(upbeat music)
-: Net capital gains are statutory income under section 102-5
of the ITAA97 and are included in taxable income.
The calculation of the net capital gain is reflected
in this simplified formula.
There is a six step approach to calculating
the net capital gain.
In order for a capital gain to occur
in a particular tax year,
a CGT event must have taken place.
There are 12 categories of CGT events,
with many categories comprising multiple CGT events.
The legislation provides a description
of each individual CGT event,
including details on when the event occurs,
how the capital gain or loss should be calculated,
and whether any exceptions apply.
It is important to ensure that the most appropriate
CGT event is applied.
Noting that some CGT events such as D1 and H2
can only apply if other CGT events do not apply.
A CGT event must apply in respect of a CGT asset.
These include land and buildings,
shares, options, rights and foreign currency.
In addition, there are two types of special categories
of CGT assets, collectibles and personal use assets
which are used or kept for personal use or enjoyment.
To calculate whether a capital gain or loss exists,
we need to compare the capital proceeds from the CGT event
to the cost base of the CGT asset.
If the capital proceeds a higher than the cost base,
then a capital gain arises.
If the capital proceeds are less than the reduced cost base,
then a capital loss arises.
If the capital proceeds less than the cost base,
but more than the reduced cost base,
no capital gain or loss arises.
Capital proceeds generally refers to the amount
the taxpayer received or was entitled to receive.
Cost base refers to the non deductible expenditure incurred
in acquiring, maintaining and disposing of the CGT asset.
In certain circumstances,
the cost base could be indexed to inflation,
effectively reducing any resulting capital gain.
Reduced cost base is similar to the cost base,
but it excludes any costs associated
with owning the CGT asset,
such as interest on money borrowed to acquire the asset.
There are specific exceptions
or exemptions that can apply in certain circumstances.
The primary exception is where the CGT asset was acquired
before 20 September 1985.
Referred to as a pre CGT asset.
Rollover relief is sometimes available
to defer a capital gain or loss arising from a CGT event.
The rollover provisions apply to a number of situations,
including where an asset has been transferred
as part of the incorporation of a business,
or where an asset is being replaced
due to involuntary disposal.
In such situations,
the original capital gain or loss can be disregarded,
the cost base of the original asset is maintained,
and any CGT implications are effectively deferred
until another CGT event takes place
in respect of the CGT asset.
The final step is to determine the net capital gain or loss
for the year.
Here we calculate our capital gains
and subtract any capital losses.
Note that losses on collectibles can only be applied
against gains on collectables,
and losses on personal use assets
are completely disregarded.
If capital losses are greater than capital gains,
then a net capital loss arises,
which can generally be carried forward
to offset capital gains in future years.
If capital gains are greater than capital losses,
we can then apply any carried forward net capital losses
from prior years in the order in which they occurred.
Note that special rules exists for applying capital losses
of a company requiring either
the continuity of ownership test or the same business test
to be satisfied.
We can then apply any CGT discounts that may be available.
Discounts apply to resident individuals, trusts
and complying superannuation funds.
But are not available from most companies.
Note also that there's CGT discount
does not apply to all CGT events.
Further, for the CGT discount to apply,
a range of criteria must first be met,
including that the CGT asset must have been owned
by the taxpayer for at least 12 months.
The final element to consider is whether
any small business concessions apply,
to reduce the net capital gain.
After the application of these six steps,
we ascertain our net capital gain for the tax year,
which is included in our assessable income
per section 102-5.