Running Head: AUSTRALIAN TAXATION LAW
Australian Taxation Law
Australian Taxation Law
Introduction
A capital gain or capital loss is the contrast that exists between the cost of acquiring an asset and the price acquired when selling it. According to the Australian government, one is required to pay tax on the capital gains; it still arises as part of the general income tax one incurs though more generally termed to as capital gains tax (CGT). If one has incurred a loss it may not be claimed though may be applied to minimize a capital gain in the income year. If a person suffers from capital loss and it is more than the capital gains one is entitled to transfer the loss to another period and reduce it against the capital gains in the later years.
Capital gain tax asset is explained in 108-5 based on the Income Tax Assessment Act of 1997 as “any kind of property” or “a legal or equitable right that is not property.” Such assets may involve lands, buildings, shares and debts among others. The capital gain tax will be charged when selling shares or real property. Any step taken by an individual when selling an asset has to be informed of the impacts that he or she will face on the CGT. They are required to be keen on the CGT holding rule that will or may issue a discount on the CGT depending on the transactions that have taken place.
One should first take into consideration if there is any CGT event that has taken place, as forms of activities are able to trigger the capital gain tax, more selling a property. The tax provisions of tax triggered may be avoided only if there is an exception or a rollover that is provided; one has to do calculations of the capital gain. Attaining advice from an experienced tax accountant would do much help to an individual. Of consideration is that the date of selling of the asset is when the asset selling process begins and not when it has been completed. It is therefore with noting that a CGT event occurs when an exchange has taken and not when the events are settled.
Capital gains happen when an individual is able to acquire more money from an item that he or she has paid for. The net capital gain is included in the taxable income and the taxing happens in a marginal form. Capital losses on the other hand are not excluded from the taxable income, though they may be applied to limit any form of capital gain, hence going against the taxable income. However, they may be used to limit additional forms of capital gains in a financial year or the consecutive years. Gains are transferrable, though applications are necessary when they increase (decisions on the year is not based on the individual).
The law states that assets acquired are subjected to follow the law as from 20th September 1985 unless it is excluded. Asset selling, real estates are or shares are common manner used to acquire capital gain or loss. It is similarly applied to assets not touchable or intangible goods. Exception of CGT happens on personal assets like house, vehicle and other personal things like furniture. However, CGT is not applicable to depreciating assets that are applied mainly for taxable reasons like business items or fittings in rental substances. CGT happens to Australians in every part of the world.
Issues
Jack purchased a property on a sole ownership basis; he purchased a house and a piece of land that he divided to fit the house and the paddocks meant to uphold his cattle farming. In this case he should already be in possession of records of the acts, transactions, events or instances that are required for capital gain or capital loss. Due to illness that Jack suffered, he decided to sell his property as well as the house. Jack has had the property for two years 4 months and 14 days. On the sale of the property he will be liable to pay Capital Gains on Tax as well as receive exemptions from the CGT or relief. This will however be based on certain things from onset of buying the asset, the transactions he undertook and the selling of the asset.
The house bought by Jack is his main residence meaning that he lives in it and is not just an empty block; the transactions incurred for the house did not involve any other activity like renting hence consideration will be taken when calculating the capital gain tax. The cattle farming enterprise that Jack is involved in is a depreciating asset that he uses for personal satisfaction. The house on the other hand is an asset that contains several personal items and collectables. The acquisition, holding and selling of the assets are done satisfactorily within the effective date of the CGT. The assets that Jack is in possession of are mainly assessable income, that is, they are mostly involved in creating income for him.
Rules
Any Australian resident living in any part of the world is supposed to be liable to incur a capital gain or capital loss on any property owned in any part of the world. Before any calculation of tax, Jack will have to avail records of the transactions he was in (ATO, 2011). The timing for the CGT event is quite useful as it will help him to know which year of income he should report his capital gain. It similarly governs if or not he will be liable to get a discount on the CGT. The CGT event occurs when Jack is involved in a contract for disposing the property. In instances when there is no contract, then the CGT event will take place when a person (in this case Jack) ceases to being the owner. The capital gain acquired by Jack has to be part of the contract when selling a real estate; this however should happen when settlement of the selling has been completed. If in any case he the settlement of the property occurs after lodging the tax return and has been assessed for the applicable income year, one will be required to request that changes be made. Jack should know that according to the Australian law on capital gains tax, that there are some things that can be disregarded or excluded, as well as capital losses that one has to disregard, that is they cannot be used to offset a capital gain. This consequently leads to a reduction of the income that will be examined.
The most notable exemptions are capital gains or losses for the main residence, this however depends on how an individual (in this case Jack) came to own the house and what was done to it like renting it. Exceptions on the house would however take place if the person lives in the house. Full exceptions will issue on the house if it is on a land of less than 2 hectares and below, it has not been used as source of income for the individual. It may also happen for a car that is meant to carry goods not below a tonne and lesser passengers than nine, or motor cycle. Exceptions can also occur on pre- CGT assets, these are assets that were acquired on the initial date of 20th September which the capital gains tax was taken up to be law in Australia. This however excludes certain pre-CGT shares in personal enterprises or interest vested in private trusts where the joining of certain aspects may at times cause a CGT event leading to a taxable capital gain. A unit holder is not liable to have any form of interest on the property of a unit trust for CGT purposes. Personal assets that are kept for personal use are not considered as collectable, its acquisition being low than $ 10,000 is not meant for CGT on selling it.
Exceptions are also possible on collectables, which are stuff that are applied for the reason of enjoyment or decorations like jewelry, antiques, coins, postage stamps as well as paintings, it may as well be an interest, debt or right to acquire in the items stated and personal stuff. Depreciating assets that are required for taxing reasons are exempted. It is also applicable to CGT items that are applied to create an exempt income or a form of non-examinable non-exempt income.
Roll overs are allowed or happen when certain CGT events accrue to an asset. Rollovers only occur when an item has undergone; loss, destruction or compulsory acquisition. In such an instance on is able to choose either to transfer a liability to pay tax on the capital gain attributed to the disposal or otherwise acquire a CGT exception for a substitutive asset if one acquired the asset before the effective date of capital gain (that is 20th September 1985). A roll over is applicable when one disposes the CGT asset to another organization not being a foreign country.
A disregard on capital gain on a small business may be done through concession; this is possible through a 50 percentage active asset reduction additional to the 50 percentage discount on the CGT considering that one has owned an asset for over 12 months or even higher. To apply concession the four basic conditions used on the four concessions have to be satisfied. One is bale to apply several concessions until the capital gain is minimized to nothing giving one the ability to acquire the highest tax outcome for the prevailing conditions.
In calculating the capital gain, most of the events acquire it by finding the difference between the capital proceeds and the cost base of the CGT asset. It is through this that one receives more asset than it costs an individual. The cost base of a CGT asset is largely what one pays for it along with other costs that are related to it like purchasing it, holding it and selling it. Ownership of an asset for more than 12 months before selling or disposing it creates a relief on the capital gain.
There is a fact sheet that is applicable to capital gain tax on business assets in the year period 2007-2008 and the following years to come. The concession gives the user the ability to defer capital gain from the selling of the business asset for a period of not less than two years. CGT on small business concessions may exempt or minimize ones capital gain. The choice to roll over the whole of the property or part of it is dependent on the owner of the property, if in any case a rollover has not taken place on the gain it is involved in his or her assessable income. This is unless one chooses one of the remaining concessions of the gain.
Argument
Jack will be liable to incur capital gain on his assets considering that the CGT event occurs on an asset of an Australian resident that be living in any part of the world. The date at which Jack purchased the property is within the period at which effective taxation will apply according to the Australian law (20th September 1985). This will be useful when calculating the capital gain; so as to not pay more tax, so as to know the method to calculate the capital gain. The form of ownership that Jack is in is a sole trader hence not in any partnership, his capital gain or will be calculated wholly on him.
Jack has records of the transactions that will be useful to working out the capital gain as well as ensuring he does not pay more. Jack is not liable to incur penalties on the records as according to the rules, it has to be at least below five years after acquiring it while in his case it hangs around two years after acquiring it. Jack has also specified the events or circumstances leading to the transaction (Editor-in-Chief Mendel, 2010/11). However, the records made by Jack lack some important aspects that are necessary; the records lack the parties that were involved in the transaction that was carried out.
The type of CGT carried out by Jack is the ceasing to be the owner of the property, which is the most common CGT, by selling it. This is as a result of illness that Jack faced possibly leading him. The timing of a CGT event is similarly crucial as it is useful when one is to report the capital gain and if entitled to CGT discount. Jack has been involved in selling an active asset, which is the cattle farming enterprise he is involved in, and according to roll over by selling it one may defer the capital gain. This happens until the next CGT event happens which will eventually crystalize the gain. In the event a CGT event is crystallized, an initially deferred gain may wholly or partly become assessable. Jack is liable to receive a relief on his capital gain considering that he has had his property for over the 12 months period specified as the cut. The CGT is acquired by what is calculated from the transactions of acquiring, possessing it and selling it.
Jack is able to acquire concession so as to defer capital gain from the selling of the business asset, considering that he has been operating the business for more than two years. The business being operated by Jack is a small business; hence the CGT on such business concessions may exempt or limit his capital gain. Jack will have to make a decision whether to roll over all of the property he owned or just a part of it. If in any case Jack does not make any roll over of his property on the gain, it will consequently be included in his or her assessable income.
Jack will similarly acquire exemptions on his property; there are certain capital gains that are not included in the assessable income while similarly some capital losses that are disregarded; meaning one is not liable to offset a capital gain and hence limiting once assessable income. In Jack’s instance the exceptions will be applicable his main residence depending on how he acquired the house and what has been done to it like renting. On the issue of selling his house, Jack will be able to acquire full exceptions on the property considering that he has used the house for his personal use and not used it as a way of acquiring income. Moreover, the land is on a land that is below 2 hectares, that is it occupies 1 hectare of land. Exceptions will also be included on Jack’s collectables; items that he uses for personal satisfaction for himself or associates, these are things like paintings, jewels as well as interest vested in these things, and debt from them.
Assets that loss their value with time, like the cattle farming enterprise, also termed to as depreciating assets are included in the capital gain tax. The gains that are attributed to these assets are not taken as assessable income, otherwise deductions. This is because, according to the Australian law on exceptions based on depreciating assets, this rule is only applicable to assets that have not been used for private reasons. In this case Jack has used the cattle farming enterprise for his personal purpose and through this he is liable to receive an exception on his asset.
Conclusion
It is advisable to keep records of all the transactions made by an individual from purchasing the assets, operations done on it and also when selling the asset, as all of these steps will play a role when it comes to taxation.
In Australia the capital gains tax is applicable when an individual has made profit on the selling of a capital asset taken up before the effective date. The capital gains tax exceptions for gains that are accrued to selling of a house is a huge relief that most individuals are able to benefit in their future life. One is able to get the net CGT by calculating total gain then subtracting it from the losses incurred. The net gain is added to the assessable income of the individual paying the tax when lodging the tax returns (tax, 2011). The CGT is applicable to all Australians that may have residence within the country and outside the country.
Bibliography
ATO. (2011). Australian Taxation Office. Retrieved September 3, 2011, from Australian Government: http://www.ato.gov.au/
Editor-in-Chief Mendel, C. A. (2010/11). Australian master financial planning guide 2010/11. Australia: CCH Australia Limited.
tax, C. g. (2011). Australian Capital Gains Tax. Retrieved September 3, 2011, from http://www.capitalgainstax.com.au/cgt_assets.htm
