered.
The categories below make it possible to consider the common law application
of the principles and specific statutory provisions that supplement or override
the replacement principle.
Compensation for losses incurred by

individuals
[10.40] Compensation or damages received by a taxpayer not carrying on

a business will relate to either income-producing circumstances or personal
circumstances. In Chapter 6, the concept of income from personal services
and employment is discussed. The doctrines set out in that chapter are the
fundamental principles to be applied to determine the consequences of a
compensation or damages payment received by an individual taxpayer.
Students should review these concepts.
“Income from personal exertion” is income consisting of earnings, salaries,

wages, commissions, fees, bonuses, pensions, superannuation allowances
and retiring gratuities, allowances and gratuities received in the capacity of
employee or in relation to any services rendered. These amounts are assessable
as ordinary income under s 6-5 of the ITAA 1997. To determine whether an
amount is income from personal exertion, the courts have established certain
indicia. Amounts that do not satisfy the indicia of income from personal
exertion are generally considered non-assessable, non-exempt income; that is,
the amounts are not subject to income tax. Of course, there may be statutory
income provisions that override the common law and include an amount as
assessable income.
payment, which was the difference between the salary paid by the
employer and the salary paid by the armed forces, was made voluntarily
and without any conditions attached.
The Commissioner assessed the taxpayer on the payments on the basis
that they constituted ordinary income. The High Court held that the receipts
were assessable as ordinary income. In particular, Fullager J concluded
that the amounts were ordinary income as they were compensation
for wages (and periodical payments) that would have otherwise been
received.
Case study 10.2: Compensation payment held to be ordinary income

In C of T (Victoria) v Phillips (1936) CLR 144, the taxpayer, a director of a
company, entered into a contract in which he agreed to serve as managing
director for 10 years. In the sixth year, the contract was terminated by the
employer and the taxpayer was compensated with monthly payments
corresponding to the amounts the taxpayer would have received under
the contract. The Court held that the new payments were in the nature of
income
as they were of the same nature as those they replaced.
In both FCT v Dixon and C of T (Victoria) v Phillips, the payments were

periodical. However, the receipt of compensation or damages as a lump sum
will not alter its assessability where the lump-sum payment is for loss of income
only or a portion of the lump-sum payment is identifiable and quantifiable as
income: Determination TD 93/58.
Example 10.1: Lump-sum compensation
Adele manages Belinda’s business. Adele’s contract provides that Belinda
is required to pay her a 5% share of the profits from the business. Adele
calculates that Belinda has only been paying her 4% of the profits of
the business due to an error in the figures. Belinda agrees to pay Adele
$50,000 to make up for the mistake. The $50,000 is assessable income
in the hands of Adele as it is compensation for losses of an income
nature: see Determination TD 93/58. It is irrelevant that the compensation
is paid as a lump sum. The receipt is income only, as there is no capital
component. It is also not relevant that the basis of the calculation of the
lump sum cannot be determined.

10: Principles of compensation [10.80] 311
Loss of earnings vs loss of earning capacity

[10.80] Where compensation is awarded, it is necessary to ensure that any
compensation is received for lost earnings as opposed to a payment for the
loss of earning capacity. Compensation for lost earnings will be considered
income while compensation for loss of earning capacity will be considered
a capital payment. Although this can be difficult to do, this is demonstrated
by the different results in Sommer v FCT (2002) 51 ATR 102 as compared to
Coward v FCT (1999) 41 ATR 1138.
Case study 10.3: Compensation receipt held to be ordinary income

In Sommer v FCT (2002) 51 ATR 102, the taxpayer was a medical
practitioner specialising in stress management. He became unable to work
and claimed compensation under a Professional Income Replacement
Policy. Ultimately the taxpayer was paid a lump sum of $140,000 as
consideration for the cancellation of the policy. The taxpayer claimed
that the lump sum was a capital amount and therefore not assessable as
ordinary income. The Court, in finding for the Commissioner, held that
the sum was ordinary income as the purpose of the insurance was to
replace
a revenue receipt.
Case study 10.4: Compensation receipt held to be capital

Sommer v FCT can be contrasted with Coward v FCT (1999) 41 ATR

1138, where the taxpayer, having reached 65 years of age, converted
weekly personal injury compensation payments to a lump sum. The
AAT held that, while the weekly payments replaced lost wages, the
lump sum was capital in character as it related to a loss of earning
capacity.

Example 10.2: Loss of salary or wages

Jamie, an apprentice chef, slices his index finger off during work. Jamie
is paid $5,000 in workers’ compensation for lost wages.
The $5,000 that replaces lost income is assessable as ordinary income.

Compensation received by way of insurance or

indemnity
[10.90] Compensation received by way of insurance or indemnity that is
not assessable as ordinary income may still be assessable under s 15-30 of
the ITAA 1997. Section 15-30 provides that a taxpayer’s assessable income
includes an amount received by way of insurance or indemnity for the loss of
an amount if the lost amount would have been included in assessable income,
and it is not assessable as ordinary income under s 6-5.
Compensation for loss of physical abilities

[10.100] A compensation or damages payment for the loss of a physical
ability, such as the loss of a limb, eye or finger, is a capital receipt. Further,
the compensation or damages payment relating to the taxpayer personally
or the taxpayer’s occupation will be exempt from CGT implications under
s 118- 37 of the ITAA 1997. Section 118- 37(1)(a)(i) exempts from CGT
consequences any gain or loss made from a CGT event relating directly to
compensation or damages received by the taxpayer for any wrong or injury
suffered in the taxpayer’s occupation. Section 118-37(1)(a)(ii) exempts from
CGT consequences any gain or loss made from a CGT event relating directly
to compensation or damages received by the taxpayer for any wrong, injury
or illness the taxpayer or a relative suffers personally. Section 118-37(1)(b)
exempts compensation or damages received by a trustee for the same reasons
as s 118-37(1)(a) of the ITAA 1997. Section 118-37(1)(ba) goes on to exempt
from CGT consequences a CGT asset that is received by a beneficiary of a trust

to the extent that the CGT asset is attributable to compensation or damages that
the trustee receives in relation to a wrong or injury to a beneficiary or a wrong,
injury or illness suffered personally by a relative. Any post-judgment interest
received on a personal injury compensation payment is also exempt from
tax under s 51-57. This will cover interest accrued from the time the original
judgment is made to the time when the judgment is finalised, for example,
when the period for lodging an appeal ends.
Example 10.3: Loss of physical ability

Jamie, an apprentice chef, slices his index finger off during work. In
addition to the $5,000 Jamie is paid in workers’ compensation for lost
wages, he is awarded $10,000 for the loss of the finger.
The $10,000 is considered a capital receipt. In addition, the amount will
be exempt from CGT under s 118-37 of the ITAA 1997, which exempts
from CGT any sum received by way of compensation or damages for any
injury
suffered by Jamie either to his person or in his vocation.
Compensation for pain, suffering or medical expenses

[10.110] Any compensation or damages received for pain, suffering or
medical expenses is replacing lost capital and therefore will be a capital receipt.
Section 118-37 of the ITAA 1997 will also apply in this situation.
Example 10.4: Award of medical expenses

Jamie, an apprentice chef, slices his index finger off during work. In
addition to the $5,000 Jamie is paid in workers’ compensation for lost
wages and the $10,000 he is awarded for the loss of the finger, Jamie is
awarded $6,000 to cover his out-of-pocket medical expenses.
The $6,000 is considered a capital receipt. In addition, the amount will
be exempt from CGT under s 118-37 of the ITAA 1997, which exempts
from CGT any sum received by way of compensation or damages for any
injury
suffered by Jamie to his person or in his vocation.
Compensation under anti-discrimination legislation

[10.120] Compensation paid because of claims made under the Commonwealth
or State anti-discrimination legislation, for example, the Sex Discrimination
Act 1984 (Cth), may be assessable income depending on the circumstances
of the payment. To illustrate the operation of the income tax law in relation to
these types of compensation payments, in Ruling IT 2424, the Commissioner
provides common examples that serve as a guide. However, it is stressed in the
Ruling that the determination of the character of a compensation payment and,
in particular, whether it is liable to tax in the hands of an employee depends
upon the nature of the payment.
As with other types of payments, the broad principle is that a compensation

payment in substitution of lost earnings or for income that would otherwise
have been earned is in the nature of income and is subject to income tax.
On the other hand, compensation payments for psychological and emotional
injury, such as injury to feelings, humiliation, embarrassment, depression and
anxiety, are capital in nature. Such an amount will be exempt from CGT by
virtue of s 118-37(1) of the ITAA 1997: see [11.290].
[10.125] The Commissioner offers the following examples of compensation

awarded under anti-
discrimination legislation, along with the likely tax
consequences:
• Hiring practice –Compensation for failure to offer employment would
normally make up for lost wages and therefore be ordinary income.
Any part of the compensation payment that relates to psychological

or emotional injury would be capital in nature and not subject to
income tax.
• Sexual harassment –Compensation paid for sexual harassment will
generally be a payment made for psychological and emotional injury,
injury to feelings, humiliation and embarrassment, loss of self-esteem,
anxiety or distress, or loss of enjoyment of life. Any of these payments
will be capital in nature and not subject to income tax.
• Terms and conditions of employment –An employee may be
compensated where the terms of employment discriminate on the
basis of sex, marital status or pregnancy. For example, an employee
may receive less salary than a peer or have less flexibility in working
hours. Compensation paid for these types of claims may be made up of
both assessable and non-assessable receipts. A payment will generally
make up for lost wages, salary or bonus and will be considered income
in nature. Further, compensation may be paid for psychological and
emotional injury, such as frustration, and is capital in nature.
• Opportunities for promotion –Any payment made for loss of a higher
salary, due to discrimination in relation to promotion, is considered
income and therefore subject to income tax. Payment compensating
for impairment to prospects for future promotion or future earning
capacity, as well as payment for psychological and emotional injury, is
capital in nature.
• Dismissal –A compensation payment received because of unlawful
dismissal is considered to be made “in consequence of the termination
of any employment of the taxpayer”. Therefore, the payment is

considered an employment termination payment and is subject to
income tax in accordance with the employment termination payment
provisions. See [6.260] onwards for a discussion of employment
termination payments.
Example 10.5: Compensation paid under anti-discrimination legislation

Jane applies for a position at her local supermarket. She is awarded the
position and starts work four days per week. A month after starting work
Jane has an appraisal where her employer states that they are very happy
with her work. At the same appraisal, Jane notifies her employer that she
is pregnant. Two days later Jane is advised that her employer is no longer
satisfied with her work and that her employment is being terminated.
Jane lodges a complaint with the Human Rights and Equal Opportunity
Commission seeking appropriate redress and compensation from the
employer. She requests that her employment be reinstated and that
the employer make up lost wages during the intervening period and
that compensation be paid for injury to feelings, loss of self-esteem and

humiliation. Jane is ultimately successful in receiving $2,000 in lost wages
and $10,000 for injury to feelings.
A compensation payment paid to Jane to make up for lost earnings is
considered to be income according to ordinary concepts. The whole
of the payment is included in Jane’s assessable income in the year it is
received. A payment to compensate for damages for injury to feelings is
a payment of a capital nature and is not liable to tax.

Compensation paid by financial institutions

[10.130] The recent inquiry into banking practices has resulted in bank
customers receiving compensation. This compensation is generally for loss
of an investment, refund or reimbursement of fees, or interest. Where the
compensation is for the loss of an investment that the taxpayer has already
disposed of, the compensation will be treated as additional capital proceeds
from the disposal. If the investment is still held by the taxpayer, the cost base
of the asset will need to be adjusted by the amount of compensation. Where
compensation is in the form of a refund of fees paid for financial advice, the tax
consequences will depend on whether the original payment was claimed as a
deduction or whether it was part of the cost base of an asset. If no deduction
was claimed, the reimbursement will not be included in assessable income. If,
however, an amount was included in an asset’s cost base, an adjustment will

need to be made. Where compensation is in the form of interest, that amount
will be assessable as ordinary income.
Structured settlements
[10.140] Division 54 of the ITAA 1997, which applies from 26 September
2001, provides that certain annuities (periodic payments) and lump sums
provided under structured settlements and structured orders to persons
who have suffered personal injury are exempt from income tax. Division 54
applies to compensation or damages paid other than compensation paid
by an employer or under a workers’ compensation claim. A “structured
settlement” is defined as an agreed settlement in writing of a claim that is
for compensation or damages for personal injury where at least part of the
payment is in the form of an annuity. A “structured order” is defined as an
order by the court in respect of a claim for compensation or damages for
personal injury where at least part of the payment is in the form of an annuity.
Division 54 does not prevent part of the compensation being in the form of
a lump sum; however, there must be at least one annuity purchased out of
the compensation or damages receipt. Without Div 54, any annuity would
be assessable under s 27H of the Income Tax Assessment Act 1936 (Cth)
(ITAA 1936).
Despite perceived benefits, structured settlements have not generally been

taken up. In 2007, the income tax exemption for structured settlement payments
underwent a review. The principal recommendation of the review was to retain
Div 54 in its current form without any extension. On 20 March 2008, the Federal
Government responded to the recommendations of the review, agreeing to
retain Div 54 and commenting that “structured settlements may be adopted in
the future”.
Compensation for business losses

[10.150] As with compensation received by an individual, compensation
received by a business will be subject to taxation consequences in accordance
with the replacement principle. Compensation or damages received by a
taxpayer carrying on a business will either replace an amount that otherwise
would have been received from transactions carried out in the ordinary course
of business or compensate for the loss of capital or a capital item.
Income from business is considered in Chapter 8. The doctrines set out in

that chapter are the fundamental principles to be applied to determine the
consequences of a compensation or damages payment received by a business.
Students should review these concepts. Once the existence of a business is
established, it is necessary to determine the scope of the business as not all

receipts of the business are assessable as income. Receipts within the scope
of the business will constitute assessable income, as will some receipts that
have been considered to fall outside the ordinary scope of the business: see
FCT v Myer Emporium Ltd (1987) 163 CLR 199 and FCT v Whitfords Beach Ltd
(1982) 12 ATR 692. On the other hand, receipts of capital are subject to the CGT
provisions of the ITAA 1997.
In addition to the income taxation consequences of a compensation receipt,

the GST consequences also need to be considered. The GST consequences
will depend on whether the payment constitutes consideration for a supply
and whether that supply is a taxable supply. Students should review the
concepts discussed in Chapter 25. The Australian Taxation Office (ATO)
approach to GST on compensation payments is set out in GST Ruling GSTR
2001/4.
[10.160] With these principles in mind, the consequences of the following

types of compensation or damages received by a business are set out in
Figure 10.3.
contracts were cancelled and the taxpayer received compensation by

way of lump sums.
The Commissioner assessed the taxpayer on the lump-sum compensation
payments. The High Court held that the payments were ordinary income
in the hands of the taxpayer despite the fact that the contracts in question
ensured a regular market for the taxpayer’s goods. It was concluded
that the mining operations had been abandoned not because of the
cancellation of the contracts, but rather because of the collapse of the
market
in general.
[10.180] A similar result was reached in Allied Mills Industries Pty Ltd v FCT
(1989) 20 ATR 457.
Case study 10.6: Compensation for breach of ordinary trading contract

In Allied Mills Industries Pty Ltd v FCT (1989) 20 ATR 457, the taxpayer had
an agreement to be the sole distributor of Peek Frean Australia’s biscuits,
which included Vita-Weat biscuits. The taxpayer became the sole selling
and distribution agent for Peek Frean biscuit products in Australia, Papua
New Guinea and Fiji. The agreement could be terminated on six months’
notice, but the taxpayer was to be offered the right to manufacture and sell
Vita-Weat for a minimum of 10 years. Instead of this original agreement
being followed, the parties agreed to terminate the distribution agreement
in return for a lump-sum payment of $372,700.

The Commissioner included this amount in the taxpayer’s assessable
income. The Full Federal Court held that the amount was assessable as
ordinary income. In coming to this conclusion, the Court held that the
taxpayer was not parting with a substantial part of its business, ceasing
to
carry on business or disposing of the fixed framework of its business.
Example 10.6: Compensation for breach of ordinary trading contract

A tenant fails to vacate a commercial property at the end of the lease. The
landlord sues and is awarded damages in the amount of the difference
between rent paid by the tenant and rent that is obtainable on the open
market.
The damages awarded are ordinary income in the hands of the
landlord: see Raja’s Commercial College v Gian Singh & Co Ltd [1976] 2
All ER 801.

Compensation for breach of contract going to

fundamental structure of business
[10.190] Compensation for breach of contract may go further than a payment
to compensate for loss of trading income. In this case, the amount may be
considered capital. An amount may be considered a capital sum where the
payment is for a breach of contract that goes to the fundamental structure of
the business. Usually the termination of the contract results in the cessation of
the business as a whole. One such example is Californian Oil Products Ltd (in
liq) v FCT (1934) 52 CLR 28, where the Full High Court held that compensation
amounts paid as a result of the termination of a contract were capital receipts
because the termination led to the cessation of the taxpayer’s business.
Case study 10.7: Compensation for breach of contract going to

In Californian Oil Products Ltd (in liq) v FCT (1934) 52 CLR 28, the taxpayer
was the exclusive distributor in Australia of the products of an American
company. This was the taxpayer’s only business. The American company
subsequently decided to have a local subsidiary distribute the products
and terminated the contract, which led to the closure of the taxpayer’s
business.
Despite the fact that the termination agreement provided for semi-annual
payments over the same period as the original contract, the payments
were held to be capital receipts because the termination of the contract
resulted
in the cessation of the taxpayer’s business.
Example 10.7: Compensation for breach of contract going to

Betty has a contract with a UK company to act as the sole distributor
of Ester’s Exquisite Jewellery range. There is such a demand for Ester’s
Exquisite Jewellery in Australia that Betty does not distribute any other
products. The contract, which is for a period of five years, is terminated
by Ester after two years. Betty and Ester come to an agreement regarding
compensation for the early termination of the contract. Based on estimated
earnings, Betty is to receive $20,000 per year for the next three years.
The compensation paid to Betty is capital in nature and will not be ordinary
income, despite being calculated by reference to the lost income and paid
over the same period as the terminated contract. However, Betty will need
to consider the CGT consequences of the receipts: see Ruling TR 95/35.

Compensation for loss of asset –depreciable assets

[10.200] Any compensation received for the loss or damage to a depreciable
asset will be dealt with under the depreciation provisions. Where the
compensation relates to the disposal of the asset, it is necessary to make any
required balancing adjustments under Div 40 of the ITAA 1997.
Compensation for loss of asset –capital assets

[10.210] Compensation in relation to capital assets depends on whether
the asset has been rendered permanently destroyed or disabled or merely
temporarily disabled. Generally, an amount that relates to the permanent
disablement of the asset is considered capital in nature and subject to the CGT
provisions.
Case study 10.8: Compensation for loss of capital asset

In Glenboig Union Fireclay Co Ltd v The Commissioners of Inland Revenue
[1922] SLT 182, the taxpayer, the lessee of land that contained fireclay,
was in the business of mining clay deposits. A railway company had
tracks running over part of the land. It exercised certain statutory powers
preventing the taxpayer from working parts of the land.
The taxpayer was paid compensation calculated by reference to the
profits that would have been earned from the unworked part of the
land. Despite the method of calculating the compensation payment,

the House of Lords held that the amount was capital in nature as part of
the taxpayer’s company was “sterilised” and destroyed by the exercise
of
the statutory power.
In contrast to Glenboig Union Fireclay Co Ltd v The Commissioners of Inland

Revenue, compensation paid in relation to an asset that has been rendered
temporarily disabled will generally be considered income in nature and
assessable under s 6-5 of the ITAA 1997: see Ensign Shipping Co Ltd v The
Commissioners of Inland Revenue (1928) 12 TC 1169 and Burmah Steamship
Co Ltd v The Commissioners of Inland Revenue (1931) 16 TC 67.
An amount that compensates for temporary disablement will need to be

assessed on the facts: see, for example, Sydney Refractive Surgery Centre Pty
Ltd v FCT (2008) 73 ATR 28.
Case study 10.9: Damages for defamation

In Sydney Refractive Surgery Centre Pty Ltd v FCT (2008) 73 ATR 28,
the taxpayer carried on business, which included performing laser eye
surgery. The taxpayer successfully sued for damages for defamation and
was awarded $844,624. The question before Sackville J was whether
$812,726 actually received after allowing for $31,898 in costs was “income
according to ordinary concepts”. The taxpayer claimed damages on two
alternative bases: the loss it sustained by the reduction in the value of its
business attributable to the defamatory publications or the loss of profits
sustained during a closed period by reason of the reduction in the number
of laser procedures attributable to the defamatory publications. The
second basis was accepted by the Supreme Court. However, in deciding
the assessability of the damages, Sackville J held that the damages were
to compensate the taxpayer for the injury to its reputation in the way of
business. His Honour went on to state that the fact that the award was
calculated by reference to loss of profits did not alter the character of the
payment. It was compensation for injury to a capital asset and thus the
payment
was not income according to ordinary concepts.
Compensation for loss of asset –trading stock

[10.220] Section 70-115 of the ITAA 1997 provides that a taxpayer’s assessable
income includes an amount received by way of insurance or indemnity for a loss

of trading stock as long as that amount is not assessable as ordinary income
under s 6-5. Consequently, it is necessary to consider whether an amount
received for loss of trading stock is ordinary income under the common law
principle. This issue was considered by the High Court in FCT v Wade (1951)
84 CLR 105, where it was held that a lump-sum compensation payment paid
to a taxpayer who carried on the business of dairy farming was income. The
compensation was paid for the loss of dairy cows that were condemned and
destroyed. As the cows were trading stock, the compensation payment was on
revenue account meaning the payment was included as income.
Given that receipts from the sale of trading stock are ordinary income under
s 6-5, an amount received to replace lost trading stock will be ordinary income.
Therefore, it is difficult to see when s 70-115 would be applied. However, it
may be argued that s 70-115 extends beyond the common law proposition
with the use of the words “by way of … indemnity” to capture a statutory right
to compensation not caught by the common law principle.
Example 10.8: Compensation for loss of trading stock

Bob is a poultry farmer who breeds chickens to sell for meat. Due to
excessive amounts of pesticides in chicken food obtained from Barry,
a local wheat farmer and poultry food producer, Bob suffers the loss of
80% of his chickens. Barry is found liable to compensate Bob for the
losses suffered.
As Bob is being compensated for loss of trading stock, the compensation
will be ordinary income under s 6-5 (or, alternatively, assessable under
s 70-115): see Gill v The Australian Wheat Board [1980] 2 NSWLR 795.

Compensation by way of insurance proceeds

[10.230] Section 15-30 of the ITAA 1997 provides that a taxpayer’s assessable
income includes an amount received by way of insurance or indemnity for the
loss of an amount if that amount would have been included in assessable
income, and the amount was not assessable as ordinary income under s 6-
5. Where an amount may be assessable as ordinary income and statutory
income under s 15-30, the ordinary income provisions will prevail. It may
also be necessary to consider whether the right under the insurance policy
is an asset for CGT purposes where the payment of a claim gives rise to a
capital gain.
There are specific provisions dealing with the recovery of losses under
insurance policies where the loss relates to livestock and timber. Section
385-130 provides that where the livestock is an asset of a primary production
business, the insurance payout may be included in assessable income in equal
instalments over a five-year period. A similar provision applies for the loss of
trees on land held for the purposes of manufacture or sale in the course of
carrying on a business.
Composite claims
[10.240] The above discussion assumes that a compensation or damages
payment is easily identifiable as a substitute for income or capital. Often,
however, taxpayers receive an undissected lump-sum payment representing
compensation for both a loss of income and a loss of capital or capital assets.
This will be common where there is an out-of-court compromise settlement.
Where the compensation or settlement payment received is for unliquidated
damages, the courts have been reluctant to apportion the sum received
into income and capital components. Instead, the whole amount is treated
as capital. If, however, there is a portion of the lump-sum payment that is

identifiable and quantifiable as income, the Commissioner considers that part
of the compensation will be assessable as ordinary income: Determination
TD  93/58.
Example 10.9: Composite claim
Charles, the owner of land, agrees to accept a payment of $100,000 in
compensation for its compulsory resumption. In addition, interest of 10%
on the principal sum is to be paid. The compensation paid to Charles
under the settlement includes an amount of $20,000 for interest.
The $20,000 is assessable income under s 6-5 of the ITAA 1997 as it can
be identified and quantified by the parties.

[10.250] The question as to the assessability of a lump-sum payment arose in

McLaurin v FCT (1961) 104 CLR 381.
Case study 10.10: Composite claim

In McLaurin v FCT (1961) 104 CLR 381, the taxpayer’s grazing property
was damaged by a fire that started on NSW Railway land. Compensation
of £12,350 was paid to the taxpayer by NSW Railways in full settlement
of a claim for damages. The claim was for a sum of £30,240 under a
number of heads of damage, including damages to pastures, loss of
livestock, damage to wool and loss of fencing. The settlement amount

was computed by reference to the various items; however, the taxpayer
was not aware of the calculations.
The Commissioner included a portion of the settlement payment in the
taxpayer’s assessable income. The High Court held that no part of the lump
sum was assessable as ordinary income. In coming to this conclusion, the
Court made it clear that where the payment is in respect of a claim of
unliquidated damages and is made or accepted under a compromise that
treats the settlement as a single undissected amount, the amount is to be
considered as a whole. A similar conclusion was reached in Allsop v FCT
(1965)
113 CLR 341: see Case Study [10.11].
Given that an undissected amount of compensation or damages is treated

as capital, it may be subject to the CGT regime. The CGT consequences of a
capital receipt are considered by the Commissioner in Ruling TR 95/35. Where
it is possible to attribute the capital receipt to an underlying asset, the cost base
of that underlying asset will attach to the compensation or damages receipt.
Where there is no underlying asset, CGT events H2 (see [11.120]) and C2 (see
[11.70]) should be considered.
Reimbursement of previously deducted

expenses
[10.260] Compensation that replaces lost income is in itself considered
income and assessable to the recipient. A logical expansion of this principle
would provide that a reimbursement of a previously deducted expense (a
revenue expense) would be assessable income. However, as a common law
proposition, the courts have not adopted this principle. Instead, the courts
have looked at the receipt itself.
Case study 10.11: Reimbursement of previously deducted expense

In FCT v Rowe (1997) 187 CLR 266, the High Court rejected the notion
that, as a general principle of law, an amount paid as compensation for
or reimbursement of a deductible expense is income within ordinary
concepts. In that case, the taxpayer had been allowed a deduction for
legal expenses incurred in relation to his suspension from a Queensland
Shire Council. After being cleared of all wrongdoing, the Queensland
Government made an ex gratia payment in the equivalent amount of the
expenditure incurred.
The High Court concluded that it was necessary to determine whether

the receipt was income according to ordinary concepts and, in this case,
it
was not.
The High Court in FCT v Rowe clearly rejected the notion that a reimbursement
of a previously deducted expense is itself income. Rather, the courts have
adopted the approach that the assessability of a reimbursement of a previously
deducted expense is determined by reference to the receipt itself and the
ordinary concepts of income, which are discussed in Chapter 5. Several
cases have discussed the application of the common law concepts where a
taxpayer has received a reimbursement of a previously deducted expense. The
cases generally centre on the question of whether the reimbursement can be
considered as received in the ordinary course of carrying on a business.
[10.270] The cases of Allsop v FCT (1965) 113 CLR 341, HR Sinclair & Son
Pty Ltd v FCT (1966) 114 CLR 537 and Warner Music Australia Pty Ltd v FCT
(1996) 34 ATR 171 all demonstrate the application of the common law principle
of income according to ordinary concepts to reimbursements of previously
deducted expenses.
Case study 10.12: Reimbursement of capital receipt

In Allsop v FCT (1965) 113 CLR 341, the taxpayer, Allsop, was an interstate
carrier who paid fees for haulage permits. The fees were subsequently
held to be unconstitutional and the taxpayer sued to recover the fees. The
claim was settled prior to the trial and, upon the execution of a deed of
release, Allsop was paid £37,500.
The Commissioner assessed the taxpayer on the basis that the amount
recovered was assessable income. The Court concluded that the sum
received was not a reimbursement of fees paid, but rather a payment for
settlement of a claim. That being the case, the sum was not assessable as
ordinary
income, but rather a capital receipt.
[10.280] A year later, the High Court was again faced with a similar issue.
Case study 10.13: Reimbursement received in ordinary course of

business
In HR Sinclair & Son Pty Ltd v FCT (1966) 114 CLR 537, the taxpayer had
paid, for a period of four years, royalties under protest to the Forests
Commission of Victoria. The taxpayer, who had been claiming the
royalties as a deduction for taxation purposes, eventually convinced the
Commission that the royalties had been miscalculated and a refund was
voluntarily paid to the taxpayer.

The Commissioner included in the taxpayer’s assessable income the
amount of the refund. The High Court concluded that the refund did not
acquire the character of income because it was made as payment for
previously deducted expenses. However, the ordinary concepts of income
were applied to conclude that the payment was income to the taxpayer as
the
refund was received in the course of the taxpayer’s business.
Case study 10.14: Reimbursement an incident of business

Also supporting the notion that a reimbursement may be assessable
income is the Federal Court decision in Warner Music Australia Pty Ltd
v FCT (1996) 34 ATR 171. In that case, Hill J held the reduction in sales
tax liability that had previously been allowed as a deduction was “so
intimately connected with Warner’s business of selling records, cassettes
and the like, that it must be treated as being an incident of that business,
even if not an ordinary incident of that business” (at 182). Consequently,
based on the tests in FCT v Myer Emporium Ltd (1987) 163 CLR 199, the
gain
was “stamped” with the character of income.
[10.290] So far, the common law position in relation to the reimbursement

of previously deducted expenses has been considered. It is also necessary to
consider the statutory provisions of the ITAA 1997 that affect the common law
position.
Division 20 of the ITAA 1997 includes amounts in a taxpayer’s assessable income

to reverse the affect of certain kinds of deductions. In particular, it includes in
a taxpayer’s assessable income amounts received, either by the taxpayer or
another entity, by way of insurance, indemnity or other recoupment if it is for
a deductible expense and it is not otherwise assessable income. Division 20
divides amounts received into two categories: an amount received by way
of insurance or indemnity (s 20-20(2)) and other recoupments (s 20-20(3)).
Other recoupments must be of an amount deducted under one of the specific
provisions listed in s 20-30, which include bad debts, rates or taxes, tax-related
expenses, embezzlement or larceny by an employee, capital allowances and
foreign exchange losses.
The first category of reimbursements in s 20-20, an amount received by way of

insurance or indemnity, was previously found in s 26(j) of the ITAA 1936. The
meaning in s 26(j) of “indemnity or recoupment” has been considered by the
courts.
Case study 10.15: Meaning of “indemnity or recoupment”

In FCT v CSR Ltd (2000) 45 ATR 559, the taxpayer received a lump-
sum settlement from an insurer who had previously refused to pay an
indemnification. The Commissioner assessed the settlement payment

as an indemnity to reimburse the taxpayer for a previously deducted
outgoing. The Full Federal Court held that as the payment was an
undissected lump sum in settlement of all claims against another party,
it could not be said to be a reimbursement of a previously deducted
outgoing. A similar conclusion was reached in the case of Allsop v FCT
(1965)
113 CLR 341: see Case Study [10.11].
Questions
[10.300]
10.1 David disturbed two prison escapees who were attempting to break
into his car. He suffered serious head injuries as a result of being
bashed by the men and spent three months recuperating in hospital.
The escapees were later recaptured, found guilty of the assault and
sentenced to an additional two years in jail. David applied for and was
awarded $30,000 compensation under the Victims Compensation Act
1987 (NSW) for his pain and suffering resulting from the assault. Marina,
David’s wife also received $20,000 compensation under this Act. She
was able to establish that the fear she now had of driving a car alone
was attributable to the assault on her husband and she was therefore
entitled to compensation for the loss of enjoyment of life. What are the
tax consequences of the compensation receipts?
10.2 While cycling home from work, Mark is hit by a car and seriously injured.
He spends the next three months in hospital. Due to the severity of
his injuries, at the end of the three months, Mark is declared unable
to work again. After protracted legal proceedings, Mark receives the
following sums of money:
• $500,000 from the insurer of the driver who hit Mark;
• $15,000 in lost wages through a workers’ compensation
payment; and
• $100,000 for the permanent loss of the sight in one eye.
How is each of these amounts assessed?
10.3 Alice, an employee of Acme Co, is sexually harassed by a workmate.
Alice complains to the company and seeks compensation for the
humiliation and indignity she has suffered. In return for signing an
agreement in which she surrenders any rights she may have against
the company, Alice receives from the company an amount of $35,000
and resigns from the company. The payment is calculated on the
basis of six months’ salary, including long service and annual leave
entitlements. What are the tax consequences of the compensation
receipt?
10.4 Jenny and Mark have their own business producing furniture for both
wholesale and retail clients. Unfortunately, their factory was burned
to the ground because of an electrical fault. Jenny and Mark lost
everything. They had various insurance policies that provided for the
following amounts of compensation:
• $1 million for the loss of the factory;
• $500,000 for the loss of machinery and other depreciable assets;
• $200,000 for loss of trading stock; and
• $50,000 each to Jenny and Mark for loss of income while the
business was not operating.
What are the tax consequences of each of these amounts?
10.5 At the start of the current tax year, Colin installs a water tank at his
rental property for $3,000. Colin claims a deduction for the decline
in value of the water tank under Div 40 of the ITAA 1997 using the
prime cost method and an effective life of 10 years. Colin also applies
for and receives a Queensland State Government rebate of $1,000

as a recoupment of his expenditure on the water tank. Is the $1,000
assessable in the hands of Colin?
10.6 Hospitality Pty Ltd (Hospitality) carries on a business of providing
catering services for corporate events. Their major client is an Australian
airline. Hospitality is contracted to run the airline’s airport premium
customer lounges across Australia, providing the food and beverage
as well as service staff in each lounge. The duration of the contract
is five years, with an annual charge of $5 million payable in monthly
instalments. This represents approximately 80% of Hospitality’s annual
revenue. Recently, the airline reviewed its operations and decided to
terminate the contract one year early, that is, at the end of the fourth
year. The airline agreed to pay Hospitality the balance of the contract
of $5 million, but sought to mitigate the amount payable by claiming
that the work performed by Hospitality was of a poor standard. After
lengthy negotiations, Hospitality and the airline agreed to settle their
claims for a final amount of $4.7 million. Is the $4.7 million ordinary
income in the hands of Hospitality?
10.7 Felicity sought financial advice from Makemoneyfast Bank in 2015. She
paid $5,000 for advice that involved advising her to invest $500,000
into one of their managed funds. It was a fund that was labelled high-
risk, high-return. The fund performed badly, and Felicity disposed of
her investment for $250,000 in the current tax year.
In the same year, Makemoneyfast Bank reviewed the advice given to
Felicity and determined that, based on her instructions that she wanted
to ensure the money was “safe”, the advice should have been to invest
in a conservative “low-risk” fund. As a consequence, the Bank paid
Felicity $200,000 in compensation, including a refund of $5,000 on the
fee for the original financial advice and $50,000 in lost interest. Felicity
had claimed a tax deduction for the fee.
Advise Felicity of the tax consequences.
10.8 Ozzie Bank has agreed to pay thousands of its customers compensation
for charging interest above the agreed rate, failing to activate offset
accounts and failing to switch customers from an interest-only loan to
a principle and interest loan. Compensation is in the form of damages
for poor advice, additional interest charges and lost opportunity.
Advise the recipients of the compensation of their tax liability. Would
it make any difference if the loan related to their main residence or a
rental property?
10.9 Erin is a professional Australian Football League (AFL) player. She
was suspended for three games due to a breach of the AFL Code. Erin
challenged her suspension and, as she was playing professionally at
the time of the suspension, she was able to deduct her legal expenses
against her AFL income. It was found that she should not have been
suspended and the AFL reimbursed her by way of an ex gratia payment
for the legal expenses.
Erin has asked for advice on whether the reimbursement of the legal
expenses is assessable income.
11
Capital gains tax
Key points.................................................................................................... [11.00]
Introduction................................................................................................ [11.10]
Step 1 –Have you made a capital gain or a capital loss?....................... [11.30]
Question 1: Has a CGT event happened to the taxpayer?................. [11.40]
Subdivision 104-A: Disposals.................................................................. [11.50]
Subdivision 104-B: Use and enjoyment before title passes.................. [11.60]
Subdivision 104-C: End of a CGT asset................................................... [11.70]
Subdivision 104-D: Bringing into existence a CGT asset....................... [11.80]
Subdivision 104-E: Trusts........................................................................ [11.90]
Subdivision 104-F: Leases..................................................................... [11.100]
Subdivision 104-G: Shares.................................................................... [11.110]
Subdivision 104-H: Special capital receipts......................................... [11.120]
Subdivision 104-I: Australian residency ends...................................... [11.130]

Subdivision 104-J: CGT events relating to rollovers............................ [11.140]
Subdivision 104-K: Other CGT events................................................... [11.150]
Subdivision 104-L: Consolidated groups and multiple entry
consolidated groups...................................................................... [11.160]
Question 2: Is the asset a CGT asset?............................................... [11.170]
Collectables............................................................................................ [11.180]
Personal use assets................................................................................ [11.190]
Separate CGT assets.............................................................................. [11.200]
Time of acquisition of CGT asset........................................................... [11.210]
Question 3: Does an exception or exemption apply?...................... [11.220]
Disregarded capital gains and losses on certain assets...................... [11.230]
Exempt or loss denying transactions.................................................... [11.280]
Anti-overlap provisions.......................................................................... [11.310]
Small business relief.............................................................................. [11.320]
Main residence exemption.................................................................... [11.380]
Death....................................................................................................... [11.425]
Question 4: Can there be a rollover?................................................ [11.430]
Step 2 –Work out amount of capital gain or loss................................. [11.440]

What is a capital gain or loss?........................................................... [11.450]
What factors come into calculating a capital gain or loss?.............. [11.460]
Capital proceeds..................................................................................... [11.470]
Cost base................................................................................................ [11.480]
Reduced cost base................................................................................. [11.500]
Step 3 –Work out your net capital gain or loss for the income year...... [11.510]
Calculation 1....................................................................................... [11.520]
Calculation 2....................................................................................... [11.530]
Calculation 3....................................................................................... [11.540]
Calculation 4....................................................................................... [11.550]
Calculation 5....................................................................................... [11.560]
Capital losses.......................................................................................... [11.570]
Indexation figures.............................................................................. [11.580]
Current index reference base................................................................ [11.580]
Questions................................................................................................... [11.590]

Key points
[11.00]
• Capital gains tax (CGT) affects a taxpayer’s income because assessable
income includes the net capital gain for the income year. As such,
there is no such thing as a separate CGT. Rather, capital gains are
taxed as statutory income under the Income Tax Assessment Act
1997 (Cth).
• A taxpayer’s net capital gain for an income year is the total of the
capital gains for the income year minus certain capital losses for the
income year.
• Capital losses cannot be deducted from assessable income. This is
known as quarantining. However, capital losses may be carried
forward to be offset against capital gains in future income years.
• A taxpayer makes a capital gain or a capital loss only if a CGT event
happens; that is, CGT applies only to realised gains.
• Most CGT events involve a CGT asset.
• There are certain exemptions or exceptions that reduce the capital
gain or loss or allow the taxpayer to disregard it altogether.
• Gains and losses made on assets acquired before 20 September 1985
are generally exempt from CGT.
• There are certain rollovers that allow a taxpayer to defer a capital gain
or loss from a CGT event.
11: Capital gains tax [11.15] 333
•
A taxpayer generally makes a capital gain if he or she receives capital
amounts (known as capital proceeds) that exceed the total costs
(known as the cost base) associated with the CGT event.
•
A taxpayer generally makes a capital loss if he or she receives
capital amounts (known as capital proceeds) that are less than the
total costs (known as the reduced cost base) associated with the
CGT event.
•
In certain circumstances, a taxpayer may be able to take into account
inflation or apply a general discount to a capital gain.
Introduction
[11.10] The topics covered so far have considered whether a receipt is income
or capital and whether that receipt is ordinary or statutory income. The focus
has then been on the tax consequences of a receipt of income. This chapter
considers the consequences of a receipt of capital or, more specifically, capital
gains tax (CGT). Gains that are assessable under the CGT regime are a form of
statutory income.
The capital gains and capital losses provisions (commonly referred to as capital
gains tax or CGT) are contained in Pts 3-1 and 3-3 of Ch 3 of the Income Tax
Assessment Act 1997 (Cth) (ITAA 1997). Part 3-1 deals with capital gains and
losses general topics, while Pt 3-3 deals with special topics, such as rollovers
and small business concessions.
A taxpayer’s income tax liability is affected by CGT because assessable income

includes the net capital gain for the income year (s 102-5(1)), where net capital
gains consist of the total capital gains for the year reduced by certain capital
losses. A taxpayer cannot deduct a net capital loss. However, a loss may be
carried forward to be offset against gains in future years.
The starting point for considering the application of the CGT provisions
is generally Div 104 which contains all of the CGT events. Once it has been
established that there is a CGT event, it is possible to consider the other
Divisions of the CGT Parts of the Act. For example, it will be necessary to
consider Div 108 which provides a definition of a CGT asset, Div 110 which
provides the rules relating to the cost base of the asset, Div 116 which provides
the rules relating to the capital proceeds from the event and Div 118 which
provides many of the exemptions available.
[11.15] One of the most important aspects of calculating a taxpayer’s net

capital gain is determining whether the general discount percentage applies.
The general discount percentage is applied at the third step outlined below
after determining whether there is a gain or loss and the amount of that gain
• 104-E – trusts;
• 104-F – leases;
• 104-G – shares;
• 104-H –special capital receipts;
• 104-I –Australian residency ends;
• 104-J –CGT event relating to rollovers;
• 104-K –other CGT events;
• 104-L –consolidated groups and multiple entry consolidated (MEC)
groups.
Subdivision 104-A: Disposals
[11.50] CGT event A1 is the most common CGT event. CGT event A1 happens
if a taxpayer disposes of a CGT asset: s 104-10(1) of the ITAA 1997. A disposal
occurs where there is a change in ownership because of some act or event or
by operation of law. However, a change of ownership does not occur if the
taxpayer stops being the legal owner, but continues to be the beneficial owner,
or merely because of a change of trustee: s 104-10(2).
The time of CGT event A1 is when the taxpayer enters into the contract or,
if there is no contract, when the change of ownership occurs: s 104-10(3).
Where there is more than one contract –for example, an original contract
and a subsequent contract varying the terms –the date of disposal will be
determined by reference to the contract that gives rise to the obligation to sell
or transfer the asset: FCT v Sara Lee Household & Body Care (Australia) Pty Ltd
(2000) 44 ATR 370. Further, in the context of an acquisition, the court has held
that an oral contract, whether enforceable or not, will determine the date of
acquisition: McDonald v FCT (1998) 38 ATR 563. However, where the contract
is preliminary and not the actual contract for acquisition, the date of acquisition
will be the latter contract: Elmslie v FCT (1993) 26 ATR 611. Where there is no
contract, the time of the event will be the time of the change of ownership to be
determined on the facts –for example, the provision of access to the property,
such as the handing over of the keys.
Where CGT event A1 occurs, you make a capital gain if the capital proceeds
from the disposal are more than the asset’s cost base and you make a capital
loss if those proceeds are less than the asset’s reduced cost base: s 104-10(4).
The cost base is generally the total costs associated with the CGT event (see
[11.480]), while the capital proceeds are generally the amount the taxpayer
receives, or is entitled to receive, from the CGT event: see [11.470].
Example 11.1: Event A1
In June 2020, Kylie enters into a contract to sell land. The contract is
settled in October 2020. Kylie makes a capital gain of $50,000. The $50,000
gain is made in the 2019–2020 income year, that is, the year in which the
contract is entered into, and not the 2020–2021 income year.
Source: Adapted
from s 104-10 of the ITAA 1997.
Case study 11.1: Time of disposal

In FCT v Sara Lee Household & Body Care (Australia) Pty Ltd (2000) 44
ATR 370, the taxpayer was a subsidiary of a US company involved in
the pharmaceuticals and healthcare product market. On 31 May 1991,
the taxpayer entered into a contract with Roche to sell its business. On
30 August 1991, a number of amendments were made to the original
agreement, including an adjustment to the purchase price and the name
of the purchaser. The issue before the High Court was whether the
relevant date of the contract for CGT purposes was 31 May 1991 or 30
August 1991.
The High Court held that it is a question as to which contract gave rise to
the obligation to effect the disposal. In this case, although the terms of
the original agreement were varied in August, the obligation established
on 31 May 1991 did not change. Therefore, the date of disposal for CGT
purposes
was 31 May 1991.
Subdivision 104-B: Use and enjoyment before title passes

[11.60] CGT event B1 happens if a taxpayer enters into an agreement under
which the right to the use and the enjoyment of a CGT asset owned by the
taxpayer passes to another entity and title in the asset will or may pass to that
entity before the end of the agreement: s 104-15(1) of the ITAA 1997. The time
of the event is when the other entity first obtains the use and enjoyment of the
asset: s 104-15(2).
Example 11.2: Event B1
Mark agrees to rent an investment property to John for a period of two
years. The agreement entered into by the parties provides that at any time
during the two-year period John has the right to purchase the property
from Mark. Event B1 occurs when Mark starts renting the property.

Subdivision 104-C: End of a CGT asset

[11.70] Category C, dealing with the end of a CGT asset, contains three
separate events.
CGT event C1, the loss or destruction of a CGT asset, happens if a CGT asset
that the taxpayer owns is lost or destroyed: s 104-20(1) of the ITAA 1997. The
time of CGT event C1 is when the taxpayer first receives compensation for
the loss or destruction or, if no compensation is received, when the loss is
discovered or the destruction occurred: s 104-20(2).
Example 11.3: Event C1
Erin owns a factory that burns down. She has insurance that compensates
her for the loss. CGT event C1 happens when the factory is destroyed,
and the time of the event is when she receives the insurance payment.

CGT event C2, covering cancellation, surrender and similar endings, happens
where the taxpayer’s ownership of an intangible asset ends by the asset:
• being redeemed or cancelled; or
• being released, discharged or satisfied; or
• expiring; or
• being abandoned, surrendered or forfeited; or
• if the asset is an option –being exercised; or
• if the asset is a convertible interest –being converted: s 104-25(1).

The time of CGT event C2 is when the taxpayer enters into the contract that
results in the asset ending or, if there is no contract, when the asset ends:
s 104-25(2).
Tim has a contract with Acme Co to be the exclusive supplier of their
widgets for the next 10 years. Acme Co terminates the agreement with
Tim after five years. Tim is paid $5,000 as compensation for the early
termination of the contract.
CGT event C2 happens as Tim’s intangible asset, that is, his rights under
the agreement, have come to an end.
Later we will see that the capital gain will be the $5,000 less any costs
associated with the event (eg, legal fees).

CGT event C3, the end of an option to acquire shares, happens if an option that
a company or trustee of a unit trust granted to an entity to acquire a CGT asset,
which is shares in the company (or units in the unit trust or debentures in the
company or unit trust), ends because it is not exercised by the latest time for its
exercise, is cancelled, released or abandoned: s 104-30(1). Event C3 only deals
with company issued options. All other options are dealt with as a D2 event,
with the difference being the time of the event. The time of event C3 is when
the option ends: s 104-30(2).
On 1 January 2020, Gina pays Acme Co $100 for the right to acquire
10,000 shares in the company for $1 per share. The option to acquire
shares must be exercised within 12 months of entering into the option.
Gina decides not to exercise the option. As a result, the option expires
and CGT event C3 happens on 1 January 2021.
Acme Co makes a capital gain of $100 (less any associated expenses) on
1 January 2021.

Subdivision 104-D: Bringing into existence a CGT asset

[11.80] Category D, bringing into existence a CGT asset, has four separate
events.
CGT event D1 happens where a taxpayer creates a contractual or other legal

right in another entity: s 104-35(1). The bringing into existence of an asset that
triggers a CGT event D1 often leads to a CGT event C2 when the asset created
comes to an end.
Example 11.6: Event D1
Bart sells his business to Lucy. As part of the agreement, Bart agrees not
to operate a similar business within a 5-km radius for the next two years.
Lucy pays $10,000 for Bart to agree to this restraint of trade. A contractual
right in favour of Lucy has been created. If Bart breaches the contract,
Lucy can enforce that right.
CGT event D1 happens when the contract for the restraint of trade is
entered into and Bart will have a capital gain. At the end of the two-year
period, CGT event C2 will happen and Lucy will have a capital loss.
Source: Adapted from s 104-35 of the ITAA 1997.

CGT event D2 happens if a taxpayer grants an option to an entity or extends

an option already granted: s 104-40(1). Event D2 does not happen if CGT event
C3 applies to the situation, that is, the option is for the acquisition of shares in
a company.
Example 11.7: Event D2
Ben pays Sara $5,000 for an option to purchase her business. The one-
month option is granted on 1 January 2021. Ben decides not to exercise
the option.
CGT event D2 happens on 1 January 2021 and Sara has a capital gain of
$5,000 less any associated expenses.
If Ben exercises the option, CGT event D2 is ignored and CGT event A1
happens: see [11.50].

CGT event D3 happens if a taxpayer who owns a prospecting entitlement or

mining entitlement grants the right to receive income from the operation of the
entitlement: s 104-45(1).
CGT event D4 happens if a taxpayer enters into a conservation covenant over

land that he or she owns: s 104-47(1).
Subdivision 104-E: Trusts
[11.90] There are ten CGT events relating to trusts listed in subdiv 104-E of
the ITAA 1997:
• creating a trust over a CGT asset –CGT event E1;
• transferring a CGT asset to a trust –CGT event E2;
• converting a trust to a unit trust –CGT event E3;
• capital payment for trust interest –CGT event E4;
• beneficiary becoming entitled to a trust asset –CGT event E5;
• disposal to beneficiary to end income right –CGT event E6;
• disposal to beneficiary to end capital interest –CGT event E7;
• disposal by beneficiary of capital interest –CGT event E8;
• creating a trust over future property –CGT event E9;
• annual cost base reduction exceeds cost base of interest in AMIT –CGT
event E10.
Subdivision 104-F: Leases
[11.100] There are five CGT events relating to leases listed in subdiv 104-F of
the ITAA 1997:
• granting a lease –CGT event F1;
• granting a long-term lease –CGT event F2;
• lessor pays lessee to get lease changed –CGT event F3;
• lessee receives payment for changing lease –CGT event F4;
• lessor receives payment for changing lease –CGT event F5.
Example 11.8: Event F4
On 1 January 2021, Jake (the lessee) enters into a lease. On 1 May 2021,
Jake agrees to waive a term. Eastfield (the lessor) pays Jake $1,000 for
this. If Jake’s cost base at the time of the waiver is $2,500, it is reduced
from $2,500 to $1,500.
On 1 September 2021, Jake agrees to waive another term. Eastfield pays
Jake $2,000 for this. If Jake’s cost base at the time of the waiver is $1,500,
Jake makes a capital gain of $500 and the cost base is reduced to nil.

Example 11.9: Event F5
Eastfield owns a shopping centre. Con (the lessee of a shop in the centre)
pays Eastfield $10,000 for agreeing to change the terms of its lease.
Eastfield incurs expenses of $1,000 for a solicitor and $500 for a valuer.
Eastfield makes a capital gain of $8,500.

Subdivision 104-G: Shares
[11.110] There are two CGT events relating to shares listed in subdiv 104-G
of the ITAA 1997.
CGT event G1 happens if a company makes a payment to a taxpayer in

respect of shares the taxpayer owns in the company and the payment is not a
dividend: s 104-135(1).
CGT event G3 happens if a taxpayer owns shares in a company and a liquidator

or administrator declares the shares worthless: s 104-145(1).
Subdivision 104-H: Special capital receipts

[11.120] There are two CGT events relating to special capital receipts listed in
subdiv 104-H of the ITAA 1997.
CGT event H1 happens if a deposit paid to a taxpayer is forfeited because a

prospective sale or other transaction does not proceed: s 104-150(1).
Example 11.10: Event H1
Barry decides to sell land to Judy. A contract of sale for $120,000 is
entered into, and Judy pays Barry a 10% deposit. Judy fails to complete
the contract, and the deposit is forfeited. CGT event H1 happens, and
Barry has a capital gain of $12,000 less any costs associated with the
failed transaction.

CGT event H2 happens if an act, transaction or event occurs in relation to a

CGT asset that the taxpayer owns, and the act, transaction or event does not
result in an adjustment being made to the asset’s cost base or reduced cost
base: s 104-155(1).
Example 11.11: Event H2
Max owns land on which he intends to construct a manufacturing facility.
A business promotion organisation pays Max $50,000 as an inducement
to start work early. No contractual rights or obligations are created by the
arrangement.
The payment is made because of an event (the inducement to start
construction early) in relation to Max’s land, so a CGT event H2 happens
and Max has a capital gain of $50,000 (less any costs associated with
starting early).

Subdivision 104-I: Australian residency ends

[11.130] There are two CGT events relating to the ending of Australian
residency listed in subdiv 104-I of the ITAA 1997.
CGT event I1 happens when a taxpayer stops being an Australian resident:

s 104-160(1). However, an Australian resident individual may choose to
disregard making a capital gain or capital loss, in which case the assets will be
deemed to be taxable Australian property until a CGT event happens to those
assets or the taxpayer becomes an Australian resident again.
CGT event I2 happens if a trust stops being a resident trust for CGT purposes:
s 104-170(1).
Subdivision 104-J: CGT events relating to rollovers

[11.140] There are five CGT events relating to rollovers listed in subdiv 104-J
of the ITAA 1997 (note that CGT event J3 has been repealed):
• company ceasing to be a member of wholly owned group after
rollover –CGT event J1;
• change of status of replacement asset for a rollover under subdiv 152-
E –CGT event J2;
• trust failing to cease to exist after rollover under subdiv 124-N –CGT
event J4;
• failure to acquire replacement asset and to incur fourth element
expenditure after a rollover under subdiv 152-E –CGT event J5;
• cost of acquisition of replacement asset or amount of fourth element
expenditure, or both, not sufficient to cover disregarded capital gain –
CGT event J6.
Subdivision 104-K: Other CGT events

[11.150] There are 12 CGT events listed in subdiv 104-K of the ITAA 1997.
They are as follows:
• incoming international transfer of emissions unit –CGT event K1;
• bankrupt pays amount in relation to debt –CGT event K2;
• asset passing to tax-advantaged entity –CGT event K3;
• CGT asset starts being trading stock –CGT event K4;
• special collectable losses –CGT event K5;
• pre-CGT shares or trust interest –CGT event K6;
• balancing adjustment events for depreciating assets and s 73BA
depreciating assets –CGT event K7;
• direct value shifts –CGT event K8;
• carried interests –CGT event K9;
• certain short-term forex realisation gains –CGT event K10;
• certain short-term forex realisation losses –CGT event K11;

• foreign hybrids –CGT event K12.
Subdivision 104-L: Consolidated groups and multiple entry

consolidated groups
[11.160] There are seven CGT events relating to consolidated groups and
MEC groups listed in subdiv 104-L of the ITAA 1997:
• loss of pre-CGT status of membership interests in entity becoming
subsidiary member –CGT event L1;
• where pre-formation intragroup rollover reduction results in negative
allocable cost amount –CGT event L2;
• where tax cost setting amounts for retained cost base assets exceeds
joining allocable cost amount –CGT event L3;
• where no reset cost base assets and excess of net allocable cost
amount on joining –CGT event L4;
• where amount remaining after step 4 of leaving allocable cost amount
is negative –CGT event L5;
• error in calculation of tax cost setting amount for joining entity’s
assets –CGT event L6;
• where reduction in tax cost setting amounts for reset cost base assets
cannot be allocated –CGT event L8.
Question 2: Is the asset a CGT asset?

[11.170] Most CGT events involve a CGT asset. Division 108 of the ITAA
1997 defines the various categories of assets that are relevant to working out
a taxpayer’s capital gains and losses. A “CGT asset” is defined as any kind of
property or a legal or equitable right that is not property: s 108-5(1). The definition
includes part of, or an interest in, an asset as defined, goodwill or an interest in it,
and an interest in an asset of a partnership. Division 108 also sets out when land,
buildings and capital improvements are taken to be separate CGT assets. The first
part of the definition contained in s 108-5(1)(a) provides that a CGT asset is any
type of property, including both tangible property, such as land and buildings,
as well as intangible property, such as copyright and patents. The second part
of the definition contained in s 108-5(1)(b) provides that a CGT asset is a legal or
equitable right that is not property. This category includes those assets that are
not transferable, such as the right to sue, and rights under an insurance contract.
Examples of CGT assets from s 108-5 include the following:

• land and buildings;
• shares in a company;
• units in a unit trust;
• options;
• debts owed to you;
• a right to enforce a contractual obligation; and
• foreign currency.
While the definition of “CGT asset” is very broad, there are certain things that
are not considered CGT assets. Generally, a right that is not property must be
enforceable by legal or equitable proceedings. For example, general freedoms,
such as the right to work, are not CGT assets nor are the right of a landlord
to enter into a lease and the right to a refund. Although, the Commissioner of
Taxation has recently expressed the view that bitcoin is a CGT asset.
It is important to classify CGT assets into their relevant categories as special

rules apply to each. The relevant categories of assets in Div 108 are as follows:
• CGT assets;
• collectables: see [11.180]; and
• personal use assets: see [11.190].
Each CGT asset needs to be classified into one of the three categories as there
are special rules that apply to collectables and personal use assets. An item not
considered to fall within the subcategories collectables or personal use assets
is a general CGT asset.
Collectables
[11.180] “Collectable” is defined in s 108-10(2) of the ITAA 1997 as:

• artwork, jewellery, an antique or a coin or medallion; or
• a rare folio, manuscript or book; or
• a postage stamp or first day cover,
that is used or kept mainly for personal use or enjoyment.
It is important to remember that there are two limbs to this definition. First, the item
must be one of the kind listed. For example, the Commissioner considers that an
antique is an “object of artistic or historical significance that is of an age exceeding
100 years”: Determination TD 1999/40. Second, the asset must be used or kept
mainly for personal use or enjoyment. This means that artwork that is purchased
as an investment rather than to enjoy will not be considered a collectable.
Where an item is defined as a collectable, there are four specific rules that  apply:
1. Capital gains and capital losses made from collectables are disregarded
where the first element of the asset’s cost base is $500 or less.
2. When working out the cost base of a collectable, disregard the third
element (non-capital costs of ownership).
3. Capital losses from collectables can only be used to reduce capital
gains from collectables. This is known as a quarantining rule. Any
losses not used in the current tax year can be carried forward to be
offset against gains from collectables in future years. Note, however,
that the quarantining rule only applies one way –that is, you are able
to offset losses from the sale of ordinary CGT assets against gains from
collectables.
Example 11.12: Losses from collectables

Bridgette has a capital gain from collectables of $200 and capital losses
from collectables of $400. She has other capital gains of $500. She has a
net capital gain of $500 and a net capital loss of $200.
The $200 loss can be carried forward to be offset against any capital gain
from collectables she has in future tax years. However, it cannot be used
to reduce the $500 capital gain.

Example 11.13: Gains from collectables but losses from ordinary

CGT assets
Brodie has a capital gain from collectables of $200 and capital losses from
ordinary CGT assets of $600. She has other capital gains of $500. She has
a net capital gain of $100, as the losses can be used to reduce both the
$200 capital gain and the $500 capital gain.

4. If you own collectables that are part of a set, then that set of collectables
is treated as a single collectable.
Example 11.14: Sets
Lily buys a set of three books for $900. If the books are of equal value, she
has acquired the books for $300 each. However, the books are taken to
be a single collectable. Lily will not get the exemption in s 118-10 because
she acquired the set for more than $500.

Personal use assets
[11.190] “Personal use asset” is defined in s 108-20(2) of the ITAA 1997 as a
CGT asset (other than a collectable) that is used or kept mainly for personal use
or enjoyment.
Where an item is defined as a “personal use asset”, there are four specific rules
that apply:
1. Capital gains made from personal use assets are disregarded where
the first element of the asset’s cost base is $10,000 or less.
2. When working out the cost base of a personal use asset, disregard the
third element (non-capital costs of ownership).
3. A capital loss made from a personal use asset is disregarded.
4. If you own personal use assets that are part of a set, then that set of
personal use assets is treated as a single personal use asset.
Examples of personal use assets include:
• a television at home;
• mobile telephone for private use;
• a bicycle; or
• a yacht owned for personal use and enjoyment.
Section 108-20(3) provides that a personal use asset does not include a land or
a building. Further, if an asset is considered a collectable, it will not be treated
as a personal use asset.
Given that a gain made from a personal use asset acquired for $10,000 or less
is disregarded, it is difficult to think of many personal use assets that would
be subject to tax on any gains. Examples commonly cited are yachts and
racehorses.
Separate CGT assets
[11.200] Subdivision 108- D of the ITAA 1997 provides special rules for
separate CGT assets. In particular, it provides an exception to the common law
principle that what is attached to the land is part of the land, special rules about
buildings and adjacent land, and rules about when a capital improvement to a
CGT asset is treated as a separate asset.
The following specific rules are provided:

• If land is acquired on or after 20 September 1985, a building or structure
on the land is taken to be a separate asset if the depreciating asset or
research and development balancing adjustment provisions apply.
Example 11.15: Separate CGT assets
Mills Pty Ltd constructs a timber mill on land it already owns. The building
is subject to a balancing adjustment on disposal, loss or destruction. The
timber mill is considered a separate CGT asset.
Source: Adapted from s 108-55(1) of the ITAA 1997.

• If land was acquired before 20 September 1985, a building or structure

constructed on the land is taken to be a separate CGT asset if the
contract for construction was entered into on or after that day or, if
there is no contract, the construction started on or after that day.
Acme Co purchases a block of land with a building on it on 1 January
1980. On 1 January 2010, Acme Co enters a contract to have another
building erected on the land. The second building is taken to be a separate
CGT asset.

A depreciating asset that is part of a building is a separate CGT asset.
Acme Co carries on a business of producing widgets from its factory.
It installs new bathrooms for the employees. The plumbing fixtures
and fittings are depreciable assets. They are separate CGT assets to
the factory. The factory will be subject to the CGT provisions, but the
depreciable assets will be disregarded for CGT purposes.

Land acquired on or after 20 September 1985 that is adjacent to land already

owned is taken to be a separate CGT asset if the two parcels of land are
combined into the one title.
In 1980, David purchased a block of land. In 1990, David purchased
the adjacent block of land and amalgamated the two titles into one. The
second block is a separate CGT asset. A capital gain will be made on the
second block when the land is disposed of.

A capital improvement is a separate CGT asset to the land if:

• a balancing adjustment provision applies to the land;
• the cost base of the capital improvement to an asset acquired before
20 September 1985 is more than the improvement threshold for the
relevant income year and more than 5% of the capital proceeds from
the event; or
• the total cost base of related capital improvements to an asset acquired
before 20 September 1985 is more than the improvement threshold
for the relevant income year and more than 5% of the capital proceeds
from the event.
The improvement threshold is $50,000 indexed from 1985. For the year ended
30 June 2019, it is $150,386 (TD 2018/8): for the year ended 30 June 2020, it is
$153,093 and for the year ended 30 June 2021 it is $155,849.
Example 11.19: Improvements to CGT assets
In 1980, William purchased a boat. In 1991, he installed a new mast for
$30,000. He sold the boat in 2020–2021 for $150,000. Assuming the cost
base of the improvement in the year of sale is $41,000, the improvement
will not be considered a separate CGT asset as it is below the $155,849
threshold. Therefore, the capital gain or loss on the boat will be fully
exempt.

Time of acquisition of CGT asset

[11.210] The time of the acquisition of a CGT asset needs to be considered

for two specific reasons. First, an asset acquired before 20 September 1985 is
generally exempt from CGT. Second, indexation or the CGT general discount
only applies where an asset is held for at least 12 months. Acquisition rules are
dealt with in Div 109 of the ITAA 1997.
In general, a taxpayer acquires an asset when he or she becomes its owner:

s 109-5(1). Where a taxpayer acquires a CGT asset as a result of a CGT event,
specific rules contained in s 109-5(2) will apply before the general provision. For
example, s 109-5(2) provides that where there is event A1 and an entity disposes
of a CGT asset to a taxpayer, the taxpayer acquires the asset when the disposal
contract is entered into or, if none, when the entity stops being the assets owner.
Specific rules will also apply where a CGT asset comes into existence without
a CGT event. For example, a taxpayer may construct or create a CGT asset. In
this case, the time of acquisition is when the construction or work that resulted
in the creation started: s 109-10 Item 1. It should be noted that s 109-10 Item 1
only applies where the taxpayer or the taxpayer’s agent constructs the asset. If
the asset is created by an independent contractor, s 109-5(1) will apply as the
asset is constructed by the contractor with the taxpayer’s acquisition date being
at some later date when ownership is passed to the taxpayer.
Question 3: Does an exception or exemption apply?

[11.220] Where it is determined that there is a CGT event, it is necessary to
establish whether there is an exception or exemption that would reduce the
capital gain or loss or allow the taxpayer to disregard it. We have already briefly
discussed some of these exceptions and exemptions when we considered
Div 104 and the special rules relating to collectables and personal use assets.
The exemptions for capital gains and capital losses on these assets, as well as
many other exemptions, are contained in Div 118 of the ITAA 1997.
The most common exception that we saw in Div 104 applies to CGT events
where the CGT asset was acquired before 20 September 1985. Where this is
the case, the capital gain or loss is generally disregarded. In this section of the
chapter, we are going to consider some of the other common exemptions.
Exemptions can be divided into four broad categories:
• exempt gains and losses on certain assets: see [11.230];
• exempt or loss denying transactions: see [11.280];
• anti-overlap provisions: see [11.310]; and
• small business relief: see [11.320].
Disregarded capital gains and losses on certain assets

[11.230] Cars, motor cycles and valour decorations. A capital gain or capital
loss made from a car, motor cycle or similar vehicle, or a decoration awarded
for valour or brave conduct, is disregarded in terms of CGT: s 118-5 of the ITAA
1997. “Car” is defined in s 995-1 to mean a motor vehicle designed to carry a
load of less than one tonne and fewer than nine passengers. Any capital gain
made on the disposal of a decoration awarded for valour or brave conduct is
ignored provided the taxpayer did not pay any money or give property for it.
[11.240] Collectables and personal use assets. A capital gain or capital loss
made from a collectable is disregarded if the first element of its cost base is
$500 or less: s 118-10(1). Where a capital loss is made from a collectable with
a cost base of more than $500, it can only be used to reduce capital gains from
collectables: s 108-10(1). A capital gain from a personal use asset is disregarded
if the first element of its cost base is $10,000 or less (s 118-10(3)), while a capital
loss from a personal use asset is always disregarded: s 108-20(1).
[11.250] Assets used to produce exempt income. Subject to certain

exceptions, a capital gain or capital loss made from a CGT asset that is used
solely to produce exempt income or non-assessable non-exempt income is
disregarded: s 118-12(1).
[11.260] Shares in a pooled development fund (PDF). A capital gain or

capital loss made from a CGT event happening in relation to shares in a PDF is
disregarded: s 118-13.
[11.265] Investments made in start-up companies. From 1 July 2016, there

is a CGT exemption for investments made in a start-up company where they
are held for more than 12 months and less than 10 years: subdiv 360-A.
[11.270] Depreciating assets. A capital gain or capital loss made from a CGT
event that involves the disposal of a depreciating asset is disregarded provided
the event is also a balancing adjustment event where the asset was used wholly
for a taxable purpose and the decline in value was worked out under Div 40:
s 118-24(1). If the asset was not used wholly for a taxable purpose, any disposal
of it may give rise to both a capital gain or loss and a balancing adjustment.
[11.275] Trading stock. A capital gain or capital loss made from a CGT asset
is disregarded if the asset is trading stock: s 118-25 of the ITAA 1997. This is
because the treatment of trading stock is dealt with in Div 70 of the ITAA 1997.
Exempt or loss denying transactions

[11.280] Subdivision 118-A of the ITAA 1997 contains various exempt or loss
denying transactions, for example, payments made under certain government
grants and arrangements. However, the two most common exemptions in this
category relate to compensation payments (see [11.290]) and gambling or
competitions: see [11.300].
[11.290] Compensation. A capital gain or capital loss is disregarded if it is

made from a CGT event that relates directly to compensation or damages
received for any wrong or injury suffered in an occupation or for any wrong,
injury or illness that a taxpayer or a relative suffers personally: s 118-37(1)

(a) and (b). In Ruling TR 95/35, the Commissioner states that the exemption
includes out-of-court settlements and should be read as widely as possible to
cover the full range of employment and professional type claims and include
claims for discrimination, harassment and victimisation (or any directly related
claims) arising out of State and Commonwealth anti-discrimination legislation,
as well as wrongful dismissal. It should be noted that not all compensation
payments are exempt. For example, compensation for a breach of contract
may still be assessable: see Chapter 10.
[11.300] Gambling and competitions with prizes. A capital gain or capital

loss made from a CGT event relating to gambling, a game or a competition
with prizes is disregarded: s 118-37(1)(c). However, the exemption will not
apply to capital gains or losses where the taxpayer is considered to be in the
business of gambling under the ordinary income provisions.
Anti-overlap provisions
[11.310] The most important anti-overlap provision is s 118-20 of the ITAA
1997, which provides that any capital gain made from a CGT event is reduced
if, because of the event, a provision of the Act includes an amount in the
taxpayer’s assessable income or exempt income: s 118-20(1). In essence, if an

amount is considered ordinary or statutory income under another provision of
the ITAA 1997 or the Income Tax Assessment Act 1936 (Cth), that amount will
not be included in the capital gain.
Example 11.20: Reducing capital gains where the amount is otherwise

assessable
Ross purchases land in 1995 as part of a profit- making scheme. In
December 2020, he sells it for a profit of $100,000. This amount is
included in his assessable income as ordinary income under s 6-5 of the
ITAA 1997. Ross determines that the capital gain he made from the land
is $70,000. This amount will be reduced to zero as the ordinary income is
greater than the capital gain.

Further anti-overlap provisions include eligible termination payments (s 118-22),

film copyright (s 118-30) and research and development: s 118-35.
Small business relief
[11.320] As a measure to help small business, provided the basic conditions
for relief are satisfied, any capital gains arising from the disposal of the business
can be reduced by various concessions in Div 152 of the ITAA 1997. The four
available small business concessions are as follows:
• 15-year exemption: see [11.340];

• 50% reduction: see [11.350];
• retirement concession: see [11.360]; and
• rollover relief: see [11.370].
[11.330] Basic conditions for relief. For a taxpayer to be able to access the
CGT small business relief, certain conditions must be met. The three basic
conditions, contained in subdiv 152-A of the ITAA 1997, are as follows:
• The entity must be a small business entity or a partner in a partnership
that is a small business entity, or the net value of assets that the entity
and related entities own must not exceed $6 million. A taxpayer will
also be a small business entity if it is an individual, partner, partnership,
company or trust that is carrying on a business and has an aggregated
turnover of less than $2 million in the previous or current year (either
as an estimate or an actual turnover). From 1 July 2016, the aggregate
turnover test for a small business has increased to $10 million. However,
this new threshold does not apply to CGT concessions.
• The CGT asset must be an active asset. An active asset may be a
tangible asset or an intangible asset. The asset will be an active asset if
it is used or held ready for use in the course of carrying on the business
or, if an intangible asset, it is inherently connected with the business –
for example, goodwill.
• If the asset is a share or interest in a trust, there must be a CGT concession
stakeholder (a significant individual or spouse of a significant individual)
just before the CGT event, and the entity claiming the concession must
be a CGT concession stakeholder in the company or trust, or CGT
concession stakeholders in the company or trust must have a small
business participation percentage in the entity of at least 90%.
Legislation currently before Parliament proposes to amend s 152-5 of the ITAA

1997 to reflect the fact that an entity must be what is known as a “CGT small
business entity” to have access to the CGT small business concessions. Basic
conditions for relief will not be affected.
[11.340] 15-year exemption. The 15- year exemption provides a total
exemption for any capital gain on the disposal of a CGT asset owned for at
least 15 years where the taxpayer is 55 years of age or over and retiring or
is permanently incapacitated. If this exemption applies, it is not necessary to
consider any of the other exemptions as it will take priority.
Example 11.21: 15-year exemption
Jo is 60 years old. He has owned the local news agency that he purchased
in 1986 for $50,000. Jo decides to retire as he wants to travel the world.
In March 2021, Jo sells the business for $250,000, making a capital gain
of $200,000.
Assuming Jo meets the three basic conditions to qualify for the small
business exemptions, he will qualify for the 15-year exemption as he is
over 55 years and has owned the business for more than 15 years. As this
will exempt all capital gains made from the sale of the business, Jo will
not need to consider any other exemptions or concessions nor will he
need to consider indexation.

[11.350] 50% reduction. The 50% reduction allows a qualifying taxpayer to

reduce the amount of its capital gain by 50%. The 50% reduction may be used
after the capital gain has been reduced by the general 50% discount percentage,
giving a total discount of 75%. Further, the gain may also be reduced by the
small business retirement exemption or a small business rollover.
Example 11.22: 50% reduction
Zara, who operates a small manufacturing business, disposes of a CGT
asset. She owned the CGT asset for three years. It was used as an active
asset of the business.
Zara qualifies for the CGT general discount and for the small business
50% reduction. From the CGT event, she makes a capital gain of $20,000,
and she sells another asset, which gives her an additional capital loss of
$5,000 in the income year.
Zara calculates her net capital gain for the year as follows:
$20,000 − $5,000 = $15,000
$15,000 − (50% × $15,000) = $7,500
$7,500 − (50% × $7,500) = $3,750
Assuming the small business retirement exemption and the small

business rollover do not apply, Zara’s net capital gain for the year is
$3,750. If she chose the rollover or the retirement exemption, some or all
of the remaining capital gain would be disregarded.
Source: Adapted from ATO, Advanced Guide to Capital Gains Tax
Concessions for Small Business available at https://www.ato.gov.au/
uploadedFiles/Content/MEI/downloads/39821n33590614.pdf.

[11.360] Retirement concession. A taxpayer may choose to disregard a capital

gain arising from the sale of a CGT asset connected with a small business if
the proceeds are used in connection with the taxpayer’s retirement. There is a
lifetime limit of $500,000. However, the taxpayer may apply other concessions
to reduce the amount before applying the retirement concession.
If the taxpayer is under 55 years, the proceeds must be paid into a complying
superannuation fund, approved deposit fund or retirement savings account. If
a taxpayer is over 55 years, the concession is available automatically, and it is
not necessary to rollover the capital gain to a complying superannuation fund.
Example 11.23: Retirement concession
Jack acquired a farm in 2013. In December 2020, at the age of 60 years,
he retires and transfers the farm to his son for no consideration. The
market value of the farm was $1 million, so the market value substitution
rule applies. It deems that the capital proceeds equal the market value of
the farm.
The cost base of the farm was $600,000, so, assuming the other retirement
exemption conditions are satisfied, Jack made a capital gain of $400,000.
Jack reduces his capital gain twice: first, by the 50% CGT general
discount to $200,000 and then further, by the 50% active asset reduction,
to $100,000. Although he received no capital proceeds, and assuming
the other retirement exemption conditions are satisfied, Jack may choose
to apply the retirement exemption for the full amount of the remaining
$100,000 capital gain.

[11.370] Rollover relief. If a taxpayer chooses a rollover, all or part of the capital
gain is not included in the taxpayer’s assessable income until circumstances
change. A taxpayer may defer paying tax on a capital gain made from a CGT
event in relation to a small business if the taxpayer acquires a replacement
active asset and elects to obtain a rollover. The rollover relief may be applied
after the CGT general discount and active asset reduction.
Example 11.24: Partial rollover relief
Jude’s small business has an original capital gain of $100,000. After Jude
applies the CGT general discount and 50% active asset reduction, his
original capital gain is reduced to $25,000.
If we assume the first and second elements of the cost base of the business’
replacement asset total $20,000, this amount can be disregarded under
the rollover, leaving Jude with a final capital gain of $5,000.

Main residence exemption

[11.380] A capital gain or loss as a result of a CGT event happening to a
taxpayer’s main residence is generally ignored. Specifically, subdiv 118-100 of
Pt 3-1 of the ITAA 1997 provides that you can disregard a capital gain or capital
loss made from a CGT event that happens to a dwelling that is the taxpayer’s
main residence.
The full exemption on gains or losses on a main residence is known as the base
case. However, this full exemption, or base case, will only apply where the
residence was the main residence during the whole of the ownership period
and it was not used for the purposes of producing assessable income. There
are some specific rules that may extend the exemption and other specific rules
that may limit the exemption. Section 118-105 contains a map of subdiv 118-B
as reproduced in Figure 11.3.
A dwelling includes a unit of accommodation that is a building that consists

wholly or mainly of residential accommodation, a caravan, houseboat
or mobile home and the land immediately under the accommodation:
s 118-115(1). The exemption also applies to land that is adjacent to the dwelling,
up to a maximum of two hectares, provided it is used for private or domestic
purposes: s 118-120.
The basic case applies where the taxpayer lives in the property for the whole
of the ownership period. Where this is the case and the taxpayer sells the
property, the capital gain or loss will be disregarded. There are instances
where the taxpayer does not live in the property for the whole of the ownership
period but can still disregard the capital gain or loss on disposal. These rules
extend the exemption. Where a taxpayer is able to extend the exemption, it is
not necessary to consider the partial exemption rules.
[11.400] Rules that may extend the exemption. The following rules may
extend the main residence exemption:
• The main residence exemption extends to cover the period from the
time of acquisition to the time when it is first practicable for the taxpayer
to move into the dwelling: s 118-135 of the ITAA 1997.
• A taxpayer who acquires a new dwelling that is intended to be a
main residence, but still holds an existing main residence, may treat
both dwellings as a main residence for the six-month period before
the disposal of the old dwelling or the period between the acquisition
of the new dwelling and disposal of the old dwelling, whichever
is the shorter: s 118-140(1). The extension only applies, however, if
the original main residence was the taxpayer’s main residence for a
continuous period of at least three months in the 12 months before it is
disposed of and it was not used to produce income during any part of
that 12-month period: s 118-140(2).
• A taxpayer may be entitled to treat a dwelling as his or her main residence
during a period of absence provided no other dwelling is treated as a
main residence during the period of absence. If a dwelling that was
the taxpayer’s main residence ceases to be the main residence, and
the taxpayer uses the dwelling for the purposes of producing income,
the taxpayer may choose to continue to treat the dwelling as his or her
main residence for a maximum period of six years: s 118-145(2). If the
dwelling is not used for the purposes of producing income, a taxpayer
may treat the dwelling as a main residence indefinitely: s 118-145(3).
• Where a taxpayer builds, repairs or renovates a dwelling, provided no
other dwelling is treated as a main residence, a taxpayer may choose
to treat the dwelling as his or her main residence from the time of
acquisition, provided it becomes the taxpayer’s main residence as
soon as practicable after the work has finished: s 118- 150(2). This
extension can only operate for the shorter of four years before the
dwelling becomes the taxpayer’s main residence or the period between
the date of acquisition of the land the dwelling becoming the main
residence: s 118-150(4). TD 2017/13 deals with the situation where you
build a dwelling on land acquired pre-CGT and wish to claim the main
residence exemption before it becomes your main residence. In that
case, a choice needs to be made under s 118-150(2).
• Where a dwelling that is a taxpayer’s main residence is accidentally
destroyed and a CGT event happens in relation to the land, provided
there is no other main residence, the taxpayer may choose to apply
the exemption to the period after destruction until the land is sold:
s 118-160.
[11.410] Rules that may limit the exemption. The following rules may limit
the main residence exemption:
• The main residence exemption does not apply to a CGT event that
happens in relation to land, or a garage, storeroom or other structure,
to which the exemption can extend if the event does not also happen
in relation to the dwelling: s 118-165 of the ITAA 1997.
• A taxpayer and his or her spouse will generally have the same main
residence. Where the taxpayer and spouse have different main
residences, the parties must choose one of the dwellings as the
main residence of both or nominate the different dwellings as the main
residences: s 118-170(1). If the parties nominate different residences,
the entitlement to the main residence exemption is split between the
two dwellings in accordance with s 118- 170(3) and (4). Where the
taxpayer’s interest in his or her main residence is not more than half,
the dwelling is taken to be the main residence during the period.
Otherwise the dwelling is taken to be the taxpayer’s main residence for
half of the period. The same principle applies to the main residence of
the taxpayer’s spouse.
• A taxpayer and his or her dependent child or children will generally have
the same main residence. If another dwelling is the main residence of
a dependent child under 18 years, the taxpayer must choose one main
residence for both themselves and the dependant: s 118-175.
• The main residence exemption will be limited where the dwelling
is acquired by a taxpayer under the marriage breakdown rollover
provisions. In these circumstances, the taxpayer’s exemption will be
apportioned according to how the dwelling was used both before and
after the rollover: s 118-178.
[11.420] Partial exemption rules. In addition to the rules that extend or limit
the main residence exemption, there are two situations where a taxpayer may
be entitled to a partial exemption only.
A taxpayer will only be entitled to a partial exemption for a CGT event that
happens in relation to a main residence if the dwelling was the taxpayer’s
main residence for part only of the ownership period. Where only a partial
exemption is allowed, the capital gain is apportioned according to the days
the dwelling was the taxpayer’s main residence: s 118-185 of the ITAA 1997.
Where a taxpayer is only entitled to a partial exemption because the property is
used for income-producing purposes and that income-producing purpose first
occurred after 20 August 1996, the partial exemption is calculated by reference
to s 118-192. This section deems the taxpayer to have acquired the property at
market value at the date it first produces income.
Example 11.25: Partial exemption
Rebecca bought a house in March 2010 for $200,000 and moved in
immediately. In March 2013, she purchased another property, which she
immediately began to treat as her main residence. She moved out of
the first property and began to rent it out. At that time, it was valued at
$350,000. She sold it in March 2021 for $360,000.
The capital gain or capital loss will be calculated using s 118-192 to value
the property. Rebecca will have made a capital gain of $10,000.

Example 11.26: Partial exemption using s 118-145 to extend the

exemption
Connor bought a house on 1 July 2010 for $200,000 and moved in

immediately. On 1 July 2013, he moved out and began to rent it out. At
that time, it was valued at $350,000. He sold it on 1 July 2020 for $360,000.
Connor chooses to continue to treat the dwelling as his main residence
under s 118-145 (about absences) for the first six of the seven years
during which he rented the house out.
The capital gain or capital loss (ignoring leap years as per the example
provided in s 118-185) will be calculated using the following formula:
Non-main residence days

Capital gain or capital loss amount ×
Days in ownership period
Connor will be taken to have made a capital gain of:
366
$10,000 × = $1,431
2,557

A taxpayer will only be entitled to a partial exemption for a CGT event that
happens in relation to a main residence if the dwelling was used for the
purpose of producing assessable income during all or part of the period of
ownership: s 118-190. The test to determine whether the property was used
to earn assessable income is based on whether the interest is or would be
deductible if incurred: s 118-190.
Example 11.27: Partial exemption
Sandra’s house purchase contract was settled on 1 January 2017, and the
house was her main residence for the entire four years she owned it, until
she sold it under a contract entered into on 1 November 2020 and settled
on 31 December 2020. From the time Sandra bought it until 31 December
2018 (75% of the ownership period), she used 25% of her house to run
her photographic business. The rooms were modified for that purpose so
were no longer suitable for private and domestic use.
Sandra made a capital gain of $10,000 when she sold the house and used
the following formula to calculate the taxable portion:
Capital gain × % of floor area not used as main residence × % of
period of ownership that that part of the home was not used as main
residence = taxable portion
$10,000 × 25% × 75% = $1,875

Death
[11.425] Division 128 of the ITAA 1997 sets out what happens when a taxpayer
dies and a CGT asset devolves to a legal personal representative or a beneficiary
of the estate. The capital gain or capital loss made by the deceased from the
CGT event is disregarded: s 128-10. There are, however, consequences for
the beneficiary. The beneficiary will have acquired either a pre- CGT asset
or a post-CGT asset. Where the beneficiary acquires a pre-CGT asset, he or
she is deemed to have acquired the asset for the market value on the date of
death: s 128-15(4). Where the beneficiary acquired a post-CGT asset, he or she
is deemed to have acquired the asset for the deceased person’s cost base as at
date of death: s 128-15(4). For the purposes of applying the discount, the asset
is taken to be acquired when the deceased person acquired them if they are
post-CGT assets: s 115-30. If, however, the CGT asset was the deceased’s main
residence, the beneficiary is deemed to have acquired the asset for market
value at the date of death: s 128-15(4).
Question 4: Can there be a rollover?

[11.430] In certain specific situations, rollovers allow a taxpayer to defer or
disregard a capital gain or loss from a CGT event. A rollover is either automatic
or requires the taxpayer to make an election. Rollovers apply only to specific
situations.
Rollovers are divided into two categories: replacement asset rollovers and

same asset rollovers.
With a replacement asset rollover, the taxpayer is allowed the deferral of a

capital gain or loss from one CGT event until a later CGT event happens where
one CGT asset is replaced with another. Replacement asset rollovers are dealt
with in subdiv 112-C of the ITAA 1997. A replacement asset rollover involves
one CGT asset ending and the taxpayer acquiring another.
The consequence of a replacement asset rollover is that the cost base of

the replacement asset is modified. If the taxpayer acquired the original CGT
asset before 20 September 1985, the replacement asset is taken to have been
acquired before that day. If a taxpayer acquired the original asset on or after
20 September 1985, the cost base of the replacement asset is modified. The
first element of the replacement asset’s cost base (or reduced cost base) is
replaced by the original asset’s cost base (or reduced cost base) at the time the
replacement asset was acquired.
All replacement asset rollovers are listed in a table in s 112-115. However,

some common examples of replacement asset rollovers are as follows:
• disposal of assets by an individual, trustee or partners to a wholly

owned company;
• where an asset is compulsorily acquired, lost or destroyed;
• strata title conversion;
• Crown leases;
• scrip for scrip; and
• demergers.
With a same asset rollover, the taxpayer is allowed to disregard a capital

gain or loss from a CGT event where the same CGT asset is involved. Same
asset rollovers are dealt with in subdiv 112-D. A same asset rollover allows a
taxpayer to disregard a capital gain or loss from the disposal or creation of a
CGT asset to another taxpayer. The gain or loss is effectively transferred to
the other taxpayer and deferred until there is a CGT event in the hands of that
taxpayer.
All same asset rollovers are listed in a table in s 112-150. However, some
common examples of sale asset rollovers are as follows:
• transfer of a CGT asset from one spouse to another because of a
marriage breakdown;
• transfer of a CGT asset to a wholly owned company; and
• transfer of an asset between related companies.
From 1 July 2016, optional rollover relief is available where a small business
undertakes a genuine restructure, but the ultimate legal ownership of the asset
remains unchanged. This rollover extends beyond CGT assets to apply to gains
and losses on trading stock, revenue assets and depreciating assets as well.
Step 2 –Work out amount of capital gain

or loss
[11.440] Once we have answered the four questions in Step 1 and determined
that the taxpayer has made a capital gain or loss, it is necessary to work out
the amount of that capital gain or loss. This requires us to consider two more
questions:
• What is a capital gain or loss for the particular CGT event? See [11.450].
• What factors come into calculating a capital gain or loss for the particular
CGT event? See [11.460].
Columns 3 and 4 of the table contained in s 104-5 of the ITAA 1997 provide
a useful summary of when a capital gain or a capital loss arises for each
CGT event.
What is a capital gain or loss?

[11.450] For most CGT events the taxpayer makes a capital gain where the
capital amount received (or that the taxpayer is entitled to receive) from a CGT
event exceeds the total costs associated with that event and makes a capital
loss where total costs associated with a CGT event exceed the capital amount
received (or that the taxpayer is entitled to receive).
CGT event A1, the disposal of a CGT asset, is the most common event. Section
104-10(4) of the ITAA 1997 specifically provides:
You make a capital gain if the capital proceeds from the disposal are more than the
asset’s cost base. You make a capital loss if those capital proceeds are less than the
asset’s reduced cost base.
If you re-examine the other CGT events, you will find a similar section for
each. In each provision is the use of various terms that have specific legislative
Capital proceeds
[11.470] For most CGT events, the capital amounts that the taxpayer receives
or is entitled to receive are the capital proceeds. Section 116-20 of the ITAA
1997 defines the capital proceeds from an event as the total amount of money
the taxpayer has received or is entitled to receive in relation to a CGT event
happening and the market value of any other property the taxpayer has
received or is entitled to receive in respect of the event happening. The Full
Federal Court has held that an entitlement to receive money is not affected
even if the money is received from a third party: Quality Publications Australia
Pty Ltd v FC of T [2012] FCA 256. For the purposes of determining the proceeds
of a CGT event, any GST on the supply is disregarded: s 116-20(5).
The definition in s 116-20 is known as the general rule about capital proceeds.
In addition to this general rule, there are six modifications that may be relevant:
1. The first modification rule is the market value substitution rule, which
is relevant if a taxpayer receives no capital proceeds from a CGT event
or some or all of the capital proceeds cannot be valued, or the taxpayer
did not deal at arm’s length with another entity in connection with
the event: s 116-30. In other words, there is a connection between
the parties; for example, they are related or good friends. The capital
proceeds are deemed to be the market value determined at the time
of the CGT event. “Market value” is determined by reference to its
ordinary meaning and is generally understood to mean the price that
a willing purchaser at that date would have had to pay: Spencer v
Commonwealth (1907) 5 CLR 418 at 441 per Isaacs J.
Example 11.28: Market value substitution rule

Bill gives a rental property to his daughter and does not receive any
consideration. Bill is taken to have received the market value of the
property, which is a CGT asset.

2. The second modification rule is an apportionment rule, which is relevant

if a payment received by a taxpayer in connection with a transaction
relates in part only to a CGT event: s 116-40. The capital proceeds from
each event are so much of the payment as is reasonably attributable to
that event.
Example 11.29: Apportionment rule
Betty sells a block of land and a boat for a total of $100,000. This transaction
involves two CGT events.
The $100,000 must be divided among the two events. The capital proceeds
from the disposal of the land are so much of the $100,000 as is reasonably
attributable to it. The rest relates to the boat.

3. The third modification rule is a non-receipt rule, which is relevant if the

taxpayer does not receive or is not likely to receive, some or all of the
capital proceeds from a CGT event: s 116-45. The capital proceeds are
reduced by the amount not received.
Example 11.30: Non-receipt rule
Lyn sells a painting to Mat for $5,000 (the capital proceeds). Lyn agrees to
accept monthly instalments of $100.
Lyn receives $2,000, but then Mat stops making payments. It becomes
clear that Lyn is not likely to receive the remaining $3,000. The capital
proceeds are reduced to $2,000.

4. The fourth modification rule is a repaid rule, which is relevant if the

taxpayer is required to repay some or all of the capital proceeds from a
CGT event: s 116-50. The capital proceeds are reduced by the amount
repaid.
Example 11.31: Repaid rule
Simon sells a block of land for $50,000 (the capital proceeds). Siobhan
(the purchaser) later finds out that Simon misrepresented a term in the
contract. Siobhan sues Simon, and the court orders him to pay $10,000
in damages to Siobhan.
The capital proceeds are reduced by $10,000, to $40,000.

5. The fifth modification rule is an assumption of liability rule, which is

relevant if another entity assumes a liability in connection with a CGT
event: s 116-55. The capital proceeds are increased by the amount of
the liability.
Example 11.32: Assumption of liability rule
Olivia sells land for $150,000. She receives $50,000 (the capital proceeds),
and Angus (the buyer) becomes responsible for a $100,000 liability under
an outstanding mortgage.
The capital proceeds are increased by $100,000, to $150,000.

6. The sixth modification rule is a misappropriation rule, which is relevant

if an employee or agent misappropriates all or part of the proceeds.
The capital proceeds will be reduced by the amount misappropriated:
s 116-60.
Cost base
[11.480] For most CGT assets, the cost base is the total of the costs associated
with the CGT asset. The cost base is used for the purpose of working out a
capital gain. Where the taxpayer is registered for GST, the cost base will be
net of any GST credits available. If, however, the taxpayer is not registered for
GST, any GST paid will be included in the cost base of the asset.
Subdivision 110-A of the ITAA 1997 sets out the rules for determining the cost
base of a CGT asset. The cost base of a CGT asset has five elements:
• Element 1: The money paid by the taxpayer, or required to be paid,
in respect of acquiring the asset and the market value of any other
property given or required to be given in respect of acquiring the
asset: s 110-25(2).
• Element 2: The incidental costs incurred by the taxpayer. There are
a number of incidental costs that a taxpayer may have incurred.
The following nine categories of costs, the first eight of which must
occur in relation to the acquisition or event, are listed in s 110-35 as
incidental costs:
– remuneration for the services of a surveyor, valuer, auctioneer,

accountant, broker, agent, consultant or legal adviser;
– cost of transfer;
– stamp  duty;
– cost of advertising or marketing to find a buyer or seller;

– costs for any valuation or apportionment;
– search fees relating to a CGT asset;
– cost of a conveyancing kit;
– borrowing expenses;  and
– expenditure incurred by the head company of a consolidated group
to an entity that is not a member of a group and the cost reasonably
relates to a CGT asset held by the head company and is incurred
because of a transaction between members of the group.
• Element 3: The costs of owning the CGT asset (only if the asset is
acquired after 20 August 1991) including the items listed in s 110-25(4):
– interest on money borrowed to acquire the asset;
– costs of maintaining, repairing or insuring it;
– rates or land tax, if the asset is land;
– interest on money borrowed to refinance the money borrowed to
acquire the asset; and
– interest on money borrowed to finance the capital expenditure

incurred to increase the asset’s value.
• Element 4: Capital costs incurred to increase or preserve the
assets value or expenditure incurred to install or move the asset:
s 110-25(5).
• Element 5: Capital costs incurred to establish, preserve or defend the
title to the asset or a right over the asset: s 110-25(6).

Once the costs associated with a CGT event have been determined according
to the five elements, it is necessary to determine those costs that do not form
part of the cost base because they are specifically excluded. The following
amounts are excluded from the cost base:
• expenditure that does not form part of the second or third element of
the cost base to the extent that you have deducted or can deduct it:
ss 110-40(2)–110-45(1B);
• expenditure that does not form part of any element of the cost base to
the extent that it has been recouped unless the amount is included in
assessable income: ss 110-40(3) and 110-45(3);
• expenditure that is prevented from being a deduction under s 26-54
(certain offences), s 110-38(1) or s 26-5 (penalties): s 110-38(4);
• expenditure to the extent that it is a bribe to a public official:
s 110-38(2); and
• expenditure to the extent that it is in respect of providing entertainment:
s 110-38(3).
[11.490] In addition to the basic rules about cost base, there are cost base
modification rules that need to be considered:
• The first modification rule is the market value substitution rule. The
first element of the cost base will be replaced with the market value if
the taxpayer did not incur any expenditure to acquire the asset, some
or all of the expenditure cannot be valued or the taxpayer did not deal
at arm’s length in relation to the acquisition: s 112-20(1). Where it is
the case that the parties did not deal at arm’s length with each other
and the acquisition resulted from another entity doing something
that did not constitute a CGT event happening, the market value will
only be substituted where the taxpayer paid more than market value:
s 112-20(2). However, there are circumstances where the market value
substitution rule will not apply –for example, where CGT event D1
happens and the taxpayer did not pay anything for it.
• The second modification rule deals with split, changed or merged
assets. If a CGT asset is split into two or more assets or a CGT asset
changes into an asset of a different nature, the splitting or change is
not a new CGT asset. However, the cost base needs to be worked
out for the new assets. The cost base of each asset is a reasonable
apportionment of the cost base of the original asset. If two or more
assets are merged, the cost base of the new asset is the sum of the
elements of each original asset: s 112-25.
• The third modification rule deals with the apportionment of expenditure
where the expenditure relates in part only to the CGT asset. The
expenditure allocated to the CGT asset is that which is reasonably
attributable to each element: s 112-30.

• The fourth modification rule is the assumption of liability rule. If a
taxpayer acquires a CGT asset from another taxpayer and that asset is
subject to a liability, the first element of the asset’s cost base includes
the amount of the liability: s 112-35.
• The fifth modification rule relates to put options and provides that
the first element of the cost base of the right to dispose of a share
in a company acquired as a result of CGT event D2 happening to the
company is the amount included in the taxpayer’s assessable income
as ordinary income as a result of the acquisition of the right, plus any
amount paid to acquire the right: s 112-37.
Modification provisions are contained in the capital proceeds rules with each
of the cost base modification rules discussed above having a mirror equivalent
in relation to capital proceeds.
[11.495] Indexation. A CGT asset acquired at or before 11.45 am on 21

September 1999 may have an indexed cost base. Indexation takes into
account inflation up to September 1999. All of the elements, except for the
third element, may be indexed. However, a taxpayer can only index the cost
base of a CGT asset acquired at least 12 months before the CGT event. Where
a taxpayer acquires an asset before 21 September, they will have a choice to
use either indexation or the CGT general discount discussed below in Step 3
and may use whichever gives them the best result. Subdivision 960-M of the
ITAA 1997 shows how to apply indexation and calculate the indexation factor.
The calculation involves multiplying the separate elements of the cost base by
the indexation factor. The indexation factor is determined by dividing the index
number for the quarter in which the CGT event occurred (or September 1999 if
the CGT event occurred after that date) by the index number of the quarter in
which the expenditure was incurred. Note that the indexation factor is always
rounded to three decimal places. See [11.580] for a table of indexation figures.
Example 11.33: Indexation and discounting

Peter purchased a building as an investment on 1 January 1987 for
$250,000. This amount forms the first element of his cost base. He sold
the building on 1 February 2021 for $500,000.
The cost base can only be indexed up to the September 1999 quarter.
The indexation number for that quarter is 68.7. The index number for
the quarter in which he purchased the building (the March quarter
1987) is 45.3.
Applying s 960-275, work out the indexation factor as follows:
68.7
= 1.517
45.3

The indexed first element of Peter’s cost base is:
1.517 × $250,000 = $379,250
Assuming Peter has no other costs associated with the property, his
capital gain under the indexation method would be:
$500,000 − $379,250 = $120,750
Peter’s capital gain using the CGT general discount would be:
$500,000 − $250,000 = $250,000
less 50% discount = $125,000
In this case, Peter would be advised to use the indexation method to

determine his net capital gain from the sale of the property as it results in
the least capital gain.

Reduced cost base
[11.500] For most CGT events, the reduced cost base is the total of the
costs associated with the CGT event. The reduced cost base is used for the
purpose of working out a capital loss. The reduced cost base also consists of
five elements. All the elements are the same as the cost base (see [11.480])
except for the third element. The third element of the reduced cost base is
an amount included in the taxpayer’s assessable income because of certain
balancing adjustments. Further, the elements of the reduced cost base cannot
be indexed.
The reduced cost base does not include any of the costs the taxpayer has
previously claimed or can claim in the current year as a deduction. For example,
the cost base must be reduced by any capital works deductions claimed for
capital expenditure.
Example 11.34: Capital works deduction –effect on reduced cost base

Kate acquires a new income- producing asset on 1 January 2005 for
$250,000. She sold it for $200,000 in May of the current tax year. While
she owned it, she claimed capital works deductions of $30,000 for
expenditure she incurred. Her capital loss is worked out as follows:
Cost base $250,000

Less capital works deductions $30,000
Reduced cost base $220,000

Less capital proceeds $200,000
Capital loss $20,000

Step 3 –Work out your net capital gain or loss

for the income year
[11.510] Step 2 required calculations to be performed to determine the
capital gain or loss from a CGT event. However, in an income year, a taxpayer
may have more than one CGT event. Step 3 reconciles the gains or losses
made from the individual events. It involves a determination of a taxpayer’s
net capital gain or loss, that is, we need to calculate the amount of gain to be
included in assessable income or the amount of loss to be carried forward to
future years. This requires five calculations.
losses from personal use assets are disregarded and losses from collectables
are quarantined to be used only against gains from collectables.
Generally, a taxpayer will apply any losses against gains that cannot utilise the
50% general discount or indexation. It will then normally be a case of applying
losses against indexed capital gains and, finally, against gains that attract the
50% CGT general discount.
Calculation 2
[11.530] If a taxpayer still has capital gains after deducting the current year
capital losses, he or she can then reduce those capital gains in the order he or
she chooses by any losses of previous years. The losses, however, are applied
in the order in which they were incurred.
Example 11.35: Taking into account losses

Lily has capital gains for the current income year of $1,000 and capital
losses for the current income year of $600. Her capital losses are
subtracted from her capital gains, to leave a balance of $400.
If she also has net capital losses of $300 from the previous year and $200
from the year before that, she can reduce the current balance of $400
to nil. The net capital losses are applied in the order in which she made
them. Therefore, the $200 will be used and $200 of the $300 will be used,
leaving her with $100 to be carried forward.

Calculation 3
[11.540] Calculation 3 allows some taxpayers to reduce any discount capital
gain by the discount percentage. Discount capital gains are dealt with in Div
115 of the ITAA 1997.
In certain circumstances, the cost base of a CGT asset may be indexed to take
into account inflation: see [11.490] and Example 11.33. As of 21 September
1999, indexation was abolished and replaced with a CGT general discount.
Individuals and trusts receive a 50% general discount on the capital gain from
certain CGT events, while complying superannuation funds receive a one-third
general discount. A taxpayer may apply the general discount where a CGT
event occurs on or after 11.45 am on 21 September 1999 and he or she has
held the asset for more than 12 months. A further 10% discount specifically
available for investors disposing of property used for affordable housing was
introduced with effect from 1 January 2020: see s 115-125 of the ITAA 1997.
Where a CGT asset is acquired before 21 September 1999 and the CGT event
occurs after that date, the taxpayer may elect to use indexation or apply the
general discount. Taxpayers cannot use both.
There are also certain CGT events that do not attract the CGT general discount,
generally because the 12-month rule is not satisfied. For example, the CGT
general discount does not apply to any of the D category events. In certain
circumstances, a discount capital gain may be recalculated without reference
to indexation.
Example 11.36: Recalculation without reference to indexation

Maxine acquired land from her ex-husband under a court order made
under the Family Law Act 1975 (Cth) in 1995. Her ex-husband’s indexed
cost base for the land was $56,000, and Maxine was treated as having
paid that amount for it. Her ex-husband’s cost base for the land then was
$40,000. Maxine sold the land in the current tax year for capital proceeds
of $150,000.
Maxine’s discount capital gain on the land is calculated as:
Capital proceeds − Cost base for the land without indexation

$150,000 − $40,000 = $110,000

Calculation 4
[11.550] Once any losses are taken into account, as well as any CGT general
discount available, a taxpayer who is entitled to any of the small business
concessions may apply them at this stage: see [11.320].
Calculation 5
[11.560] Calculation 5 requires a taxpayer to add up any remaining capital
gains that are not discount capital gains and any remaining discount capital
gains to determine the net capital gain to be included in assessable income.
A net capital gain is included in a taxpayer’s assessable income as statutory
income.
Capital losses
[11.570] A net capital loss is determined via similar steps to determine a net
capital gain. However, a taxpayer cannot deduct from his or her assessable
income a net capital loss for any income: s 102- 10(2) of the ITAA 1997.
Therefore, there is only a three-step process to follow to determine a taxpayer’s
net capital loss. To the extent that a net capital loss cannot be applied in an
income year, it can be carried forward to a later income year: s 102-15(1).
Indexation figures
Current index reference base
[11.580]
Quarter ending
Year 31 March 30 June 30 September 31 December
1985 37.9 38.8 39.7 40.5
1986 41.4 42.1 43.2 44.4
1987 45.3 46.0 46.8 47.6
1988 48.4 49.3 50.2 51.2
1989 51.7 53.0 54.2 55.2
1990 56.2 57.1 57.5 59.0
1991 58.9 59.0 59.3 59.9
1992 59.9 59.7 59.8 60.1

1993 60.6 60.8 61.1 61.2
1994 61.5 61.9 62.3 62.8
1995 63.8 64.7 65.5 66.0
1996 66.2 66.7 66.9 67.0
1997 67.1 66.9 66.6 66.8
1998 67.0 67.4 67.5 67.8
1999 67.8 68.1 68.7 N/A
Questions
[11.590]
11.1 Anita is a client of yours. To fund her career as an artist, Anita sold
some of her art collection by other artists. It consisted of:
(a) An antique ceramic bowl purchased in February 1985 for $4,000.
She sold the bowl on 1 December of the current tax year for $12,000.
(b) A sculpture purchased in December 1993 for $5,500. She sold the
sculpture on 1 January of the current tax year for $6,000.
(c) A bronze figure purchased in October 1987 for $14,000. She sold
the bronze figure on 20 March of the current tax year for $13,000.
(d) A painting purchased in March 1987 for $470. She sold the painting
on 1 July of the current tax year for $5,000.
Consider the CGT consequences of the above transactions.
11.2 Other than the examples provided in this chapter, provide an example
for each of CGT events A1, B1, C1, C2, D1 and D2.
11.3 Are the following CGT assets collectables or personal use assets:
(a) An engagement ring that cost $5,000?
(b) A second-hand car purchased for $2,000?
(c) Shares in BHP?
(d) Your home?
(e) A painting hung in the foyer of your accounting firm?
(f) A holiday house at Byron Bay?
11.4 List five things that you own that are considered personal use assets.
Can you think of any collectables that you may own?
11.5 What CGT events apply to the following transactions:
(a) You sell shares in BHP for $5,000.
(b) You receive $100,000 in return for signing a three-year contract to
play AFL with the Brisbane Lions.
(c) You sell your holiday home at Byron Bay for $750,000.
(d) You sell your hairdressing salon for $200,000 and receive an
additional $20,000 for agreeing not to open another salon within a
10-km radius for the next three years.
(e) You pay Shelby $50,000 for the option to purchase her hairdressing
salon in three years time.
(f) In three years time, you exercise the option to purchase Shelby’s
salon for $300,000.
(g) You sell a diamond ring for $20,000. You paid $12,000 for the ring
in 1984.
11.6 Dave Solomon is 59 years of age and is planning for his retirement.
Following a visit to his financial adviser in March of the current tax
year, Dave wants to contribute funds to his personal superannuation
fund before 30 June of the current tax year. He has decided to sell
the majority of his assets to raise the $1,000,000. He then intends to
rent a city apartment and withdraw tax-free amounts from his personal
superannuation account once he turns 60 years in August of the next
year. Dave has provided you with the following details of the assets he
has sold:
(a) A two-storey residence at St Lucia in which he purchased and has

lived in since 1984. He paid $70,000 to purchase the property and
received $850,000 on 27 June of the current tax year after the real
estate agent deducted commissions of $15,000. The residence
was originally sold at auction, and the buyer placed an $85,000
deposit on the property. Unfortunately, two weeks later, the buyer
indicated that he did not have sufficient funds to proceed with the
purchase, thereby forfeiting his deposit to Dave on 1 May of the
current tax year. The real estate agents then negotiated the sale of
the residence to another interested party.
(b) A painting by Pro Hart that he purchased on 20 September 1985
for $15,000. The painting was sold at auction on 31 May of the
current tax year for $125,000.
(c) A luxury motor cruiser that he has moored at the Manly Yacht
club. He purchased the boat in late 2004 for $110,000. He sold it on
1 June of the current tax year to a local boat broker for $60,000.
(d) On 5 June of the current tax year, he sold for $80,000 a parcel
of shares in a newly listed mining company. He purchased
these shares on 10 January of the current tax year for $75,000.
He borrowed $70,000 to fund the purchase of these shares and
incurred $5,000 in interest on the loan. He also paid $750 in
brokerage on the sale of the shares and $250 in stamp duty on
the purchase of these shares. Dave has contacted the ATO, and
they have advised him that the interest on the loan will not be an
allowable deduction because the shares are not generating any
assessable income.
Dave has also indicated that his taxation return for the year ended
30 June of the previous year shows a net capital loss of $10,000
from the sale of shares. These shares were the only assets he sold
in that year.
(a) Based on the information above, determine Dave Solomon’s net
capital gain or net capital loss for the year ended 30 June of the
current tax year.
(b) If Dave has a net capital gain, what does he do with this amount?
(c) If Dave has a net capital loss, what does he do with this amount?
11.7 Your client is an investor and antique collector. You have ascertained
that she is not carrying on a business. Your client provides the following
information of sales of various assets during the current tax year.
Based on this information, determine your client’s net capital gain or
net capital loss for the year ended 30 June of the current tax year.
(a) Block of vacant land. On 3 June of the current tax year, your
client signed a contract to sell a block of vacant land for $320,000.
She acquired this land in January 2001 for $100,000 and incurred
$20,000 in local council, water and sewerage rates and land taxes
during her period of ownership of the land. The contract of sale
stipulates that a deposit of $20,000 is payable to her when the
contract of sale is signed and the balance is payable on 3 January
of the next tax year, when the change of ownership will be
registered.
Antique bed. On 12 November of the current tax year, your client
(b)
had an antique four-poster Louis XIV bed stolen from her house.
She recently had the bed valued for insurance purposes and the
market value at 31 October of the current tax year was $25,000.
She purchased the bed for $3,500 on 21 July 1986. Although the
furniture was in very good condition, the bed needed alterations
to allow for the installation of an innerspring mattress. These
alterations significantly increased the value of the bed, and cost
$1,500. She paid for the alterations on 29 October 1986. On 13
November of the current tax year, she lodged a claim with her
insurance company seeking to recover her loss. On 16 January of
the current tax year, her insurance company advised her that the
antique bed had not been a specified item on her insurance policy.
Therefore, the maximum amount she would be paid under her
household contents policy was $11,000. This amount was paid to
her on 21 January of the current tax year.
Painting. Your client acquired a painting by a well-known Australian
(c)
artist on 2 May 1985 for $2,000. The painting had significantly
risen in value due to the death of the artist. She sold the painting
for $125,000 at an art auction on 3 April of the current tax year.

Shares. Your client has a substantial share portfolio that she has
(d)
acquired over many years. She sold the following shares in the
relevant year of income:
(i) 1,000 Common Bank Ltd shares acquired in 2001 for $15 per
share and sold on 4 July of the current tax year for $47 per
share. She incurred $550 in brokerage fees on the sale and
$750 in stamp duty costs on purchase.
(ii) 2,500 shares in PHB Iron Ore Ltd. These shares were also
acquired in 2001 for $12 per share and sold on 14 February of
the current tax year for $25 per share. She incurred $1,000 in
brokerage fees on the sale and $1,500 in stamp duty costs on
purchase.
(iii) 1,200 shares in Young Kids Learning Ltd. These shares were
acquired in 2005 for $5 per share and sold on 14 February of
the current tax year for $0.50 per share. She incurred $100 in
brokerage fees on the sale and $500 in stamp duty costs on
purchase.
(iv) 10,000 shares in Share Build Ltd. These shares were acquired
on 5 July of the current tax year for $1 per share and sold on
22 January of the current tax year for $2.50 per share. She
incurred $900 in brokerage fees on the sale and $1,100 in
stamp duty costs on purchase.
(e) Violin. Your client also has an interest in collecting musical
instruments. She plays the violin very well and has several violins
in her collection, all of which she plays on a regular basis. On 1 May
of the current tax year, she sold one of these violins for $12,000
to neighbour who is in the Queensland Symphony Orchestra. The
violin cost her $5,500 when she acquired it on 1 June 1999.
Your client also has a total of $8,500 in capital losses carried forward
from the previous tax year, $1,500 of which are attributable to a
loss on the sale of a piece of sculpture that she sold in April of the
previous year.
11.8 Scott is an accountant who purchased a vacant block of land in
Brisbane on 1 October 1980. On 1 September 1986, Scott built a house
on the land. At the time, the land was valued at $90,000 and the cost
of construction was $60,000. The property has been rented out since
construction was completed. On 1 March of the current tax year, Scott
sold the property at auction for $800,000.
(a) Based on the information above, determine Scott’s net capital
gain or net capital loss for the year ended 30 June of the current
tax year.
(b) How would your answer to (a) differ if Scott sold the property to
his daughter for $200,000?

(c) How would your answer to (a) differ if the owner of the property
was a company instead of an individual?
11.9 On 1 July 1986, Sophia acquires an office block under a contract of
purchase for $750,000. She also incurred stamp duty associated with
the purchase of $25,000 as well as conveyancing and legal costs
incidental to the purchase of $15,800. These costs were incurred on
the date of settlement, which was 1 September 1986.
Sophia was immediately sued and incurred $50,000 in legal costs
defending her right to the office block against a person challenging
the legal validity of her title. These costs were paid on 15 February
1987. Ongoing expenses during the ownership period were interest
totalling $120,000, deductible repairs to the property of $50,000 and
rates and taxes totalling $85,000. On 7 April 1991, Sophia made capital
improvements to the building totalling $75,000.
On 1 September 2020, Sophia sold the office block under a contract of
sale for $1,200,000. In doing so, she spent $7,500 in advertising costs in
relation to the sale and paid sales commission to the real estate agent
of $48,000.
The four offices in the block had been rented out to tenants for the
period of ownership.
Sophia wants to know whether she is better off using the indexation
method for calculating her capital gain or the discount method. Based
on your calculations, advise her.
11.10 Discuss the CGT consequences of the following in relation to the main
residence exemption:
(a) Your client purchases a property to live in and does so for four
months. They are then sent overseas by their employer for
12 months during which time the residence is rented out.
(b) Your client purchases a new home and moves in immediately.
Four months later, their previous main residence is sold.
(c) Your client purchases a new home and moves in immediately.
Nine months later, their previous main residence is sold.
(d) Your client decides to make extra income by renting out their
spare bedroom in their main residence on Airbnb.
11.11 Martin purchased a home in Brisbane on 7 April 2011 and moved into
it once the contract was settled. Martin lived there until he moved into
a retirement facility on 18 September 2016. At that stage, he rented the
house to long-term tenants.
On 20 January 2020, Martin passed away. Martin’s daughter, Millie,
was the beneficiary of the estate and inherited the house. Millie then
sold the house on 20 December 2020.

What are the CGT consequences of the sale?

Principles of Taxation Law Part 2.

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10

Compensation for breach of contract –​ordinary

The first category includes compensation or damages received by an employee,

Often compensation or damages that replace income will be in the form of a

Prima facie, the replacement principle applies to all compensation or damages

Compensation for losses incurred by

[10.40] Compensation or damages received by a taxpayer not carrying on

“Income from personal exertion” is income consisting of earnings, salaries,

Case study 10.2: Compensation payment held to be ordinary income

In both FCT v Dixon and C of T (Victoria) v Phillips, the payments were

Loss of earnings vs loss of earning capacity

Case study 10.3: Compensation receipt held to be ordinary income

Case study 10.4: Compensation receipt held to be capital

Sommer v FCT can be contrasted with Coward v FCT (1999) 41 ATR

Example 10.2: Loss of salary or wages

Compensation received by way of insurance or

Compensation for loss of physical abilities

from CGT consequences a CGT asset that is received by a beneficiary of a trust

Example 10.3: Loss of physical ability

Compensation for pain, suffering or medical expenses

Example 10.4: Award of medical expenses

Compensation under anti-​discrimination legislation

As with other types of payments, the broad principle is that a compensation

[10.125] The Commissioner offers the following examples of compensation

Any part of the compensation payment that relates to psychological

of any employment of the taxpayer”. Therefore, the payment is

Example 10.5: Compensation paid under anti-​discrimination legislation

that compensation be paid for injury to feelings, loss of self-​esteem and

Compensation paid by financial institutions

however, an amount was included in an asset’s cost base, an adjustment will

Despite perceived benefits, structured settlements have not generally been

Compensation for business losses

Income from business is considered in Chapter 8. The doctrines set out in

established, it is necessary to determine the scope of the business as not all

In addition to the income taxation consequences of a compensation receipt,

[10.160] With these principles in mind, the consequences of the following

contracts were cancelled and the taxpayer received compensation by

Case study 10.6: Compensation for breach of ordinary trading contract

in return for a lump-​sum payment of $372,700.

Example 10.6: Compensation for breach of ordinary trading contract

Compensation for breach of contract going to

Case study 10.7: Compensation for breach of contract going to

Example 10.7: Compensation for breach of contract going to

Compensation for loss of asset –​depreciable assets

Compensation for loss of asset –​capital assets

Case study 10.8: Compensation for loss of capital asset

land. Despite the method of calculating the compensation payment,

In contrast to Glenboig Union Fireclay Co Ltd v The Commissioners of Inland

An amount that compensates for temporary disablement will need to be

Case study 10.9: Damages for defamation

Compensation for loss of asset –​trading stock

income includes an amount received by way of insurance or indemnity for a loss

Example 10.8: Compensation for loss of trading stock

Compensation by way of insurance proceeds

as capital. If, however, there is a portion of the lump-​sum payment that is

[10.250] The question as to the assessability of a lump-​sum payment arose in

Case study 10.10: Composite claim

livestock, damage to wool and loss of fencing. The settlement amount

Given that an undissected amount of compensation or damages is treated

Reimbursement of previously deducted

Case study 10.11: Reimbursement of previously deducted expense

The High Court concluded that it was necessary to determine whether

Case study 10.12: Reimbursement of capital receipt

Compensation for breach of contract –ordinary

Case study 10.2: Compensation payment held to be ordinary income

Case study 10.3: Compensation receipt held to be ordinary income

Example 10.2: Loss of salary or wages

Compensation under anti-discrimination legislation

Example 10.5: Compensation paid under anti-discrimination legislation

that compensation be paid for injury to feelings, loss of self-esteem and

Compensation for business losses

in return for a lump-sum payment of $372,700.

Compensation for loss of asset –depreciable assets

Compensation for loss of asset –capital assets

Case study 10.8: Compensation for loss of capital asset

Compensation for loss of asset –trading stock

Example 10.8: Compensation for loss of trading stock

as capital. If, however, there is a portion of the lump-sum payment that is

[10.250] The question as to the assessability of a lump-sum payment arose in

Case study 10.10: Composite claim

The first category of reimbursements in s 20-20, an amount received by way of

Subdivision 104-I: Australian residency ends...................................... [11.130]

Step 2 –Work out amount of capital gain or loss................................. [11.440]

Subdivision 104-B: Use and enjoyment before title passes

Subdivision 104-C: End of a CGT asset

• if the asset is a convertible interest –being converted: s 104-25(1).

Subdivision 104-D: Bringing into existence a CGT asset

Subdivision 104-H: Special capital receipts

Subdivision 104-I: Australian residency ends

Subdivision 104-J: CGT events relating to rollovers

Subdivision 104-K: Other CGT events

• certain short-term forex realisation losses –CGT event K11;

Subdivision 104-L: Consolidated groups and multiple entry

Question 2: Is the asset a CGT asset?

Examples of CGT assets from s 108-5 include the following:

[11.180] “Collectable” is defined in s 108-10(2) of the ITAA 1997 as:

A depreciating asset that is part of a building is a separate CGT asset.

A capital improvement is a separate CGT asset to the land if:

Time of acquisition of CGT asset

Question 3: Does an exception or exemption apply?

Disregarded capital gains and losses on certain assets

[11.265] Investments made in start-up companies. From 1 July 2016, there

injury or illness that a taxpayer or a relative suffers personally: s 118-37(1)

taxpayer’s assessable income or exempt income: s 118-20(1). In essence, if an

Further anti-overlap provisions include eligible termination payments (s 118-22),

• 15-year exemption: see [11.340];

Legislation currently before Parliament proposes to amend s 152-5 of the ITAA

Example 11.26: Partial exemption using s 118-145 to extend the

Non-main residence days

Connor will be taken to have made a capital gain of: