2017 Tax Planning Checklist: Capital Gains Tax Items

Capital Gains Tax

Capital Gains Tax may apply to the sale of assets purchased (or deemed to be purchased) after 20 September 1985.

Capital Gains Tax is only applicable once an asset is sold, deemed to be sold, cancelled or surrendered. It is essential that proper records be kept of all items that might be assessable to Capital Gains Tax. These include:
  • The date of the acquisition of the asset.
  • The full acquisition price - amount paid to the vendor plus legal fees, stamp duty, etc.
  • Any ongoing expenses, incurred to improve or protect the property, which have not been claimed for income tax purposes.
  • When the asset is sold full details of its sale price, date of sale, etc.

Matching Capital Losses and Capital Gains

Capital losses are not directly deductible. Capital losses are offset against any capital gains generated during that financial year.

Where capital losses are not utilised in this manner they are carried forward until such time that capital gains emerge to be offset.

Consideration of Capital Gains Tax Implications

To effectively plan to reduce tax you should consider the implications of Capital Gains Tax.

A discount of 50% is available for capital gains assets held by an individual or a trust, where capital gains are distributed to an individual, and the property is held for more than 12 months. Where there is a likelihood of a capital gain emerging on a property and you have an investment which, if sold, would generate a capital loss, then perhaps now is the time to consider selling the potential capital loss investment to offset part or all the emerging capital gain.

Note that you must be able to demonstrate that any profit derived from the sale of an asset is on capital account and not a profit-making enterprise or undertaking.

Wash Sales
The ATO has issued a ruling that relates to "wash sales". This is a situation where shares in companies listed on the stock exchange are sold to crystallise the capital loss and then shortly thereafter the taxpayer, or an associate of the taxpayer, purchases shares in that corporation on the stock exchange.   The ruling considers that Part IVA Anti-Tax Provisions apply to cancel deductions or benefits from "wash sales" and penalties may be applied. The "wash sales" prohibition announced in the ruling extends to an individual selling an underperforming asset and buying it back through their discretionary trust. However, there is a view that selling the shares to your superannuation fund would probably not be affected by the "wash sale" ruling because the dominant motive is to provide for retirement. If you wish to do this, please consult your professional accountant beforehand for advice.

Alternatively, if the potential capital loss investment can only be sold in a future year, consideration might be given to delaying the sale of the investment that will generate the capital gain to that future time.

Small Business Capital Gains Tax Concessions
You should check your eligibility for the general 50% capital gains tax discount for individuals and further concessions for small business entities. Small business entities are those with either turnover less than $2M (Note the $2m turnover test still applies here) or those that meet the $6M net asset value test. These concessions include:
  • fifteen-year exemption – provides a full exemption for a capital gain;
  • 50% active asset reduction;
  • retirement exemption; or
  • rollover concession into replacement assets.
The fifteen-year exemption rule requires:
  • the individual to own a share in a company or an interest in a trust, at all times during the period of at least fifteen years;
  • the individual must have owned the asset, or the company or the trust, had a controlling individual during the whole of that fifteen-year period, not necessarily the same person;
  • the individual to be aged fifty-five years or over and the disposal has been made in connection with retirement, or the individual is permanently incapacitated at the time of the disposal;
  • that, if the entity was a company or a trust, the entity must have had a controlling individual throughout the period of the ownership and the individual who was the controlling individual must have held at least 20% of the voting power, rights to dividends and rights to any capital distribution.
$6M Net Asset Value Test
The four concessions are only available if the taxpayer can satisfy the requirements of the $6M Net Asset Value Test or have turnover less than $2M (average of last three years) and satisfy the Small Business Entity Rules.

You need to bear in mind that the $6M Net Asset Value Test includes the market value of:
  • the individual’s net assets;
  • the net assets of entities connected with the individual including companies and trusts which the individual can directly or indirectly control; and
  • the net assets of a spouse and child under 18; or
  • a person who acts or could reasonably be expected to act in accordance with the individual’s directions or wishes.
For an individual, the following assets are ignored in calculating the $6M threshold:
  • personal-use assets;
  • ownership of a dwelling utilised for residential purposes;
  • superannuation fund asset; and
  • life insurance policy.