Re: Pay capital gains tax on land sold after 12 months? -- Cox Business Accountants

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Date Posted: Wednesday, October 29, 04:03:32pm
Author: Anthony Kiro
Subject: Re: Pay capital gains tax on land sold after 12 months?
In reply to: Mark 's message, "Pay capital gains tax on land sold after 12 months?" on Wednesday, October 29, 07:35:48am

Dear Mark,

The ATO considers that a period of 365 days must elapse between the day in which the asset was acquired and the day in which the CGT event occurred. In your case you will still be required to pay CGT, however assuming the asset has been held for more than 12 months, the discount method of calculating CGT can be used. I have included a brief explanation, and example outlining the advantages of using this method.

Discount method
The discount method is one of the ways to calculate your capital gain if:
� the CGT event happened after 11.45am (by legal time in the ACT) on 21 September 1999
� you acquired the asset at least 12 months before the CGT event.
If you use the discount method, you do not index the cost base but you may be able to reduce your capital gain by the CGT discount. However, you must first reduce your capital gains by the amount of all your available capital losses (both current year and prior years) before you discount any remaining capital gain.
If you acquired the asset before 11.45am (by legal time in the ACT) on 21 September 1999, you may be able to choose either the discount method or the indexation method, whichever gives you the better result.

Discounted capital gain

A discounted capital gain is a capital gain that has been reduced by the CGT discount. If the discounted capital gain has been received from a managed fund, the amount will need to be grossed up before you apply any capital losses and then the CGT discount.

The discount method

You can use the discount method to calculate your capital gain if:
� you are an individual, a trust or a complying superannuation entity
� a CGT event happens in relation to an asset you own
� the CGT event happened after 11.45am (by legal time in the ACT) on 21 September 1999
� you acquired the asset at least 12 months before the CGT event, and
� you did not choose to use the indexation method.
In determining whether you acquired the CGT asset at least 12 months before the CGT event, both the day of acquisition and the day of the CGT event are excluded.

Example

CGT discount method

Sally acquired a CGT asset on 2 February 2002. Sally is entitled to apply the CGT discount if a CGT event happens in relation to that asset on or after 3 February 2003.
In certain circumstances, you may be eligible for the CGT discount even if you have not owned the asset for at least 12 months. For example:
� if you acquire a CGT asset as a legal personal representative or as a beneficiary of a deceased estate. The 12-month requirement is satisfied if the asset was acquired by the deceased
o before 20 September 1985 and you disposed of it 12 months or more after they died, or
o on or after 20 September 1985 and you disposed of it 12 months or more after they acquired it
� if you acquired an asset as a result of a marriage breakdown, you will satisfy the 12-month requirement if the period your spouse owned the asset and the period you have owned the asset are in total equal to or greater than 12 months, or
� if a CGT asset is compulsorily acquired, lost or destroyed and you acquire a roll-over replacement asset, you will satisfy the 12-month requirement for the replacement asset if the period of ownership of the original asset and the replacement asset is at least 12 months.

Discount percentage

The discount percentage is the percentage by which you reduce your capital gain. You can reduce the capital gain only after you have applied all available capital losses.
The discount percentage is 50% for individuals and trusts, and 33 1/3% for complying superannuation entities and eligible life insurance companies.

Choosing the indexation or discount method

For assets you have held for 12 months or more, you may choose to use the indexation method or the discount method to calculate your capital gain. There is no one factor you can use as a basis to select the better option as it depends on the type of asset you own, how long you have owned it, the dates you owned it and the past rates of inflation. Because capital losses must be offset against capital gains before the discount is applied, your choice may also depend on the amount of capital losses that you have available.

For example, Justin sold some land and has a $10,000 capital gain under the discount method (before applying the CGT discount) or a $7,000 capital gain under the indexation method. If Justin has no capital losses the discount method will produce the smaller capital gain (that is, $5,000).
However Justin also made a capital loss of $5,000 on the sale of some shares. He will be better off to use the indexation method to work out the capital gain from the sale of his land. Under this method his net capital gain is $2,000 ($7,000 - $5,000). If he used the discount method his net capital gain would be $2,500 [($10,000 � $5,000) x 50%].

It is probably best to calculate your capital gain using both methods to find out which gives you the better result. This is shown in a worked example.

Example

Choosing the indexation or discount method
Val bought a property for $150,000 under a contract dated 24 June 1991. The contract provided for the payment of a deposit of $15,000 on that date, with the balance of $135,000 to be paid on settlement on 5 August 1991.
She paid stamp duty of $5,000 on 20 July 1991. on 5 August 1991, she received an account for solicitors fees of $2,000, which she paid as part of the settlement process.
She sold the property on 15 October 2001 (the day the contracts were exchanged) for $215,000. She incurred costs of $1,500 in solicitors fees and $4,000 in agents commission.
Val's capital gain calculated using the indexation method
Deposit X indexation factor
$15,000 X (123.4 � 106.0 = 1.164) = $17,460
Balance X indexation factor
$135,000 X (123.4 � 106.6 = 1.158) = $156,330
Stamp duty X indexation factor
$5,000 X (123.4 � 106.6 = 1.158) = $5,790
Solicitors fees for purchase of property X indexation factor
$2,000 X (123.4 � 106.6 = 1.158) = $2,316
Solicitors fees for sale of property
(indexation does not apply) $1,500
Agents commission (indexation does not apply) $4,000
Cost base (total) $187,396
Val works out her capital gain as follows:
Capital proceeds $215,000
less cost base $187,396
Capital gain $27,604
(Val's total current year capital gain using this method)
Assuming Val has not made any other capital losses or capital gains in the 2001�02 income year and does not have any prior year net capital losses, her net capital gain using the indexation method is $27,604.
Val's capital gain calculated using the discount method
Deposit $15,000
Balance $135,000
Stamp duty $5,000
Solicitors fees for purchase of property $2,000
Solicitors fees for sale of property $1,500
Agents commission $4,000
Cost base (total) $162,500
Val works out her capital gain as follows:
Capital proceeds $215,000
less cost base $162,500
Discount capital gain
(Val's total current year capital gain using this method) $52,500
less 50% discount
(as Val has no capital losses) $26,250
Net capital gain $26,250

As the discount method provides Val with the better result, she will show the amount worked out using the discount method on her tax return rather than the amount worked out using the indexation method.

Hope this helps.

Anthony

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