CGT Events | Do you actually know how to spot them?
Capital Gains Tax Events or CGT Events can be hard to spot.
CGT events and selling an asset should not be this hard to understand. There is a lot of objective criticism to all tax systems across the world. In fact, here is some of our own. (source: https://www.theage.com.au/opinion/four-stupidities-of-the-tax-system-20051217-ge1fy9.html)
Unfortunately, the ATO site’s language is more catered to tax professionals i.e. people used to reading its pages for hours every day. People like me. Unfortunately, accountants are an uncommon breed. So, here’s the simplified version of what you need to know when you are selling an asset.
Video resources | Different Types Of CGT Events
Some of us are more visual than others. A long list of CGT events (further below) may not be suitable. So, we have curated a short list of video resources for you:
Capital Gains Tax Events And Simplicity
Our list is simplified on two fronts. Instead of having an entire list of everything under the sun, I have limited my explanation to common sales of assets. Secondly, I refrain from using the clunky language you see on the ATO’s site.
Most people will usually come across the following transactions during their lives.
The main CGT event is A1 – Disposals.
Dates are important here. If there is some kind of contract, scan for the contract date. That’s what we could call the “time of event”. If there is no official contract in place, then, it’s when the previous owner stops owning that asset. For those that want to dig deeper, please look up ITAA 1997 Sect 104.10
(source: http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s104.10.html)
Disposals vary from asset to asset. For instance, in crypto a disposal happens when:
- You sell or give your crypto to someone
- Or trade it or exchange it for something else (this can anything, including another cryptocurrency)
- Converting to fiat
- You use it to buy something
(Please see our other resources on whether or not the ATO thinks you are running a business or are just an investor – this affects the Capital Gain Tax outcome significantly. Furthermore, please try to hang on to your gains for 12 months where reasonable, as you may get a large discount in taxes when you sell)
What is the cost base of an asset?
For the next bit, you will need to understand what the cost base of an asset is. Typically, it is not just how much you paid for it. For instance, you can add up to 5 different types of costs (source: https://iknow.cch.com.au/topic/tlp702/overview/cost-base)
Please bear in mind, not all these will apply to the sale of all types of assets. For instance, some may be very specific to crypto, others land and building.
Without further ado, straight from ITAA S110.25 (source: http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s110.25.html)
Acquisition costs:
This is the easy one i.e. money you paid for it OR the value of anything you had to give up for it e.g. what if you had to barter for acquiring something? That should not mean you miss out!
Incidental costs:
Stamp duty and any costs of transfer of ownership can help you out here. By adding those to your cost base, you reduce the gain and therefore, the tax in turn.
Example 2:
Jenny takes out a loan to buy an asset. In this instance, any loan application fees or mortgage discharge fees (aka borrowing fees), lenders mortgage insurance, broker fees (https://www.highview.com.au/claiming-borrowing-expenses/) can be used to increase the cost base and reduce any capital profit made. It all adds up, in the end.
Ownership costs:
In some ways, all these should form a checklist, that you can neatly just check off to ensure you are not given up your hard earned gains e.g. land tax or interest on the loan. (https://upside.com.au/articles/selling-your-property/preparing-to-sell/everything-you-need-to-know-about-capital-gains-tax)
Example 3:
Jenny decides to buy some BTC for $40,000. She gets a loan for that amount. When she later sells her cryptocurrency for $50,000, she incorrectly assumes that the gain is $10,000. In fact, she was charged an outrageously high interest rate i.e. $7500. By adding this to her cost base, now she only has to pay CGT on $2500 v/s $10,000.
Enhancement costs:
These are any major improvements you have made of a capital nature, minus any depreciation you have claimed as deductions. (source: https://iknow.cch.com.au/topic/tlp167/overview/capital-gains-tax)
Many seem to think this is just a “wishy washy” range. However, section 108.70 (ITAA 1997) is quite specific. It cannot be more than 5% of your capital proceeds from the transaction. (source: http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s108.70.html)
There is one more consideration. This requires an explanation first. That is the concept of separating assets. For instance, if you own a large plot of land and decide to fence it, is this large fence part of the original asset or a separate one?
Why are these two conditions important?
This becomes really important when we are dealing with land and building, one appreciating and the other depreciating.
As such, section 108 states that, up to a certain dollar amount, you are not treating them as separate assets. These values change from year to year.
You can find the entire table, year by year here (source: https://www.ato.gov.au/individuals/capital-gains-tax/property-and-capital-gains-tax/property-improvements-and-additions/)
How about repairs?
Most of you may already know this. However, it bears repetition if not. Activities that fall under repairs (Rather than improvements), are immediately deductible. Again, the law is quite specific in this area, namely section 25-10 and TR 97/23. (source: https://www.ato.gov.au/Business/Income-and-deductions-for-business/Deductions/Deductions-for-repairs,-maintenance-and-replacement-expenses/)
Even repairs to machinery is not immediately deductible if made right after the purchase. These will instead form part of the cost base of the equipment. There was a bit of an uproar in the mining industry on disclosures in this area but we should stay on topic!
Title costs:
This one is rather self-explanatory. These fees vary from state to state. There are expenses that are incurred when a property’s title is being registered with Land Titles Office.
As you have probably guessed, the more you bump up the cost, the less you made on the asset when sold. That means less CGT!
In fact, among all my clients, this is where they leave money on the table.
Example 1.
Paul buys a few cryptocurrencies for $50,000. He sells them for $75,000. At first glance, he will taxed on all $25,000. However, a closer look reveals a bunch of buy fees and others too. They all add up to another $3000. Now he will only be taxed on $22,000 i.e. likely a saving of $1500.
This is where the savings happen i.e. a solid knowledge of what you can claim as additional expenses.
As mentioned before, not everything applies to everything. If you are dealing with crypto, it’s not just disposals you need to be wary of. C2’s can come into play in a rather big way. (source: https://www.tved.net.au/index.cfm?SimpleDisplay=PaperDisplay.cfm&PaperDisplay=https://www.tved.net.au/PublicPapers/February_2008,_Tax_Basics,_Tax_Basics___Module_4___Program_22___CGT_General_Principles___Pre_CGT_Assets__Trusts__Shares__Rights__Options__Leases__Discounts___Exemptions.html)
Some more crypto tax distinctions
Traditionally, these apply to shares. For instance, a company can decide to cancel shares and provide funds back to the owners. Or a buy back can occur. Now, if the capital proceeds exceed the cost base of that asset, that will be a capital gain.
This is true for any asset, including crypto. This can be the case with a chain split. (source: https://www.ato.gov.au/general/gen/tax-treatment-of-crypto-currencies-in-australia—specifically-bitcoin/?page=2)
C2 v/s Cryptocurrencies?
If the developments are very different in direction from the parent coin, that can be a problem. The tax office may decide that the original asset does not exist. Enter C2. The cryptocurrencies will be deemed acquired at the time of the split with a painful cost base of zero!
A few usual CGT events you may come across
The “tougher-to-understand” section
A few more common CGT events.
One of the main issues that befuddle people when it comes to CGT events, is that they happen way more often than we tend to think.
Take a look at these ones, that caught a few of our clients unawares – they are ALL CGT events (source: https://www.ato.gov.au/Forms/Guide-to-capital-gains-tax-2021/?page=5)
- Your asset is lost or destroyed. It doesn’t matter if it’s voluntary or not.
- Your asset (typically shares or crypto) is cancelled, given back or redeemed, or changed fundamentally (please look up our section on C2 events for more information)
- You agree to not work in a particular industry for a certain amount of specified time
- The trustee makes a payment from a managed fund or unit trust – that is non-assessable to you. (source: https://www.sharesight.com/blog/attribution-managed-investment-trust-amit-tax-calculations/)
There are many different CGT events. They go by a certain nomenclature (a fancy way of saying “naming convention”) e.g. the following video is for CGT event K6.
RE: AMIT annual cost base reduction that exceeds the cost base of your interest
- You receive a non-dividend payment from a company
- In liquidation or administration, the liquidator declares the shares worthless.
- Amounts received from a council for disrupting your business assets because of their roadwork activities
- You stop being an Australian resident (be very careful with this one, there are complex rules that decide whether or not you are an Australian resident, it is definitely not just a matter of whether you are currently in Australia or not)
- With long-term conservation and protection of natural habitat, if you enter into a conservation covenant.
- You dispose of a depreciating asset that you actually used yourself for your own private usage and purposes.
Often missed CGT events
Some of these events simply do not look like they should be attracting any taxes at all. Unfortunately, they do. This is also CGT i.e. one of the big, devastating taxes out there. It is best to know what to look for:
D2 – Granting an option
When the option is granted, it’s already on. The capital gain is the proceeds from the grant itself minus any expenses incurred to grant it. If it’s a loss, it’s the other way around.
Many rush to trusts to take refuge from CGT. This is a trend in Cryptocurrencies for other reasons.
(Trusts allow gains to be re-distributed via trusts to minimise taxes, using tax brackets. Do talk to your accountant if this doesn’t make sense)
(source: https://www.abc.net.au/news/2017-07-28/trusts-and-tax-minimisation-explained/8752480)
However, trusts do not come with their own CGT pitfalls.
Enter the ‘E’ series!
(source: Ato.gov.au)
First of all, what is a trust? For the illustrative purposes of this article, a trust is an agreement or arrangement that enables one party to hold property/assets on behalf of another. (source: https://www.lawsociety.com.au/for-the-public/know-your-rights/trust)
Although that sounds simple enough, there is possibly nothing simple about trusts or their administrations. There are many different types of trusts in existence. In this context, we look at them as vehicles that allow tax minimisation.
E1 is when a trust is created over an asset. The time of the event is when the trust is created. The capital gain is then (As usual) the difference between the proceeds from creating the trust minus the asset cost base. You can start to see a pattern here. When calculating the loss, you would be using a reduced cost base.
E2 occurs when transferring an asset into a trust. The time the event is deemed to occur is the transfer time itself. Any proceeds coming from the transfer minus the cost base of the asset is the gain. If there is a loss, when calculating that loss, you would be using a reduced cost base.
E3 can happen around property and many would not even know. Unit trusts are tidy way to divide profits amongst participants in a project. However, event E3 happens when converting a trust into a Unit trust. The market value of the asset is considered, minus the cost base of the asset, again. With the loss, the reduced cost base is used.
When the trustee makes a payment to a unit holder, the latter does not include the capital payment for trust interest in his/her assessable income. This gives rise to E4. Yes, it seems the ATO has indeed thought of everything. (source: www.taxtalks.com.au)
E5 arises when a beneficiary becomes absolutely entitled to an asset. From the trustee’s perspective, the market value is used, less its cost base. From the beneficiary’s perspective, the market value of the asset at that time – less the cost base of the beneficiary’s capital interest.
Should you trust me?
Well, I am an accountant and do this every day. But I have also listed the relevant legislation so you can vet what you are reading yourself. I am a strong believer that you shouldn’t believe everything you Google – unless you see proof first.
Also, please bear in mind that none of the above may apply to your situation. That is because this page is meant for general information purposes and not specific advice for certain situations you may be facing. In fact, it strongly recommended that you do not follow any advice you find on Google or on this page, without first talking to your accountant or contacting us)