INDIVIDUALS
BAR ASSOCIATION
SEGMENT
AUDIENCE
SEPTEMBER 2005
DATE
Capital gains tax (CGT) and property
Presented by:
Australian Taxation Office
CGT AND PROPERTY
www.ato.gov.au
Objective
 The aim of today's session is to provide you with an
overview of capital gains tax (CGT) and property
 The intention is to provide you with general information,
and you should seek professional advice in relation to
your specific circumstances
CGT AND PROPERTY
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Outline of session
 Fundamentals of CGT
 Main residence exemption
 Marriage breakdown
 Deceased estates
 Compliance focus 2005-06
CGT AND PROPERTY
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Fundamentals of CGT
CGT AND PROPERTY
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What is capital gains tax?
 Tax paid on capital gains you make during the income
year
 Forms part of your income tax
 Declared in your income tax return
 Taxed at marginal tax rate
CGT AND PROPERTY
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What is capital gains tax?
 Capital gains or losses arise when certain types of
transactions or events occur
 This is known as a capital gains tax (CGT) event
 CGT events commonly involve a CGT asset
CGT AND PROPERTY
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Examples of CGT events
 You sell an investment property
 Your investment property is destroyed by fire
 You give someone a right to reside in a house
 You grant an option to a person to purchase your land
within 12 months for a set price
CGT AND PROPERTY
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Examples of CGT assets
 Land and buildings
 Boats, furniture etc
 Shares, options, etc
 Leases
 Depreciating assets
 Goodwill
 Paintings, sculptures, etc
 Licences
 Jewellery, books, antiques
 Contractual rights.
CGT AND PROPERTY
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What is capital gains tax?
Capital gains tax can still apply even if:
 you did not buy the CGT asset
 you disposed of the CGT asset without selling it.
CGT AND PROPERTY
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Main residence exemption
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Main residence exemption
 Capital gains tax generally does not apply to the sale of
your main residence
 To be exempt:
- the dwelling must have been your home
- the dwelling must not be used to produce income
- the land must be 2 hectares or less.
 No exemption for land sold separately from the dwelling
CGT AND PROPERTY
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Example – main residence
 Frank purchased his house in 1999
 He used the house as his main residence
 The house and land are situated on less than 2 hectares
 He sold the house in 2005
 The capital gain can be ignored under the main residence
exemption
CGT AND PROPERTY
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Part exemption
 Home not your main residence during the whole time it
was owned
 Part of the home was used to produce assessable
income
 Special rules apply which may still allow full exemption
CGT AND PROPERTY
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Example – part exemption
 Thomas acquired a home in July 1997 and used it as his
main residence
 He rented out one bedroom which is 20% of home
 Thomas and the tenant also used the living room,
kitchen, bathroom and laundry which is 30% of the home
 Sold home in June 2005 and made $120,000 capital gain
 $42,000 capital gain is not exempt
CGT AND PROPERTY
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Moving from one main residence to another
 Purchase a new home before selling the old home
 Both homes treated as main residence if:
- the old residence was your main residence for at least 3
months in the12 months before selling it
- you did not use your old home to produce income in the 12
months it was not your main residence
- your new home becomes your main residence.
CGT AND PROPERTY
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Example – moving from one main residence to another
 Jill and Norman bought a house on 1 January 2005
 They moved into the home immediately
 They sold the old home on 15 April 2005
 Both homes are treated as their main residence from 1
January to 15 April 2005
CGT AND PROPERTY
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Continuing main residence status
 You can choose to treat a home as your main residence
after it ceased being your main residence
 The period of time it can be treated as your main
residence is:
- unlimited if your home is not used to produce income
- for a maximum of 6 years if your home is used to produce
income.
CGT AND PROPERTY
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Example – continuing main residence status
 Lisa bought a house in 1992 and moved in
 She moved out in 1995
 She rented out the house for 3 years
 Left the house vacant for 2 years
 Rented out again for next 3 years
 Sold the house
CGT AND PROPERTY
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Constructing, renovating or repairing a home
 If you build, renovate or repair your home, you can treat
the land as your main residence for up to 4 years before
the home becomes main residence
 Must move into the home as soon as practicable
 Must continue to use the home as your main residence
for at least 3 months
CGT AND PROPERTY
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Having a different home from your spouse or child
 If you and a dependent child have different homes for a
period, you must choose one home as your main
residence for both of you for the period
 If you and your spouse have different homes for a period:
- you must choose one home as your main residence for
both of you for the period, or
- nominate different homes as main residence for the period.
CGT AND PROPERTY
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Major improvements to pre-CGT assets
 Major capital improvements made to a dwelling bought
before 20 September 1985 may be taxable
 Capital gain relates only to the improvements and not the
entire property
CGT AND PROPERTY
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Example - major improvements to pre-CGT assets
 Martin bought a home in 1984
 Undertook major capital improvements worth $100,000
(indexed cost base is $112,200) on 1 December 1993
 Sold home for $500,000 on 1 December 2004
 $120,000 of the proceeds attributed to improvements
 Is cost base of improvements > 5% of $500,000?
 Is cost base of improvements > threshold of $106,882?
CGT AND PROPERTY
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Inherited main residence – full exemption
Any dwelling deceased acquired before 20 September 1985,
or a dwelling acquired by the deceased on or after 20
September 1985 that was their main residence just before
they died and was not being used for income producing
purposes at that time if:
 sold within 2 years of death, or
 occupied by spouse or someone with a right to occupy
under the deceased’s will.
CGT AND PROPERTY
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Example – inherited main residence
 Rodrigo bought a house in April 1990 and lived in it
 Rodrigo passed away in January 2004
 Petro (Rodrigo’s son) inherited the house
 Petro rented out the house
 Sold the house in March 2005
 Capital gain can be ignored
CGT AND PROPERTY
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Marriage breakdown
CGT AND PROPERTY
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Marriage breakdown
 Conditions for marriage breakdown rollover
 Consequences of rollover
 If there is no court approval
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Deceased estates
CGT AND PROPERTY
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Deceased estates
 Capital gain or loss on death is disregarded for assets
which pass to the beneficiary or legal personal
representative
 Choosing the indexation or discount method
 Joint tenants
 Unapplied net capital losses
CGT AND PROPERTY
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Compliance focus for 2005-06
CGT AND PROPERTY
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Compliance program for 2005-06
 Capital gains tax continues to be a priority
 Non-compliance still a concern
 Refining data matching capabilities
 Letters to be sent to certain taxpayers
 Will continue to help and educate
 Review and audit program continues
CGT AND PROPERTY
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Compliance program for 2005-06
 Data matching residential property and share sales
 Undisclosed capital gains
 Claims for CGT discount and CGT SB concessions
 Reviewing SB retirement exemption claims
 Reviewing significant capital losses
CGT AND PROPERTY
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Compliance problems
 Incomplete records of cost base and capital loss
calculations
 Using unsubstantiated capital losses to offset a capital gain
 Asset valuations - not using market values
 Complete omission of a gain or CGT event
 Not meeting thresholds for small business CGT concessions
 Pre-CGT status
CGT AND PROPERTY
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Tips for capital gains tax
 Report net capital losses carried forward from earlier
income years
 Keep comprehensive records
 Know which costs are deductible and which are included
in the cost base
 Report capital gains and losses from inherited assets
 Declare your share of capital gains on jointly-owned
assets
CGT AND PROPERTY
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Tips for capital gains tax
 Deduct any capital losses before applying a discount
 Calculate a capital gain or loss when giving away
property
 Use the contract date not the settlement date for
acquisition and disposal
 Overseas investment
 Capital gain from non-assessable distribution
CGT AND PROPERTY
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Summary
 Capital gains tax is tax paid on capital gains you include
on your income tax return
 Capital gains arise when a CGT event happens
 There are three methods to work out your capital gain
 Keep good records
CGT AND PROPERTY
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Where to get help
CGT AND PROPERTY
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CGT AND PROPERTY
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For more information
www.ato.gov.au
Website
13 28 61
Personal tax enquiries
13 28 60
Order a fax
1300 720 092
Publications distribution service
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Questions
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Our commitment to you
The information in this presentation is current at November, 2005.
If you feel this information does not fully cover your circumstances,
please seek help from the Tax Office or a professional adviser.
Since we regularly revise our information to take account of any changes
to the law, you should make sure this information is still current before
relying on it. The easiest way to do this is by checking with us.
CGT AND PROPERTY
www.ato.gov.au