DISCLAIMER

Taxation Law • These notes contain a collection of slides for use by lecturers in
Lecture Slides
Session 5
Provided to Taxation Law
Students for study purposes
only. Selling, copying or any
commercial dealings of any
kind is strictly prohibited
© The Australian College for
Microcomputers Pty Ltd
Sydney 2023
Taxation Law.
• It is not meant to be a complete nor comprehensive coverage of the
topics involved. Rather it is an aid to assist students in note taking.
It should be understood that these slides may be modified,
discarded or supplemented by lecturers at their absolute discretion.
• Students should not rely on the information contained in the slides,
but should use them as a preliminary basis for research only. This
area of the law is changing on a daily basis and these slides are not
meant to cover more than some broad themes referred to in
lectures and to trigger discussion. At all times, students should refer
to primary sources such as the actual legislation, court reports &
current ATO rulings.
• Do not rely on the summaries contained in these slides.
• For individual and /or personal advice, students should consult
qualified advisors in finance, tax, accounting and law.

1 2

OVERVIEW
Capital Gain – very
basic example Step 1 - Have you made a Capital Gain or Capital Loss

Martha buys a vacant block of land for Step 2 - Work out the amount of the Capital Gain or Capital
$110,000 on 1 January 2018. Martha Loss
sells the land on 1 June 2018 for
$200,000.
(Repeat Steps 1 and 2 for each CGT event)
• CAPITAL PROCEEDS (usually sale
price) $200,000
• Less Cost Base $110,000 Step 3 - Work out your Net Capital Gain or Net Capital Loss
• CAPITAL GAIN 90.000 for the income year

3 4

1
 Overview of Steps 1 and 2 Capital Gain - Definition
Flowchart – Section 100-15

Did a CGT Event (A1 / D1) happen
in the income year?
Yes
Does an Exemption or Exception
apply?
No
Do the Capital Proceeds exceed the
Cost Base / Indexed Cost base?
No
Does the Reduced Cost Base exceed
the Capital Proceeds?
No You do not have a Capital Gain or
Capital Gain
Capital Loss EXISTS IF
Yes Disregard (or reduce) a Capital Gain or
Capital Proceeds (Sale Price)
Capital Loss from the CGT Event Exceed
Yes The excess is your Capital Gain from the Indexed Cost Base
CGT Event or, if there is no Indexed Cost Base,
Yes The excess is your Capital Loss from the COST BASE (Subsection 104–10(4))
CGT Event

5 6

Capital Loss - Definition Some CGT Events will

NOT have a Capital
CAPITAL LOSS Gain or Capital Loss.
EXISTS ONLY IF Capital Proceeds < Cost Base or
Indexed Cost Base
REDUCED COST BASE and
EXCEEDS Reduced Cost Base < Capital
Proceeds
CAPITAL PROCEEDS
Subsection 104–10(4)

7 8

2
 Examples of CGT Events
Situation Event Which CGT event?
CGT Events
You own shares you You sell them CGT event A1
acquired on or after
• You can make a capital gain or loss ONLY if 20 September 1985
a CGT Event happens. Section 100-20(1) You sell a business You agree with the purchaser CGT event D1
not to operate a similar
• There are a wide range of CGT Events.
business in the same area
• Some CGT Events happen often and affect You are a lessor You receive a payment for CGT event F5
many different taxpayers. Others are rare changing the lease
and affect only a few.
• The provisions dealing with each CGT You own shares in a The company makes a CGT event G1
Event defines what is a Capital Gain and company payment (not a dividend) to
Capital Loss from that CGT Event. you as a shareholder

Subsection 100-20(2)

9 10

Identifying What are CGT assets?

• The specific time when a CGT event
the time of Subsection 100-25(1)
happens is important for various
a CGT
event
reasons e.g. • Most CGT events involve a CGT Asset.
(Pre-CGT Assets are assets acquired before 20 September 1985)
Subsection ▪ Does your Net Capital Gain affect (Post-CGT Assets are assets acquired on or after 20 September 1985)
100-20(3) your current income tax year or
another income tax year?
• “CGT Asset” is defined in Section 108-5.
▪ Does the Discount Method (50%) ▪ Defined very widely to basically include any property
or Indexation apply?
or personal rights.
▪ Different types of CGT Assets

• However, many CGT events are concerned

directly with Capital Receipts and do not
involve a CGT Asset.

11 12

3
 FOUR TYPES OF CGT ASSETS Collectables / Personal Use
Assets
Types of CGT Assets Collectables [Section 108-10(2) & (3)]
(a) artwork, jewellery, an antique, or a coin or medallion;
or
(b) a rare folio, manuscript or book; or
(c) a postage stamp or first day cover;
Other CGT Collectables
that is used or kept mainly for your (or your associate's)
Assets personal use or enjoyment.
e.g. vacant
land, a house Personal Use Personal Use Assets [Section 108-20(2) & (3)]
on land, Assets A CGT asset (except a collectable or land)
goodwill, that is used or kept mainly for your (or your associate's)
lease, shares. Separate personal use or enjoyment.
Assets (not covered Certain debts are also included.
in this course)

13 14

Exceptions and
Exemptions Exceptions

Before deciding whether there is
a Capital Gain or Capital Loss, we
must first consider whether the
CGT event is subject to any:
Exceptions
or
Exemptions
• Refer to the Division that deals with
the CGT Event
• For example: CGT Event A1
• A Capital Gain or Capital Loss you
make is disregarded if you acquired
the asset (Pre-CGT Asset) before
20 September 1985.
Subsection 104-10(5)

15 16

4
 Division 118 - • Exempt assets (e.g. motor vehicles,
Exemptions decorations for valour) Section 118-5
• Assets used to produce exempt income
Section 118–12
• There are a number of exemptions in
Division 118. • Reduce Capital Gain if a non-CGT section
applies Section 118–20
• The main exemptions covered in this Subdivision
course are: • Trading Stock
118 - A Section 118–25
▪ General Exemptions
Subdivision 118-A • Compensation, damages
Section 118–37(1)(b)
▪ Main Residence
Subdivision 118-B • Betting/gambling wins
Section 118-37(1)(c)
Always Refer to Legislation

17 18

Capital Gain / Loss - Key Terms

Step 2
• Capital Proceeds (KP)
Work out the Sale Price / Market Value Substitution Rule - Section 116-20

Capital Gain (CG) • Cost Base (CB) - 5 Elements Section 110-25

or Note special rules

Capital Loss (CL) • Indexed Cost Base (ICB)

for each event [Relevant Cost Base elements multiplied by Indexation Factor (IF)
[if Element 3 is part of the cost base do not index]

• Reduced Cost Base (RCB)

Subsection110-55(1) 4 elements only - exclude ownership costs

19 20

5
 Cost Base, Indexed Cost Base & Reduced Cost Base
excluding modifications
Market Value Element
1 Acquisition Cost
Details CB
✓
I.F.
X
ICB RCB
▲ ✓
Substitution Rule 2
Incidental Costs – Remuneration for services of a surveyor,
valuer, auctioneer, accountant, broker, agent, consultant or legal adviser ✓ X ▲ ✓

2 Incidental Costs – Cost of Transfer ✓ X ▲ ✓

• Section 116-30 (1) and (2)(b)(i) - Market 2 Incidental Costs – Stamp Duty ✓ X ▲ ✓
Value Substitution Rule
2 Incidental Costs – Advertising ✓ X ▲ ✓

Market Value is substituted where: 2 Incidental Costs – Valuation ✓ X ▲ ✓

2 Incidental Costs – Search Fees ✓ X ▲ ✓
• Taxpayer receives no capital proceeds; or 2 Incidental Costs – Borrowing Expenses ✓ X ▲ ✓
2 Incidental Costs – Conveyancing Kits ✓ X ▲ ✓
• Part or all of capital proceeds cannot be
3 Ownership Costs – Interest (include in ICB but do not index - do not include in RCB) ✓ ▲ No
valued; or
3 Ownership Costs – Insurance (include in ICB but do not index - do not include in RCB) ✓ ▲ No
• Non-arms-length transaction where 3 Ownership Costs – Rates /Taxes (include in ICB but do not index - do not include in RCB) ✓ ▲ No
capital proceeds are more or less than 3 Ownership Costs - Repairs (include in ICB but do not index - do not include in RCB) ✓ ▲ No
market value
4 Capital expenditure to increase or preserve the asset’s value ✓ X ▲ ✓
5 Capital expenditure to protect the title to the asset ✓ X ▲ ✓

21 22

Calculation Methods for Capital Gains – Assets sold after 21 September 1999
Method – when it applies Explanation Calculate

Reduce capital gain by:

CGT Discount • 50% for individuals (including
1. Asset sold after 21 September partners in partnerships) and
1999 trusts
2. For assets held for 12 months • 331/3 % for complying super
or more funds.
Not available to companies.
1. Subtract the cost base from
the capital proceeds,
2. Deduct any capital losses,
3. Reduce by the relevant
discount percentage.

Indexation
1. Assets acquired before
21 September 1999
2. For asset held for 12 months
or more before the relevant
CGT event.
Use Indexed Cost Base - Increase 1. Apply the relevant indexation
the cost base by applying an factor,
indexation factor based on CPI up 2. Subtract the indexed cost base
to September 1999. from the capital proceeds.

Other
For assets held for less than No Indexation Subtract the cost base from the
12 months before the relevant No CGT Discount capital proceeds.
CGT event.

Assets acquired before 21 September 1999 and sold after 21 September 1999 can chose
between Indexation or Discount Method

23 24

6
 Example – Indexed Cost Base / 50% Discount STEP 3
Taxpayer can choose the method that gives the lowest capital gain Work out Net Capital Gain or Net Capital loss for the income year.
• Peter purchases a building as an investment on 1 January 1994 for $250,000. This
amount forms the first element of his cost base. Steps in determining the Net Capital Gain for an income year
• He sold the building on 1 February 2015 for $300,000.
1. Reduce any Capital Gains in the current year by any Capital Losses in the
current year in order as follows:
• The index number for the quarter in which he purchased (1.1.1994) the building
(March quarter 1994) is 61.5. a) Reduce Capital Gains not subject to indexing or discount;
b) Reduce Capital Gains subject to indexing and
• If asset sold after 21 September 1999 the numerator will always be 68.7
(September quarter 1999) c) Reduce Capital Gains subject to (but before) discount.
68.7
61.5 = (1.1170) 1.117 (rounded to three decimal places) 2. Reduce any remaining Capital Gains (if any) by any Capital Losses from
• The indexed first element of Peter's cost base is: previous years.
$250,000 × 1.117 = $279,250
• Capital Gain using frozen indexation method 3. Reduce any remaining Capital Gains (if any) by any APPLICABLE
(KP) $300,000 minus (ICB) $279,250 = $20,750 DISCOUNTS.
• Capital Gain using 50 % Discount Method
(KP) $300,000 minus (CB) $250,000 = $50,000 4. If there are any remaining capital gains, include these as a Net Capital
$50,000 (Capital gain) minus $25,000 (50% Discount) = $25,000 (Net Capital Gain) Gain in Assessable Income.
Section 102-5
Taxpayer will select the frozen indexation method

25 26

Steps in determining the Net Capital Loss for an income year

1. Add up the Capital Losses during the income year. Also
Goods and Services Tax
add up the Capital Gains during the income year without (GST)
applying any discount.
• GST will be included in the Cost Base
2. Subtract the Capital Gains from the Capital Losses. where the taxpayer is not registered for
GST.
3. If the Step 2 amount is more than zero, it is the net capital
loss for the income year. • GST will NOT be included in the Capital
Proceeds where the taxpayer is
registered for GST.
4. Any remaining Net Capital Loss is carried forward
indefinitely or until death. • GST will NOT be included in the Cost Base
Section 102-10 where the taxpayer is entitled to an Input
Tax Credit.

27 28

7

Question
• Peter purchases a building as an
investment on 1st December 1993
for $250,000. This amount forms
the first element of his cost base.
He sold the building on 1 February
2020 for $380,000.
• Work out his net capital gain for
the Year ending 30 June 2020
– Consider the indexation
discount and the 50% discount?
29
• The index number for the quarter in which he
purchased (1.1.1994) the building (December
quarter 1993) is 61.2.
• If asset sold after 21 September 1999 the
numerator will always be 68.7 (September
quarter 1999)
68.7
61.2 = (1.123) (rounded to three decimal
places)
• The indexed first element of Peter's cost base
is: $250,000 × 1.123 = $280,750
• Capital Gain using frozen indexation method
• (KP) $380,000 minus (ICB) $280,750 = $99,250
• Capital Gain using 50 % Discount Method
• (KP) $380,000 minus (CB) $250,000 = $130,000
• $130,000 (Capital gain) minus $65,000 (50%
Discount) = $65,000 (Net Capital Gain)
• Taxpayer will select the 50 % Discount Method
30