PITL brief update Week 6This weekCGT upon DeathCGT.docx

PITL brief update: Week 6
This week:
CGT upon Death
CGT Exemptions
Other CGT events
1
Revision
2 special types of CGT assets:
Collectibles (sub division 108-B)
Personal use assets (sub division 108-C)
Both receive special treatment if the cost is less than $500 for
collectibles and $10,000 for personal use assets
2
Revision
Time of CGT Event (for A1 event)
If contract is signed between parties, the contract date is the
time of the CGT event
If no contract, it is the time the transfer of the CGT asset
happens

3
Revision
CGT Calculation
Capital Gain = Capital Proceeds – Cost Base
Or reduced cost base for Capital Losses
4
Revision
Capital Proceeds (Division 116)
what you receive for the event (sales price)
6 modification rules
Market value substitution rule
Apportionment
Non receipt rule
Repaid Rule
Assumption of Liability
Misappropriation Rule
5
Revision
Cost Base (Division 110)
1st element – what you paid for the asset
2nd element – incidental costs with acquisition or event
3rd element – costs of owning the asset
4th element – capital spending to increase value of asset
5th element – costs to defend or preserve title
6

Revision
Cost Base Modifications (Division 112)
1st – if someone gets asset as gift or non-arms length
transaction, 1st element of cost is is market value
2nd – split assets
3rd – merged assets
4th – apportionment
5th – assumption of liability
7
Revision
Reduced Cost Base (Division 110)
Used for capital losses
Same calculation as cost base but no third element (costs of
owning the asset not included)
Same modifications as for cost base
8
Revision
CGT concessions
Indexation
Hold asset for more than 12 months
Acquire asset on or before 11:45AM on 21 SEP 1999
Only applies to capital gains
Results in raising the cost base to reflect the real cost
9

Revision
Discount
50% discount if conditions are met
only applies to individuals, trusts and complying super funds
(but super funds can only apply 33%)
CGT event must occur after 21 SEP 1999
Must hold asset for more than 12 months
Cannot claim indexation
10
Revision
CGT Upon Death
Section 128-10: disregard capital gains upon death
Cost Base for the Beneficiary
1st situation where deceased person bought before CGT date or
bought after CGT date but was main residence – cost base is
market value at time of death
2nd situation where deceased bought after & was not main
residence – cost base is the full cost base of the deceased
11
Revision
Death & Discount Percentage
12 month period still applies to claim discount
If deceased bought asset before CGT date, must be 12 months
from when they died

If deceased bought asset on or after CGT date, 12 months starts
from when deceased acquired asset
12
Certain situations where have inherited asset, will pay no CGT
when sell it (or other Event occurs) s118-195
Disregard CG of dwelling inherited if have:
AT LEAST ONE requirement in ‘column 2’; and
AT LEAST ONE requirement in ‘column 3’;
Column 2 (regarding deceased):
deceased bought it on/after 20/9/85 AND deceased used it as a
main residence before they died;
deceased bought it before 20/9/1985 (even if not main
residence);
Column 3 (regarding beneficiary):
person that inherits it sells it within 2 years;
person that inherits is uses it as their main residence from time
they inherit till the Event.
13
s118-195 cont’d
Eg: ‘A’ purchases a property in 1984:
A dies in January 2009;
B inherits and sells it in January 2010;
NO CGT when B sells, s118-195 exemption applies;
In column 2 = deceased bought before 20/9/85;
In column 3 = beneficiary sold within 2 years;
OR change facts as follows:
B sells in 2012 but lived in it as main residence;
As a result, NO CGT;
In column 2 = deceased bought before 20/9/85;
In column 3 = beneficiary used it as their main residence.
14

SMALL BUSINESS CONCESSIONS (SBC)
Reduces a TP’s NCG arising from the disposal of the
business.
Qualifying conditions (Subdiv 152-A):
CGT event condition;
Entity condition – small bus. entity or net value of assets not
exceeding $6m;
Active asset condition – asset must have been used or ready for
use in the course of carrying on the bus. or inherently connected
with the bus.;
CGT concession stakeholder condition – if asset in a share or
interest in a trust there must be a CGT concession shareholder.
15
Source: Virginia Beniac-Brooks
Small Business Concessions (SBC) cont’d
Choice of one or more of the following:
The 15 year exemption;
The 50% reduction concession;
The retirement concession;
The small business rollover concession.
16
Reduces a TP’s net CG arising from the disposal of the
business;

If certain qualifying conditions are met then there will be
very generous tax concessions for small business TPs ie CG
may be eliminated or reduced by 1 or more of the 4 CGT SBC
that are available;
Note that there is NO statutory limit to the amount of the CG
that can be eligible for the concessions and thereby eliminated
or reduced.
17
Small Business Concessions (SBC) cont’d
The 15 year exemption (Subdiv 152-B):
With this concession a Small Business Entity (SBE) can
disregard a CG arising from an active CGT asset that it has
owned for at least 15 years;
The 50% reduction concession (Subdiv 152-C):
With this concession the CG made by an SBE is reduced by
50%. This will be in addition to the CGT general discount;
The retirement concession (Subdiv 152-D):
With this concession a SBE can disregard up to $500,000 of a
CG from a CGT event that has happened to any of its CGT
assets;
18
SBC: The 4 concessions
The small business rollover concession (Subdiv 152-E):
This concession allows a SBE to defer the making of a CG from
a CGT event happening to one or more of its active CGT assets.
Importantly the 50% active asset reduction, the retirement
exemption and the roll-over relief can be applied in conjunction

with each other to reduce or eliminate a CG.
19
SBC: The 4 concessions cont’d
2 preconditions must be satisfied:
there must be a CGT event relating to a CGT asset; AND
the CGT event must, apart from the concession, result in a CG;
AND
either 2 or 3 access conditions must be satisfied:
the “entity” condition – SBE or net value of assets not
exceeding $6m;
the “active asset” condition – asset must have been used
or ready for use in the course of carrying on the business or, if
it is an intangible asset, it is inherently connected with the
business; AND
CGT concession stakeholder condition – if asset in a share or
interest in a trust there must be a CGT concession shareholder
20
SBC: Qualifying conditions (Subdiv 152-A)
Note: Some concessions have extra conditions to satisfy:
eg the 15 year exemption applies only where an asset has been
owned for 15 years and the TP retires.
The concessions are available to entities carrying on a business
through all forms of business vehicle: sole traders, companies,
trusts and partnerships;
As of 1/7/2006 a person who acquires an asset from a deceased
person will be eligible for the concessions where the deceased
would have been entitled to the concessions and the relevant
CGT asset is sold within 2 years of the date of death.
21
SBC: Qualifying conditions

1st precondition: CGT event relating to a CGT asset
s152-10(1)(a): Before an entity can seek to access the SBCs
there must have been a “CGT event” with respect to a CGT
asset that the TP owns;
Remember a CGT event happens when a transaction takes place,
such as the sale or purchase of a CGT asset. The result is
usually a CG or CL.
22
The CGT events: (see Table in s104-5):
A1 - Disposal of CGT asset;
C1 - Loss or destruction of a CGT asset;
C2 - Cancellation, surrender and similar endings;
D1# - Creating contractual or other rights (re below note)
F1 - Granting a lease;
H2 - Receipt for an event relating to a CGT asset.
# (re: D1): This precondition does not apply in the case of
CGT event D1;
s152-12 requires that CGT event D1 "be inherently connected
with a CGT asset" of the TP;
Eg where the vendor of a business grants a restrictive covenant
to the purchaser.
23
Example:
TP operates a motel which they acquired after 19/9/85. TP
grants a lease to a 3rd party to use the premises & run the motel
business as consideration for the 3rd party paying the TP a lump

sum;
Is there a CGT event? Yes - F1 when the TP grants, renews or
extends a lease of the motel (being a CGT asset) and therefore a
CG or CL may arise from the CGT event happening;
If the basic condition under s152-10 is satisfied, the TP may be
eligible to reduce the CG resulting from the CGT event using
the SBC.
24
2nd precondition: CGT event results in a CG
The CGT event must have resulted in a CG;
Note: that CGT SBC have no application to:
assets acquired or deemed to be acquired before 20 September
1985; or
CGT events which give rise to a capital loss.
25
Access conditions
Once a TP has satisfied the 1st and 2nd preconditions, they
must satisfy the 2 main access conditions.
1. Entity condition – SBE or net value of assets not exceeding
$6mil; AND
2. Active asset condition – asset must have been used or
ready for use in the course of carrying on the business or
inherently connected with the business
A 3rd access condition must be satisfied if the CGT asset giving
rise to the CG is a share in a company or an interest in a trust.
3. CGT concession stakeholder condition – if asset in a share or
interest in a trust there must be a CGT concession shareholder.

26
Access conditions cont’d
The 1st access condition is the “entity” condition that can be
met in one of 3 ways:
(1) the TP qualifies as a SBE (s152-10(1)(c)(i)); OR
ie the entity
- Is carrying on a business; AND
Satisfies one of 3 tests based on turnover:
the aggregated turnover of the entity in the previous year was
less than $2 million; or
the aggregated turnover for the current year is likely to be less
than $2 million; or
the aggregated turnover for the current year is actually less than
$2 million (s328-110).
27
1st Access condition cont’d
“aggregate turnover” = revenue of business less the GST sales
component. If turnover of shop = $1.1m (with GST) its
aggregate turnover = $1m and it will be an SBE;
(2) the TP satisfies the $6m NAVT (s152-15ITAA97); OR
ie the maximum net assets must not exceed $6m
“JUST BEFORE THE CGT EVENT” after taking into account:
The TPs assets (s152-15(a)); AND
The net value of any entities (company or trust) connected with
the TP (s152-15(b)); AND
The net value of the CGT assets of any “affiliates” of
entities connected your affiliates (s152-15(c)).
28
In s328-130 “affiliate” means a person or company who

acts in accordance with the TP’s wishes or in concert with the
TP - could include a spouse.
The words “JUST BEFORE THE CGT EVENT” means is that
you count BOTH asset the TP just sold and made a CG on AND
assets that the TP still owns – the latter will usually have
nothing to do with business sold. The total must not be more
than $6m;
(3) the TP is a partner in a partnership that is a SBE for the
income year and the CGT asset is an asset of the
partnership (s152-10(1)(c)(iii) ITAA97).
29
Eg Maximum Net Asset Value Test (NAVT) = $6m max
A has a factory worth $1.5m which she owns directly. She also
holds a 60% interest in a company, X Ltd. X Ltd has assets
worth $2m, so A’s interest is worth $1.2m.
A also owns an investment property worth $400,000, and lives
in a house worth $1m. A’s husband also has a shop worth
$500,000. This shop is independent to A’s factory. A sells her
factory for $1.5m and wants to know if she passes the NAVT.
If she passes this & the other tests then she will get
concessional treatment on the CG she made on selling the
factory.
30
How do we work out if the TP satisfies the $6m NAVT (s152-
15ITAA97)?
TP’s own assets – s152-15(a)
A’s assets: $1.5m (factory she just sold)

A’s investment property: $400,000
Net Value of assets of any entity connected with A. In other
words, if company or trust is “connected” with the TP then put
the FULL VALUE of the company/trust – not just the share that
the TP owns – s152-15(b).
31
Therefore we include the full value of X Ltd, as A owns
60% of it, controls it. So include $2m, not just A’s share of it
($1.2m);
Note that we didn’t include the shares in the first category (to
avoid double counting);
32
Assets of A’s affiliate – s152-15(c):
Nil - because even if A’s husband is considered an affiliate, the
shop owned by A’s husband is independent of A’s factory – so
don’t include it.
So the total assets would be $3.9m, and A would pass the
NAVT, as there is a $6m limit.
Note: didn’t count house she lives in, don’t count for NAVT;
Remember if the TP did not meet the maximum NAVT then you
need to look at the alternative ie Whether the TP meets the
requirements of a ‘SBE’ under s328-110 – that turnover is
<$2/year.
33
2nd access condition
The 2nd access condition is the “active asset” condition;
Small business CGT concessions apply only where a TP

disposes of "active assets“ ie the asset that the TP has made a
gain on;
The CGT asset will be “active asset” if:
(i) the asset (whether tangible or intangible) was owned by
the TP; and
(ii) it was used in the course of carrying on a business by
that TP (s152-40 ITAA97).
34
2nd access condition cont’d
Note under s152-40(4) certain assets are NOT active. One
worth mentioning is an asset whose main use is to derive
interest, annuity, rent, or royalties, etc. So an investment
property would not be an active asset as it’s main use is to
derive rental whereas a guesthouse would be an active asset. If
the TP owns copyright in book, get royalties – they are not
active asset if you sell the royalties. Examples of active assets:
shop or a factory;
There is a required ownership period for active asset:
(a) the TP must have owned the asset for 15 yrs or less and
the asset was an “active asset” for a total of at least half of the
period; or
35
2nd access condition cont’d
(b) the TP must have owned the asset for more than 15 years
and the asset was an active asset of the TP’s for a total of at
least 7.5 years during the period. (s152-35);
Note: the TP only needs to show this for the asset that was sold
and that a gain was made on, AND the TP wishes to claim the
small business concession. The “active asset” test DOES NOT
apply to the other assets that the TP still owns.
36

3rd access condition
The 3rd access condition is the CGT concession stakeholder
condition.
This only applies if you are considering a CGT gain in respect
of shares in a company or units in a trust.
For the CGT Concession Stakeholder Test to apply you need to
show either (s152-60):
(i) the TP claiming the concession is a ‘significant
individual’ in the company or trust; OR
(ii) is a spouse of the ‘significant individual’ in the
company/trust that the TP made a gain on.
37
3rd access condition cont’d
What is a “significant individual”?
A ‘significant individual’ of the company or trust is someone
whose interest is at least 20% (s152-55);
Example: A’s wife holds 99% of X Ltd. A holds 1%. If A sells
his 1%, then it would pass CGT Concession Stakeholder test
because A’s spouse was a “significant individual” in X Ltd, in
that her interest was at least 20%.
If instead of A’s spouse, A’s interest was at least 20%, then
again A would have passed this test as well.
38
3rd access condition cont’d
But if TP sells $1m of BHP shares, then the TP would not meet
this condition because the TP was not a significant individual in
BHP. He did not own 20%+ of it, so can’t claim small business
concession on sale of shares.

ONCE YOU HAVE WORKED OUT THE PRELIMINARY
ISSUES OF ELEGIBILITY IT IS THEN NECESSARY TO
CONSIDER WHETHER ANY OF THE SBC/ EXEMPTIONS
APPLY.
39
If the TP is eligible for the Small Business CGT Concessions
we need to consider ask which of the Concessions apply?
The 15 year exemption;
The 50% reduction concession;
The retirement concession;
The small business rollover concession;
You MUST consider them in the following order:
1. 15 year exemption?
Any gain left?
2. 50% concession?
40
Then, for gains subject to 50% concession whether either the
retirement exemption or the rollover provisions apply:
3. Retirement exemption?
4. Rollover?
41
1st SBC: 15 Year Exemption (Subdiv 152-B)
A SBE can disregard a CG arising from a CGT asset that it
owned for at least 15 yrs under Subdivision 152-B.
It is a FULL EXEMPTION from CGT – it’s the most generous
of the 4 CGT SBC;
Under s152-105 if the TP is an individual and the assets being
sold are NOT an interest in a co. or trust then for this CGT

exemption to apply the following must apply:
1. The basic conditions in Subdiv 152-A are satisfied ie
the TP is a SBE or the net value of the CGT assets that the TP
owns must < $6m and the CGT asset being disposed is an
“active asset”;
42
1st SBC: 15 Year Exemption (Subdiv 152-B)
The TP owned the asset for at least 15 years; AND
3. The TP is at least aged 55 or over at the time of the CGT
event and is retiring OR is permanently incapacitated.
If these requirements are met then there will be NO CGT
payable.
Under s152-105 if the TP is an individual and the asset being
sold is share or a trust interest, then for this CGT exemption to
apply you must show the following:
Points 1 to 3 above + during period the TP passes the
‘significant individual’ test for a total of at least 15 years
(s152-105(c)).
43
Example
Jane is aged 70 and bought her business in 1986. Her business
is a shop. Under the NAVT, she owns $3 million of net assets.
She makes a CG on her business during 2009 of $1m, ie Capital
Proceeds – Cost Base = $1m.
She would pay no CGT because:
The basic conditions in Subdiv 152-A are satisfied;
NAVT – less than $6m ($3m);
Active asset test would include a shop;
She owned the shop for at least 15 years, she is 70 and retiring.
44

2nd SBC: 50% reduction concession (Subdiv 152-C)
If the TP does not meet the requirements of the 15-year
exemption the 50% reduction will allow a qualifying TP to
reduce CGT by 50%.
To qualify the TP need only show that he/she has met the
basic conditions of subdiv s152 A - the TP is a SBE or the net
value of the CGT assets that the TP owns must < $6 million and
the CGT asset being disposed is an “active asset”.
If the TP is eligible for 50% Div 115 concession (the 50%
discount), this concession is on top of that
We covered the 50% Discount in Week 5
45
Example: $100 CG, eligible for this small business 50%
concession and Div 115 general 50% discount.
Net CG = $25 ie $100 x 50% discount (Div 115) x 50%
discount (small business concession)
***Is it possible that eligible for the small business 50%
concession but not the 50% Div 115 discount?
Yes for example if owned the business for less than 12 months
and sold it, if entitled to small business concession, can use
50% small business concession, but not general 50% discount.
46
2nd SBC: 50% reduction concession cont’d
Possible scenarios:
TP gets both small business 50% and general 50% discount;
TP gets only small business 50% BUT not general 50%
discount (eg owned < 12 months);
TP only gets 50% general discount BUT not 50% small
business concession (eg sold residential property not an active
asset); or

TP does not get either discount eg not eligible for small bus
concession and held asset < 12 months.
47
2nd SBC: 50% reduction concession cont’d
Remember 50% CGT DISCOUNT? (from Wk 5 slides);
A “discount CG” is a CG that satisfies the following
requirements (s115-5):
CG must be made by an individual, complying superannuation
entity or trust (s 115-10);
CG must result from a CGT event happening after 21 September
1999 (s115-15);
CG must have been calculated without taking indexation into
account (s115-20); and
CG must be in respect of a CGT asset held for at least 12
months before the CGT event
The CGT event must not be one listed in s115-25(3)) ie exempt
(s115-25).
48
Discount percentages for (s115-100):
Individuals and trusts = 50%
Complying superannuation entities = 331/3%
Events which are exempt from the 50% CGT Discount are
(s115-25(3)):
Events D1, D2, D3, E9, F1, F2, F5, H2, J2, J5, J6 & K10.
49
If unable to obtain 15 year exemption, a TP may still be
entitled to a full exemption for a CG arising from a sale of a

CGT asset connected with small business if the proceeds are
connected with the TP’s retirement:
To receive this exemption (s152-305):
1. The basic conditions in Subdiv 152-A are satisfied ie the
TP is a SBE or the net value of the CGT assets that the TP owns
must < $6 million and the CGT asset being disposed is an
“active asset”; AND
50
3rd SBC: Small Business Retirement (Subdiv 152-D)
2 (i) If the TP is under 55 years, the proceeds have been paid
into a complying superannuation fund (ie into a retirement
fund); OR
2(ii) If TP is 55 years or over, can do what he/she wants with
money i.e. No requirement for proceeds to be paid into a
superannuation fund.
NOTE: There is a maximum of $500,000 which a TP can use for
this exemption over a lifetime (s152-320). The TP may apply
other concessions such as the 50% discount concession under
Subdiv 152-C to reduce the amount before applying the
retirement concession.
51
3rd SBC: Small Business Retirement (Subdiv 152-D)
4th SBC: Roll-over (Subdiv 152-E)
This concession is aimed at situations where TP has sold small
business assets and bought ‘replacement ones.’ Eg sell shop,
make CG on this, and then buy factory. If use the roll-over
provisions then TP will not have to pay CGT on CG made by
selling shop;
To receive this exemption you must meet the following
requirements (s152-410):

The basic conditions in Subdiv 152-A are satisfied
ie TP is a SBE or the net value of the CGT assets that the TP
owns must < $6m and the CGT asset being disposed is an
“active asset”;
TP has made a choice to access the roll-over relief;
52
4th SBC: Roll-over (Subdiv 152-E)
3. TP acquires a replacement asset within the “replacement
asset period” ie generally the period commencing 1 yr before &
ending 2 yrs after the last CGT event in the inc. year for which
the roll-over is chosen;
4. The replacement asset is an active asset when it is acquired
or by the end of 2 yrs after the roll-over is chosen; and
5. If the replacement asset is a share in a co. or an interest in
a trust the TP is a significant individual of the co. or trust just
after the share/ interest was acquired.
Note: The rollover relief may be applied after the CGT general
discount and the 50% active asset reduction.
53
A TP can choose to use the roll-over provisions for part or all
of the CG which will allow him/her to disregard all/part CGT
payable on the CG made (s152-415). No CGT on part of gain
elected to use rollover on.
NOTE: When the roll-over applies, the TP should first
determine the CG made on the asset disposed of, and then apply
any relevant discounts (such as the ones in Div 115 and
subdivision 152–C). The rollover will then apply to this “net”
amount.
54
4th SBC: Roll-over (Subdiv 152-E) cont’d

If the TP fails to satisfy the above conditions one of 3 things
could happen:
1). The Rollover will be Fully Reversed;
The rollover will be FULLY reversed if the TP does not either
do one or both of the following - (a) and/or (b):
(a) Fails to acquire a replacement asset (or fails to incur
capital expenditure on improvements to assets) within the
“replacement asset period” ie generally the period commencing
one year before and ending 2 years after the last CGT event in
the income year for which the roll-over is chosen.
55
Eg sell shop 1, make CG of $100,000 (after 50% discount if
relevant, and the general CGT 50% concession). Then TP
spends part or all of this on renovating shop 2 that already
owned.
(b) If the replacement or capital improved asset is not, or
ceases to be, an active asset for the TP within the “replacement
asset period”
Eg sell shop 1, make CG of $100,000 (after 50% discount if
relevant, and the general CGT 50% concession), and spend
part/all of it on buying a factory.
56
If either or both of (a) and (b) occur then a CGT event J5 (s104-
197) is triggered and the roll-over relief is reversed.
The time of the event is at the end of the replacement asset
period. This means that the CG is assessable in the income year

that the CGT event occurs and not the income year in which the
CG arose originally.
57
2). The Rollover will be Partially Reversed:
If the TP does fulfil one of the above two condition, but if the
cost of:
(i) improving an existing asset – the cost of the improvement; or
(ii) buying replacement asset – the first and second element of
the replacement asset’s cost base
is less than the CG that has been subject to the rollover, then
CGT event J6 under s104-198 is crystallised and the difference
between the 2 amounts will be subject to CGT.
58
Eg: A makes a CG of $200K (say, after 50% discount and 50%
concession) on selling a shop and elects to use the rollover.
So at that stage, no CGT payable. Will not have to pay CGT, as
all need to do to use rollover is fulfil Subdiv 152-A and “elect”
to use it.
59
However, A will need to purchase a replacement asset within
the replacement asset period
ie the period commencing 1 yr before and ending 2 yrs after the
last CGT event in the income year for which the roll-over is
chosen.

If the amount of expenditure on the replacement asset is only
say $150K, a CGT event J6 happens because there has been
insufficient expenditure and A will be assessable on the
difference being $50K.
60
The time of the event is at the end of the replacement asset
period. This means that the CG is assessable in the income year
that the CGT event occurs and not the income year in which
originally the CG arose.
When CGT event J6 occurs the TP may be eligible for the
retirement exemption provided that the relevant
conditions for that exemption are met.
However the TP cannot apply the CGT general discount, 50%
active asset reduction or the 15 year exemption to reduce this
CG.
61
3. The Rollover is NOT Reversed:
The rollover will NOT be reversed if none of the above 2
apply ie
The TP spends money on 4th element of cost base which is at
least of the amount of the CG made and rolled over; and/or
The TP spend money on replacement asset which is greater
than the CG made & rollover.
End of SBC
62

Back to general CGT: Exemptions
Assets Acquired before 20 September 1985:
Various Sections, including s104-10(5): Assets acquired before
20 Sept 1985 are exempt from CGT;
Cars and Other Vehicles, s118-5:
Car, motor cycle are exempt;
Gains that are Otherwise Assessable, s118-20:
IF something is assessed as OI or SI other than CGT;
THEN it will not be subject to CGT to the extent otherwise
taxed.
63
Exemption examples
Eg 1: Own investment property that bought 10 yrs ago. Sell at a
profit. Would not be taxed as OI, or any other statutory
provision other than CGT:
Would come under Event A1. So would be subject to CGT.
Could probably benefit from 50% discount or indexation;
Eg 2: Have a business that buys and sells houses. Sold house
that it bought 4 years ago:
Would be OI. So not taxed under CGT but as OI;
Why is this relevant? Because it means you can’t benefit from
50% discount or indexation.
64
Depreciating Assets:
118-24 items subject to depreciation provisions in Division 40,
which we shall learn about when we do deductions;
Trading Stock: 118-25
eg food in a supermarket

toys in a toy store;
Trading Stock has its own taxation regime;
(will learn about in Topic 5).
65
Most important exemption:
Main residence
Subdiv 118-B allows your main residence to be exempt from
CGT:
In other words, a house that you own AND live in is exempt
from CGT;
118-110: Main residence – no CGT. This includes a house, flat,
unit;
118-115: Includes not only a home, but also a caravan,
houseboat, etc;
118-120: Exemption includes not only the house you live in but
also land surrounding it (up to 2 hectares).
66
Main residence cont’d
s118-135: When buy home, you do not need to move into it
immediately to be able to claim it as exempt?
As long as move in when ‘first practicable’ will get the full
exemption;
Eg buy house on 1 Jan 2012:
Tenants still in there for 2 months;
Move in after on 1 March 2012;
House will be regarded as ‘main residence’ from 1 Jan 2012
although you didn’t live in it until 1 Mar 2012.
Why?
Because you moved in when ‘first practicable’.
67

Note: usually can only have one main residence at a time Eg
own 2 houses and live in both of them, only claim one of them
as main residence;
Usually need to be living in house for it to be your main
residence
BUT: there is an exception to this requirement of having to live
in house – where don’t live in house & it is your main residence
(ie exempt from CGT):
68
s118-145 Absence:
If absent from your main residence, may still be able to claim
exemption for period of absence;
BUT can only do this if you are NOT claiming any other main
residence at the time;
(time limit = 6 years if renting out the main residence – though
if absent for 6 years, move back in, then absent again, 6 year
time period starts running again);
NOTE: absence provisions will only apply if you lived in house
in first place – the term “absence” implies you were there to
start with.
69
Eg: Live in house in Melbourne (own) – is your main residence
while live in it:
Move to Sydney for 3 years;

While in Sydney rent house there (so you’re not claiming a
main residence in Sydney);
While in Sydney, rent out your Melb house to tenant;
Could treat Melb house as main residence while in Sydney (so it
will be exempt from CGT), despite the fact don’t live in it – due
to absence provision;
In this case have CGT exemption for full ownership period, so
won’t have to pay CGT when you sell it.
70
Question: what if you bought a house in Sydney & made that
your main residence instead of renting one in Sydney?
Could you use absence prov. to claim a main residence
exemption in the Melb. home?
No, because the Sydney home would be your main residence;
Can’t claim more than one main residence at a time.
71
So in such an instance, Melbourne house would be only be
partially exempt from CGT, as for portion of time owned
house wasn’t covered by main residence exemption (the portion
of time you moved to Sydney and had a new main residence
there);
So a “partial exemption” situation applies (see next slide).
72
Main residence: Partial exemption
What if own house and live in it for part of the time you

own it; and
don’t live in it for another part of time you own it and the s118-
145 absence provisions don’t apply?
Eg Buy house A, live in it for 2 yrs (main residence). Buy house
B and move into it & treat B as main residence, and rent out A.
Eventually sell A – partial exemption.
Why? Because for part of time you owned house A it was
exempt – but the other part of time owned house A wasn’t
exempt, as you did not live in it, and can’t rely on absence
provisions because at this time had another main residence
(House B).
73
Main residence: Partial exemption cont’d
Then will get a PARTIAL EXEMPTION.
How to calculate the partial exemption? Depending on the
facts, need to consider either s118-185 OR s118-192.
118-185 Partial Exemption:
This applies in situations where live in residence for part of
time own it, don’t live in it (eg rent it out) for rest of time own
it AND s118-192 does not apply (we’ll discuss when s118-192
does apply soon).
74
Under s118-185 do the following calculation:
Cap gain/loss x non-residence days
ownership days
non-residence days = number of days own house but not covered
by exemption;

ownership days = number of days own house.
75
Eg: Buy house in 2004, Live for 2 years;
Rent out for 4 yrs because you bought yourself a bigger, better
house to live in that became your new main residence;
Then sell original house;
Take the total CG and multiply it by 4/6 (should use days rather
than years),
Why 4/6? Because you owned for 6 yrs, but 4 of those yrs it was
not your main residence;
So when s118-185 applies it is a simple “pro-rata”.
76
The other section that might apply where a “partial exemption”
exists is: s118-192;
Use this section rather than s118-185 IF:
Originally when you bought the house it was your main
residence and fully exempt from CGT; AND
You started using it as a rental property or for other income
producing purposes after 20/8/96;
If you fulfil these conditions then how do you calculate the
gain/loss when Event happens to house under s118-192?
77
You act ‘As if’ when start using for income producing purposes
(ie rent it out) you have re-acquired it for its Market
Value at that time;

In other words, the first element of the CB will be its market
value when you started using it for income producing purposes
ie CB will be higher leading to a lower CG;
Can add any other CB elements that are incurred after/on this
time (if any).
78
Apportionment on Use: s118-190
If all the time you owned house it is your main residence BUT
you use part of house for income producing purposes, need to
apportion as well;
Eg: Own house for 5 years & live in it, but use 2 rooms (25% of
house) to run accounting practice, then sell it:
Since 25% of house was not used as main residence, 25% of CG
is NOT under main residence exemption;
CG = the total CG x 25%.
79
OTHER CGT EVENTS
Keep in mind, need to have a CGT event for there to be a
CG/loss. So far, only looked at A1;
Other CGT Events s102-25:
Order in Which Events are Applied: (except D1 & H2)
ALL events: A1 B1 C1 C2 C3 D1 … L8;
Say, for a gain, potentially A1 and D1 apply – use A1 (A1 is
higher on the s104-5 table);
If a gain is potentially D1 and H2 – use D1.
80

C1 – Loss/Destruction of Asset (s104-20)
i) C1 applies when: s104-20(1)
CGT Asset is Lost/destroyed;
ii) Timing: s104-20(2)
When you receive compensation for loss; or
When first discover loss (if no compensation).
iii) How to calculate gain/loss: s104-20(3)
CG = CP – CB;
CL = RCB – CP;
(Same as A1).
81
Eg: House with CB of $200K burns down.
Insurance pays you $250K.
This is Event C1: destruction of CGT Asset;
CGT Asset (house);
Is destroyed;
CB = $200K, CP = $250K (what is received for event);
CG = $50K (disregarding indexation or discounting – but they
might apply);
If this house was your main residence, then no CGT.
82
House with CB of $200K burns down, No insurance;
Is Event C1, destruction of CGT Asset;
CP = $0 (got nothing); RCB = $200K;
CL = $200K.

For Event C1:
Indexation? Yes (if requirements fulfilled);
Indexation applies to events that have a CB in the “CG”
calculation. Event C1 calculates gain = CP – CB;
Discounting? Yes (if requirements fulfilled);
C1 is not excluded under s115-25(3).
83
C2 – Intangible CGT Asset ends, s104-25
When does it Apply? 104-25(1):
intangible CGT asset cancelled/expired/surrendered;
This Event is the intangible version of C1;
ii) Timing: 104-25(2)
When contract to end intangible asset was entered (if have
entered into such a contract);
When asset ends when not ended by contract;
iii) Calculation of gain or loss: 104-25(3)
CG = CP – CB;
CL = RCB – CP;
(same as A1).
84
Eg 1: Where paid to end intangible CGT Asset earlier than it
would usually end:
ie: 5 yr employment contract. Employer pays you $10K to end it
after 2nd year;
This would constitute Event C2:
intangible CGT Asset (contract);
Has been cancelled;
CB = $0 (no cost to enter employment contract);
CP = $10K (what you got due to event);
CG = $10K.
85

Eg 2: Event C2 will also apply where intangible asset ends
through expiration (ie through lapse of time);
ie ‘A’ has 5 yr agreement with McDonalds to run a McDonalds.
Cost ‘A’ $100K to enter into agreement:
When 5 years ends, is Event C2 for A;
A’s right to run McDonalds is an intangible asset;
It has Expired;
RCB = $100K (how much it cost to get agreement);
CP = $0 (no money received – has ended because the 5 yrs was
up);
CL = $100K.
86
For Event C2:
Indexation? Yes (if requirements fulfilled);
Has CB in the calculation of CG;
Discounting? Yes (if requirements fulfilled);
Not excluded under s115-25(3).
87
Tutorial Questions
88

ESSAY
Mother Tongue
Don't judge a book by its cover
or someone's intelligence by her English.
By Amy Tan • Art by Gabe Leonard
I am not a scholar of English or literature. I cannot
give you much more than personal opinions on the
English language and its variations in this country
or others.
I am a writer. And by that definition, I am
someone who has always loved language. I am
fascinated by language in daily life.
I spend a great deal of my time thinking
about the power of language—the way it can
evoke an emotion, a visual image, a complex
idea, or a simple truth. Language is the tool of
my trade. And 1 use them all—all the Englishes
1 grew up with.
Recently, I was made keenly aware of the
different Englishes I do use. I was giving a talk to a
large group of people, the same talk I had already
given to half a dozen other groups. The talk was
about my writing, my life, and my book The Joy
Luck Club, and it was going along well enough,
until I remembered one major difference that
made the whole talk sound wrong. My mother was
in the room. And it was perhaps the first time she
had heard me give a lengthy speech, using the kind
of English I have never used vnh her. I was saying
things like "the intersection of memory and imagi-

20 READ October 6. 2006
nation" and "There is an aspect of my Fiction that
relates to thus-and-thus"—a speech filled with
carefully wrought grammatical phrases, burdened,
it suddenly seemed to me, with nominalized forms,
past perfect tenses, conditional phrases, forms of
standard English that I had learned in school and
through books, the forms of English I did not use
at home with my mother.
Just last week, as 1 was walking dovm the street
with her, I again found myself conscious of the
English I was using, the English 1 do use with her
We were talking about the price of new and used
furniture, and I heard myself saying this: "Not waste
money that way." My husband was with us as well,
and he didn't notice any switch in my English. And
then I realized why. It's because over the twenty
years we've been together I've often used the same
kind of English with him, and sometimes he even
uses it with me. It has become our language of inti-
macy, a different sort of English that relates to
family talk, the language I grew up with.
vccah
KEENLY: sharply
WROUGHT: put together, created
LANGUAGE
BARRIERS
You should know that my mother's
expressive command of English belies

how much she actually understands.
She reads the Forbes report, listens to
Wall Street Week, converses daily with
her stockbroker, reads Shirley
MacLaine's books with ease—all
kinds of things I can't begin to under-
stand. Yet some of my friends tell me
they understand fifty percent of what
my mother says. Some say they
understand eighty to ninety percent.
Some say they understand none of it,
as if she were speaking pure Chinese,
But to me, my mother's English is
perfectly clear, perfectly natural. It's
my mother tongue. Her language, as
I hear it, is vivid, direct, full of obser-
vation and imagery. That was the
language that helped shape the way
I saw things, expressed things, made
sense of the world.
Lately I've been giving more
thought to the kind of English my
mother speaks. Like others, I have
described it to people as "broken" or
"fractured" English. But I wince when
I say that. It has always bothered me
that I can think of no way to describe
it other than "broken," as if it were
damaged and needed to be fixed, as
if it lacked a certain wholeness and
soundness. I've heard other terms
used, "limited English," for example.
But they seem just as bad, as if
everything is limited, including
people's perceptions of the limited-

English speaker.
I know this for a fact, because when
I was growing up, my mother's
"limited" English limited my percep-
tion of her. 1 was ashamed of her
English. I believed that her English
reflected the quality of what she had
to say. That is, because she expressed
them imperfectly, her thoughts were
READ 2 1
imperfect. And I had plenty of empirical evidence
to support me: the fact that people in department
stores, at banks, and in restaurants did not take her
seriously, did not give her good service, pretended
not to understand her, or even acted as if they did
not hear her.
My mother has long realized the limitations of
her English as well. When I was a teenager, she
used to have me call people on the phone and
pretend I was she. In this guise, I was forced to ask
for information or even to complain and yell at
people who had been rude to her. One time it was
a call to her stockbroker in New York. She had
cashed out her small portfolio, and it just so
happened we were going to New York the next
week, our first trip outside California. I had to get
on the phone and say in an adolescent voice that
was not very convincing, "This is Mrs. Tan."
My mother was standing in the back whispering

loudly, "Why he don't send me check, already two
weeks late. So mad he lie to me, losing me money."
And then I said in perfect English on the phone,
"Yes, I'm getting rather concerned. You had
agreed to send the check two weeks ago, but it
hasn't arrived."
Then she began to talk more loudly. "What he
want. I come to New York tell him fiont of his boss,
you cheating me?" And I was trying to calm her
down, make her be quiet, while telling the stock-
broker. "I can't tolerate any more excuses. If I don't
receive the check immediately, I am going to have
to speak to your manager when I'm in New York
next week." And sure enough, the following week.
Amy Tan walking with her mother.
there we were in front of this astonished stock-
broker, and I was sitting there red-faced and quiet,
and my mother, the real Mrs. Tan, was shouting at
his boss in her impeccable broken English.
BLENDINB DLD AND NEW
Lately I've been asked, as a writer, why there are
not more Asian-Americans represented in Amer-
ican literature. Why are there few Asian-Americans
enrolled in creative writing programs? Why do so
many Chinese students go into engineering? Well,
these are broad sociological questions 1 can't begin
to answer. But I have noticed in surveys—in fact,
just last week—that Asian-American students, as a

whole, do significantly better on math achievement
tests than on English tests. And this makes me
think that there are other Asian-American students
whose English spoken in the home might also be
described as "broken" or "limited." And perhaps
I began to write stories
using all the Englishes
I grew up with.
they also have teachers who are steering them
away from writing and into math and science,
which is what happened to me.
Fortunately, I happen to be rebellious and enjoy
the challenge of disproving assumptions made
about me. 1 became an English major my first year
in college, after being enrolled as pre-med. I
started writing nonfiction as a freelancer the week
after I was told by my boss at the time that writing
was my worst skill and I should hone my talents
tovrard account management.
But it wasn't until 1985 that I began to vmte
fiction. At first I wrote what I thought to be wittily
crafted sentences, sentences that would finally
prove I had mastery over the English language.
Here's an example from the first draft of a story
that later made its way into The Joy Luck Club, but
without this line: "That was my mental quandary
in its nascent state." A terrible line, which I can
barely pronounce.
Fortunately, for reasons I won't get into here,
I later decided I should envision a reader for the
stories I would write. And the reader I decided on

was my mother, because these were stories about
mothers. So with this reader in mind—and in fact
she did read my early drafts—I began to write
stories using all the Englishes 1 grew up with: the
English I spoke to my mother, which for lack of
a better term might be described as "simple"; the
English she used with me, which for lack of a
better term might be described as "broken"; my
translation of her Chinese, which could certainly
be described as "watered down"; and what I imag-
ined to be her translation of her Chinese if she
could speak in perfect English, her intemal
language, and for that 1 sought to preserve the
essence, but neither an English nor a Chinese
structure. I wanted to capture what language
ability tests could never reveal: her intent, her
passion, her imagery, the rhythms of her speech
and the nature of her thoughts.
Apart from what any critic had to say about my
writing. I knew I had succeeded where it counted
when my mother finished reading my book and
gave me her verdict: "So easy to read" •
From The Opposite of Fate, by Amy Tan. Copyright ©
2 0 0 3 by Amy Tan. Used by permission.
ABOUT THE AUTHOR
I vccah
EMPIRICAL; based on observation
QUANDARY: a state of perplexity or doubt
Amy Tan was born in Oakland,

Calif., in 1952. Her parents moved
to the United States from China a
few years before her arrival. Tan
has observed the culture clash
between the two countries of her
heritage for most of her life, and her writing often
reflects it.
Tan's first novel. The Joy Luck Club, explores
relationships between Chinese mothers and their
American daughters. In "Mother Tongue," she
relates her patient and complex love for her mother.
October 6, 2006 READ 23
PITL brief update: Week 5
Fundamentals of CGT (continued)
1
Revision

CGT
CGT is a tax that makes capital gains into SI
Many gains that are not OI because they are “capital” will be
caught under the CGT rules
2
Revision
CGT
CGT only applies to realized gains – when the taxpayer has
actually sold a CGT asset and made a capital gain
CGT only applies to CGT assets that were purchased on or after
20 September 1985
Otherwise they are pre-CGT assets
3
Revision
CGT
CGT provisions all contained in the ITAA 1997
Net Capital Gain = Capital Gain – Capital Loss
Net Capital Gain is SI and included in AI
4
Revision
CGT

Net Capital Losses are “quarantined”
can only be used to offset capital gains
can be carried forward to future income years with no time limit
5
Revision
CGT
Section 104-5: lists all CGT Events
Most common is s104-10: CGT Event A1
Disposal of a CGT Asset
Disposal is where there is a change of ownership
6
Revision
CGT
CGT Asset (section 108-5)
Could be property or a legal/equitable right
Property: tangible items (house, TV) or intangible items
(copyright, trademark)
7
Special Types of CGT Assets
There are 2 types of “CGT Assets” that receive special
treatment:
Collectables; and

Personal use assets (PUA);
Collectables Subdivision 108-B 1997:
What are they?
s108-10(2): antiques, jewellery, old coins, old stamps, others;
(items that collectors tend to collect).
8
Collectables Subdivision 108-B: cont’d
How are they special?
If they cost $500 or less, exempt (s118-10(1)) – disregard any
capital gain/loss arising on the asset;
Can only offset Capital Loss on collectable against capital gain
of collectable (s108-10(1));
Eg Yr 1: Buy $2,000 of ANZ shares (non-collectable);
Buy $1,000 antique desk (collectable);
Yr 2: Sell ANZ shares for $2,500: s104-10, event A1
(Disposal of CGT Asset) CG = $500;
Sell antique desk for $500: Event A1, CL = $500.
9
Collectables Subdivision 108-B: cont’d
NCG for Year 2 is $500;
Why $500? Why not $500 CG - $500 CL = $nil?
Because you cannot use CL on collectables (desk) to offset CG
on non-collectables (shares);
Can only use the CL on collectables against other collectables;
However, can carry forward any loss on collectables and use it
to offset CG on collectables in future years;
Consequently, if you have future CG of collectables, then you
can offset the $500 CL of collectables.

10
Personal Use Assets (PUA) 108-C:
What are they?
s108-20(2): definition: Asset that is used mainly for
personal/use enjoyment;
Examples: TV, home cinema, audio systems, racehorses, boats,
private aeroplanes;
NOTE: definition of PUAs excludes collectables;
So if something is a collectable, cannot be a PUA.
EG antique desk that is used mainly for personal use, it will be
considered to be a collectable, not a PUA.
11
PUA 108-C: cont’d
How are PUAs special?
Ignore if cost <=$10,000 (s118-10(3));
EG sell your racehorse that bought for $7,000, disregard it for
CGT purposes;
Disregard Capital losses on PUA (s108-20(2));
Cannot use PUA losses to offset capital gains on PUAs (or any
other category).
12
Timing issues
i) Time of Event
ii) Time of acquisition

i) Time of CGT Event
Every Event has own timing rule;
See s104-5 (has summary of every CGT event);
What is the timing rule for Event A1?;
Time of signing sales contract (if there is one);
Time of transfer of CGT asset (if no contract exists) – there
will be no contract when you gift an asset.
13
Timing issues: i) Time of CGT Event cont’d
Eg J: Signs contract (both parties signed it) to sell house on 1
Sep 12 (typically deposit will be paid at this time, but this
depends on contract);
Settled on 1 Dec 12 (date when seller gets balance of sale price
and takes possession of asset);
This is Event A1 for J, as J has disposed of CGT Asset;
Date of Event A1?
Date contract was signed since there is a contract
ie 1 Sep 12 is date of event A1.
14
Timing issues: i) Time of CGT Event cont’d
Another example:
Financial year starts on 1 July, ends on 30 June;
Sign contract to sell house on 1 June 2013;
Settles on 1 Aug 2013 (ie in new/next financial year);
Is Event A1 (disposed of CGT Asset);
Date of Event? 1 June 2013 (when contract entered into, not at
settlement);
This means it is in the 2012/13 financial year, even though only

get money in the 2013/14 financial year.
15
Timing issues: ii) Time of Acquisition
General rule in s109-5(1) – acquire an asset when become its
owner;
But there are 2 sets of specific rules;
Acquiring an asset isn’t a CGT Event for the acquirer - acquirer
doesn’t pay CGT upon acquisition;
So why do we care about the date of acquisition, since acquiring
an asset doesn’t trigger CGT for the acquirer?
Few reasons, one of them is that if acquired an asset before
20/9/85, it is exempt from CGT.
16
Timing issues: ii) Time of Acquisition cont’d
2 Specific sets of acquisition timing rules:
s109-5(2) has a table;
Most important rule in this table (the first one):
If asset is acquired by buying, getting it as a gift (ie asset
being transferred to you);
THEN use s109-5(2);
1st acquisition rule says you have acquired the asset at:
i) Time of signing contract (if there is one);
ii) Time of transfer (if no contract).
17
Eg A: Signed contract to buy house on 10 Sep 1985, settlement
is on 10 November 1985.
Date of contract is date of acquisition ie 10 Sep 85;

NOTE: Since this is before 20 Sep 85, house will be
exempt from CGT;
So when this TP later sells the house, no CGT.
18
2nd set of acquisition timing rules:
If you have acquired asset by creating it:
THEN use table in s109-10;
Usually, if you created it yourself, time of acquisition is when
construction commenced – (s109-10);
Eg start building house in Dec 98 and finish July 99, will
have acquired it Dec 98 (when construction started).
19
Timing issues cont’d
Summary of timing of acquisitions, 2 sets of rules:
In general, time of acquisition and event involving sale = time
of making the contract (or at time of transfer if no contract
exists), s109-5(2);
If you create asset, use table in s109-10, acquisition = when
construction commenced;
Usually, time of contract is simple –when both parties have
agreed to it;
But what if not that simple? Let’s look at some unusual
situations:
20
Legal but unenforceable contract:
Note that under contract law in general, a contract does not
have to be in writing to be valid (it can be oral), so in most
instances both oral and written contracts are binding;
BUT in SOME situations, legislation states a contract has to be

in writing to be enforceable (real estate);
In such an instance an oral contract is still a legal contract, it is
just not enforceable;
So, say on 1 Jan 2012 you make an oral contract to sell land, to
settle in 1 July 2012 – but don’t make a written contract at that
time – it is not enforceable.
21
Legal but Unenforceable Contract cont’d
Assume that the transfer of land is conducted and paid for on 1
July 2012 in accordance with the oral contract;
What is the Date of CGT Event – date of making the oral
contract (Jan 2012) or date of transfer (Jul 2012)?
McDonalds v FCT (1998):
In this situation, time of Event = time of making the contract (ie
1 Jan 2012 - even if unenforceable);
Just because unenforceable by statute, does not mean that it is
not a contract;
For CGT purposes, date of making contract determines time of
Event A1 (whether enforceable or not).
22
Legal but Unenforceable Contract cont’d
What if Original Contract is Modified?
What if there is a subsequent agreement which modifies the
original contract?
Here, talking about when only 1 contract, which is later
modified;
Do we go by date of original contract, or do we go by date of
when it was modified?
FCT v Sara Lee: If subsequent agreement merely modifies
original contract, then go by date of original contract.

23
How to calculate a capital gain (CL) or capital loss (CL)
Let’s say you have triggered a CGT Event eg sell asset;
Now you want to figure out how to calculate your capital gain
or loss;
Every Event has its own rules!
See s104-5 (event section) - specifies how to calculate capital
gain & loss for every CGT Event in its table;
For now, will only look at how to calculate Event A1.
24
How to calculate a CG or CL cont’d
Event A1:
CG (cap gain) = Capital proceeds (CP) – cost base (CB)
Eg bought shares $1,000, sold for $1,500; CG = $500;
Capital Loss = Reduced Cost Base (RCB) – CP
Eg bought share $3,500, sold for $2,500; CL = $1,000.
Let’s look in detail at:
Capital Proceeds (used for both CG & CL)
Cost base (used for CG)
Reduced Cost base (used for CL)
25
Capital Proceeds (CP)
s116-20(1):
CP = what you receive + what you’re entitled to receive from
the CGT event (whether cash or property);
Usually, the CP will be sales price (but not always);

Eg Sell house for $200K (Event A1), CP = $200K;
Sell house for $2,000/week for 100 weeks;
CP = $200K. Why?
Because CP includes what entitled to receive for CGT Event.
26
Modifications to CP:
Modifications:
There are 6 (six) situations where the ‘general rule’ for the CP
can be modified;
‘General Rule’, CP = what you receive for the event under
s116-20;
Usually this will be sales price.
27
Modifications to CP cont’d
A) ‘Market Value Substitution Rule’, s116-30:
CP = Market Value of the CGT asset time of event if:
No consideration (gift); OR
Non-arms length (non-commercial transaction);
For instance, mother sells daughter house worth $200K for
$50K – this is a non-arms length transaction – has not been sold
on commercial terms between the buyer & seller;
Note: transactions between relatives can be arms-length, if they
are on commercial terms.
28

Eg: House has CB of $80K:
You gift your sister a house (market value $200K);
This is event A1 ‘disposal of a CGT Asset’;
This is a gift, the ‘general rule’ of CP = what you got for Event
(zero in this case) doesn’t apply;
Rather, CP is deemed market value of house ($200K);
So CG of donor giving the house = $200K–80K = 120K;
Donor, by giving away house worth $200K, will pay CGT ‘as if’
sold house for $200K;
(if we ignore discounting and indexation).
29
B) ‘Apportionment Rule’, s116-40:
If TP sells more than one thing then they must reasonably
apportion the CP;
Eg TP receives $400K for house and car together, in a single
‘undissected’ amount;
Valuer says house worth $390K and car $10K;
CP for house = $390K;
CP for car = $10K.
30
C) ‘Non receipt rule’, s116-45:
If seller unlikely to receive what is owed by purchaser then CP
to be reduced by that amount;
Eg sell house for $200K;
Under the ‘general rule’ the CP = $200K because it includes
what the seller is entitled to receive;

Say, at settlement purchaser only pays bal. to $190K;
If seller accepts $190K as full payment (ie doesn’t have to);
then
Under s116-45, the CP are modified from $200K (what seller
was entitled to receive) to $190K (what seller ended up
receiving).
31
D) ‘Repaid Rule’, s116-50:
This rule states that if you have to repay part of the money you
got, then CP reduced by what you repay;
eg sell house for $200K, but then you are sued for breach of
sale contract for $50K ie contract said house was termite free,
but it wasn’t;
Under ‘general rule’, CP = $200K. However, this is then
modified/reduced under s116-50 by $50K because you repaid
$50K;
So the CP = $150K, which makes sense because in net terms
that is what you were paid.
32
E) ‘Assumption of Liability Rule’, s116-55:
This rule states that CP are increased by any debts taken over
by the purchaser;
Eg: A owns business and sells it to B;
B agrees to buy business for $100K cash; and to ‘take over’
A’s mortgage of $50K;
Under ‘general rule’ CP = $100K;
But this is modified by s116-55, so that CP = $150K;
This makes sense, as A (the seller) is $150K better off. Has
received $100K cash & has got rid of $50K in liabilities

(usually re: business).
33
F) ‘Misappropriation Rule’, s116-60:
If your employee/agent misappropriates part/all of your CP,
they are reduced by that amount;
EG sell house for $250K, agent collects money for you, but
steals $100K of it, your CP are reduced to $150K.
34
Cost Base (CB)
What is the CB? see s110-25:
Has 5 elements;
A CGT asset’s CB will be the sum of these 5 elements;
Let’s consider each element in detail:
1st element, s110-25(2):
What was paid for asset (includes non-cash items);
Usually this is the purchase price;
Eg buy house for $100K;
Will come under 1st element of cost base.
35
CB cont’d
2nd element, s110-25(3):
Incidental costs, costs associated with the acquisition or event
(buying/selling);
Note: s110-35 has an exhaustive list of incidental costs;

So to be an incidental cost that comes under 2nd element of CB,
it needs to come under s110-35 AND be related to acquisition of
asset;
eg buy house – stamp duty (related to acquisition), sell
house – estate agent’s fees (related to event).
36
CB cont’d
Incidental costs specified in s110-35 - these are:
Valuer fees, solicitor’s fees, accountant, broker, agent, etc. Eg 1
buy shares, brokerage fees. Such fees would go in the 2nd
element of CB of shares;
Eg 2 buy house and pay solicitor’s fees (conveyancing) to
transfer it into your name, would also come under this.
Cost of transfer eg buy house, cost of registering it in your
name;
Stamp duty – what need to pay government when buy real
estate.
37
CB cont’d
Cost of advertising/marketing to buy/sell asset (usually to sell);
Valuation expenses;
Search fees eg buy house, pay fee to government department to
make sure that house is owned by seller and doesn’t have
restrictions on it;
Conveyancing: When buy/sell real estate, usually pay lawyer to
effect transfer, (but can DIY using a ‘conveyancing kit’ - cost
of kit is an incidental cost);
Borrowing expenses eg buy house, pay bank application fees,
valuation fees, for a mortgage;
Consolidations – don’t worry about this one.

38
CB cont’d
So ‘incidental’ expenditure (under s110-35) is related to
acquiring an asset or a CGT Event (usually sale), will fit under
2nd element of asset’s CB;
Eg: When buy house, pay $2K in solicitor’s fees, stamp
duty $8K. When sell, pay $5K in advertising & real estate agent
fees. These are all incidental costs related to acquiring/selling
house (CGT Event);
2nd element = $2K + 8K + 5K = $15K;
Note: if you spend these costs, but NOT related to
acquisition/event eg own a house for 5 years, get legal advice
on it, unrelated to selling it – NOT in the 2nd element of CB.
39
CB cont’d
3rd element, s110-25(4):
Costs of “owning the CGT asset”
Legislation says this specifically includes (though not restricted
to these):
Repairs/maintenance/insurance for the asset
Interest on money that borrow to purchase a CGT asset – eg
interest on mortgage for a house
Council rates & land tax
Interest on money that’s borrowed to improve the asset or to
refinance asset eg borrow money to renovate, interest would
potentially come under house’s 3rd element of CB.
40

CB cont’d
4th element, s110-25(5): Capital expenditure that either:
a) Has purpose or is expected to increase/preserve the
asset’s value;
Eg add room to house, Cost $50K;
Add $50K to 4th element of CB of the house
What if spent $50K on adding room to house – you thought it
would improve its value. Then after did it, demolished it;
Could you still add $50K into element 4 of CB?
YES – capital expenditure that had purpose of increasing value.
41
CB cont’d
OR
b) Relates to installing/moving asset:
Eg ‘A’ leases land which runs a caravan park on. Buys a new
caravan, costs $5K to move and install it in caravan park. Could
add this into the 4th element of its CB of the caravan park.
42
CB cont’d
5th element, s110-25(6):
Establish, defend or preserve title;
Eg Your neighbour claims that half of your backyard is
really theirs (boundary dispute);
You spend $10K on legal fees defending title to your backyard
ie proving it belongs to you;
Can include the $10K in 5th element of your property.

43
CB cont’d
CB eg: X buys house in Jan 2001 for $200K;
1st element (the cost of acquiring asset): $200K;
2nd element (incidental costs upon acquisition): $10K for legal
fees, stamp duty;
4th element (capital expenditure): On July 2006, he builds
extension for $50K;
In March 2012, sells for $500K, pays $15K in estate agents fees
- ($15K is also 2nd element, incidental cost related to a CGT
Event).
44
CB cont’d
How much is the CG? Event A1, Disposal of asset:
CG = CP – CB;
s116-20: CP = $500K (sales price); s110-25: CB =
1) Cost of acquisition:
$200K
2) Incidental costs (to acquire & sell): 10K + 15K: $ 25K
3) Costs of owning the asset eg interest, repairs : $ nil
4) Capital expenditure (extension): $
50K
5) Costs of defending title:
$ nil
TOTAL (CB for house):
$275K

CG = $500K (CP) – $275K (CB) = $225K
45
CB cont’d
s110-45: If an expenditure is deductible it is generally excluded
from the CB;
Otherwise it would be double counting;
Eg 1: Let’s examine the CB of the following property:
Buy rental property for $300K (1st element);
Assume you borrowed money to buy house;
Total interest for 3 yrs = $50K, after which sell house;
Would $50K interest be included in 3rd element of CB (3rd
element of CB is costs of owning asset such as repairs and
interest on money borrowed to buy asset)?
46
CB cont’d
Could get deduction for interest along the term of the asset,
because you borrowed money to purchase an income producing
asset (ie it produces rent).
So $50K interest would not go in 3rd element of CB (or any
other element). Why?
Because it was deductible – can’t add to the CB;
There is no choice here – if expenditure is or could be deducted
then you cannot add it to the CB.
47
CB cont’d
Eg 2: Buy vacant land for $300K (1st element);

Buy land with borrowed money; pay $50K interest on borrowed
money for 3 years and then sell land;
Is $50K interest part of 3rd element of land CB?
Yes! Why?
Interest is not deductible along the term of the asset in this
instance. Why not?
Because vacant land is not an income producing asset (cannot
collect rent from it);
So could include interest in 3rd element of CB, because interest
is a cost of owning the asset (ie 3rd element).
48
CB cont’d
Due to this principle, for income producing investment
properties, expenditures such as interest, council and water
rates, deductible repairs cannot be added to the CB of the
property because they are generally deductible.
49
Modifications to CB
‘General Rule’ is that CB = total of 5 elements
This is modified in some instances. Some of these modifications
are “mirror images” of the CP modifications (Div 112).
What do we mean by “mirror images”?
We mean that the CB for the acquirer of the asset is changed in
the same way as the CP is for the person who disposed of the
asset.
50
Modifications to CB cont’d
Firstly, s112-20: If someone gets an asset:

As a Gift/No consideration; Or
In a non-arms length transaction
THEN ‘general rule’ that 1st element of CB = purchase price is
modified to ‘1st element = market value at time of
transfer’;
Eg you give your sister your house as a gift. House is worth
$200K at this time;
Earlier we learned that CP for person giving the house is in
such an instance 200K.
51
Now we are learning the mirror image of this - that the 1st
element of CB for person receiving the house is also
$200K (at the time of gift, is only donor that pays CGT – only
the seller triggers Event at this time);
So 1st element of CB for house (sister) = $200K;
Say, sister then adds room to house - $50K (4th element of CB –
capital improvement);
Sister then sells house for $400K: is Event A1;
CP = $400K;
CB = $200K (1st element – market value at time of gift) + $50K
(4th element) = $250K;
CG = $400K – 250K = $150K (disregard discount/index).
52
i) Split Assets, s112-25:
If an asset is split, then apportion CB between them;
eg 1 piece of land has CB of $1m;
subdivide it into 10 lots (equal size);
CB of each = $100K.

ii) Merged assets:
If merge assets, then CB = total CBs of merged assets;
Eg: 10 pieces of adjacent land, each CB =$100K;
Amalgamate/merge into one lot (land is now 1 title);
CB = $1m
53
Third, s112-30:
If you purchase more than 1 asset in a single undissected
amount, then must apportion money among assets to determine
what is the 1st element of the CB of each one;
Use a valuer’s certification for values.
Fourth: 112-35: Assumption of Liability:
The mirror image of similar rule for CP;
If purchase something, take over the liability of the seller, then
1st element of CB includes any liability taken over (re: slide
#48).
54
Reduced Cost Base (RCB):
Reduced cost base, s110-55:
When have capital loss, don’t use CB, use Reduced CB (RCB);
CL = RCB – CP;
RCB – similar to CB (but used only in CL);
Following differences to CB to make RCB:
No 3rd element (costs of owning an asset) – so things like
interest, repairs, don’t include in reduced CB.
Also, cannot index elements of cost base.

55
RCB: cont’d
Example:
Buy house in Sept 2006 for $200K (1st element);
Extension in Oct 2007 for $100K (4th element) – capital
expenditure with aim of improving asset;
Sell for $250K; is Event A1 (disposed of CGT Asset):
Cap loss = RCB – CP
= ($200K + 100K) - $250K
= $50K
56
Modifications to RCB
For many Events, including A1: CG = CP – CB;
We learned that CP = what you get for Event happening (s116-
20). In the case of A1, this will be sales price;
Also learned that CB = total of 5 different elements:
purchase price,
incidental costs,
costs of owning asset,
capital expenditure, and
protecting title.
However, these are ‘general rules’ (they usually apply);
BUT sometimes these ‘general rules’ are subject to
‘modifications’
57
CGT Concessions

Concessions:
Note: Capital gains can benefit from one of 2 types of
concessions:
i) Indexation
ii) Discounting
These will lower the tax liability;
58
CGT Concessions cont’d
i) Indexation:
So that CGT only taxes ‘after inflation’ gains.
Conditions for Indexation:
s114-10: Must have held asset >12 months; and
Must have acquired asset on/before 11:45am 21 Sep 99
Only applies to capital gains (ie not losses);
s114-5(1): Only applies to events that use a CB in the
calculation (such as A1);
59
How do we index?
We need to know what indexing is and when it applies (but do
not have to know how to index);
Basically, indexation raises the CB to reflect the real (after
inflation) cost of the CGT asset;
Since CG = CP – CB, a higher CB will mean a lower CG;
EG buy house in 1990 for $190K (1st element of CB) and pay
stamp duty of $10K (2nd element). Assume these are the only
elements of CB that apply to this house.

60
Eg from previous slide cont’d:
Before indexation, CB = $200K (190K + 10K);
Sell in 1998 for $350K;
Between 1990 and 1998, assume prices (inflation) rose a total of
45%;
So real cost in 1998: $200K (nominal CB) x 1.45 (allow for
inflation) = $290K (total indexed CB);
CG (if can use indexation):
CG = $350K (CP) - $290K (after indexation) = $60K
Without indexation:
CG = $350K (CP) - $200K (no indexation) = $150K
61
CGT Concessions: 50% Discount
If the 50% discount applies, then we can reduce the CG by 50%
when calculating the final NCG figure;
Eg: buy house for $200k; buying costs (stamp duty, etc) of
$10K, make improvements worth $30K;
Then sell for $500K - Event A1;
CP = 500K, CB = ($200K + 10K + 30K) = $240K;
If 50% concession applies do the following:
$500K (CP) – $240K (CB) = $260K
To calc. NCG apply 50% discount = $260K/2 = $130K;
(though if we have an offsetting capital loss it is not as simple
as this – will learn about that later).
62
CGT Concessions: 50% disc. rules in Div 115
Need to fulfill all following conditions (below):

NOTE: complying superannuation funds only get 33% discount,
not 50% discount;
a) Certain Entities only, s115-10:
Only the following can benefit from discount:
Individuals (includes members of partnerships);
Complying superannuation funds;
Trusts;
NOTE: Companies cannot use it;
Eg BHP sells asset, cannot use 50% discount.
63
CGT Concessions: 50% disc. rules in Div 115 cont’d
b) Event must have occurred after 21 Sept 99, s115-15:
Timing of Event? See s104-5;
c) No indexation, s115-20:
If using 50% discount cannot use indexation for the same gain;
d) Asset held for at least 12 months, s115-25(1):
Time between date of ‘acquisition’ and CGT Event must be at
least 12 months.
64
CGT Concessions: 50% disc. rules in Div 115 cont’d
e) Certain events only, :
Only certain events benefit from the 50% discount;
Unavailable (excluded) events, s115-25(3):
D1, D2, D3, E9, F1, F2, F5, H2, J2, J5, J6 and K10;
If make CG from one of these events, cannot benefit from
50% discount;

Note: Event A1 is not an excluded event, so can use discount
for Event A1.
65
CGT Concessions: Indexation and Discount
So the following is possible:
Time of Acquiring and time of Event:
If Event is A1: Can only use 50% discount if time of event
when enter into contract to dispose/sell is after 21 Sept 1999;
Why? Because indexation only applies to assets acquired before
21/9/99;
Must also fulfill a) – e) conditions on prior slides, no choice.
66
CGT Concessions: Indexation and Discount
Acquire before 21 Sept 1999, but disposal/sale is after 21 Sept
1999:
Eg buy house in 1990, sell today
Can use 50% discount or indexation.
IF fall under option b) and have a choice, which should you
use?
Depends on facts;
Choose that method that gives the lower gain – (need to
calculate result under both methods);
Would use software package in industry.
67
Implications of Death for CGT
Disregard Capital Gain upon Death, s128-10:

Eg ‘A’ owns NAB shares, dies, ‘B’ inherits them;
No CGT payable at time of death;
If s128-10 did not exist, then death would trigger Event A1,
disposal of a CGT Asset, and A’s deceased estate would have to
pay CGT;
COMPARE WITH: if you give away asset when you are alive,
usually will trigger a CGT liability;
Would be A1 and deemed to sell it at market value
68
Implications of Death for CGT cont’d
Disregarding Capital Gain upon Death, s128-10 cont’d:
NOTE: when ‘B’ (the beneficiary of ‘A’ who inherited the
shares) sells them, they (‘B’) will have to pay CGT;
Why? Because it triggers Event A1;
This raises an important issue: when the beneficiary sells it and
triggers Event A1, what is their CB for the inherited shares?
69
CB for Person that Inherits Asset:
The CB for the beneficiary of the asset depends upon if they are
in ‘1st situation’ or ‘2nd situation’ below:
1st situation: s128-15(4): If Asset was:
Bought by deceased person before 20/9/85; or
Bought by deceased person on or after 20/9/85 but it was their
main residence (house owned and lived in);
Then 1st element of CB for beneficiary = Market value of asset
at time of death;

Any expenditures by beneficiary after inherited asset, will
potentially go into other elements of the CB.
70
1st situation cont’d:
Eg ‘A’ buys house in 1982 for $50K, doesn’t use it as their
main residence, ie they rent it out.
CB for A = $50K;
A Dies in 2002;
‘B’ inherits (market value = $140K at this time);
At this point of time (ie at A dying) – no CGT payable;
So 1st element of CB for B is $140K – because the deceased
purchased the asset before 20/9/85, so 1st element of CB for
deceased is market value at time of death.
71
1st situation cont’d:
Assume B doesn’t spend any money on the house, so no other
elements of the CB are relevant (if did, then would potentially
add to the CB);
B sells in 2012 for $200K, this triggers Event A1;
CG = $200K (CP) - $140K (CB) = $60K (ie disregarding
indexation and discounting for the sake of simplicity – these
can potentially apply).
72
2nd situation s128-15(4): If Asset was:
Bought by deceased after 20 Sep 1985; AND

Was not the deceased’s main residence (this covers everything
that isn’t covered by the first situation);
Then for person who inherited asset, 1st element of CB = the
full CB that deceased had;
Eg: A buys house in 1987, doesn’t use it as their main
residence, ie they rent it out.
CB for A = $50K;
A dies in 2002;
B inherits (market value = $140K at this time).
73
2nd situation cont’d:
So 1st element of CB for B is $50K because:
Deceased acquired asset after 20/9/85; and
Is not their main residence;
So 1st element of CB for beneficiary = full CB of deceased
($50K);
Assume B doesn’t spend any money on the house, so no other
elements of the CB are relevant;
B sells in 2012 for $200K, this is Event A1:
CG = $200K – 50K = $150K;
(disregarding indexation and discounting for the sake of
simplicity – these do potentially apply).
74
Note: If the beneficiary, after inheriting the asset, had
expenditures which goes into any of the elements of the CB
(eg the beneficiary renovated the house at a cost of $30K) –
then this would be added to the beneficiary’s CB:
If this occurred here, then total CB = 50K + 30K = $80K;

CG = $200K – 80K = $120K
75
NOTE: 1st situation is usually better for beneficiary;
Why? Because in 1st situation:
The 1st element of beneficiary’s CB = market value at time of
death, whereas
In 2nd situation, 1st element of CB = deceased’s CB;
That means in 1st situation, CB will be higher usually, so there
will be a lower CG;
NOTE: as mentioned later, there will be a (limited) number of
situations where when beneficiary (person selling inherited
asset) sells asset, they pay NO CGT.
76
Death and the 50% Discount
Previously, we learned CG benefit from 50% discount;
One condition is that TP held the asset for 12 months;
If you inherit an asset and then sell it – want to know if can use
50% disc.;
Same rules of eligibility as if you bought it yourself, EXCEPT
there are special rules as to when the 12 months start running
(s115-30):
IF deceased bought it before 20/9/85, then time starts running
when deceased died – would need to be 12 months between
deceased’s death and beneficiary triggering Event.
77
Death and the 50% Discount
IF deceased bought it on/after 20/9/85, then time starts running
when deceased acquired the asset;

Eg deceased acquired 1/1/12, but dies 1/7/12;
Beneficiary inherits, sells it on 1/1/13;
Would fulfil the 12 month requirement for 50% discount,
because time started running when deceased acquired asset.
78
PITL Trimester 2 2016 – Week 4
Week 3 Revision
Royalties
Payment for Usage
Some are OI – if royalty is for intellectual property
Some are Capital – if royalty is for physical resources
1
Revision
Annuities
Pay a fixed sum of money for an income stream
Can be fixed term or for rest of life
s27H of ITAA 1936
Makes the return of capital amount of annuity non-taxable
Only the profit will be taxed as OI
2

Revision
Isolated Transaction & OI
Whitfords Beach
Transaction has enough indicators of carrying on a business
Extensive development
Investment of effort, capital, planning
Involvement of taxpayer
3
Revision
1st Strand of Myer
Must have:
Commercial/Business transaction
Profit making intention at the time they entered into the
transaction; and
Profit must be made in a way that is consistent with the original
profit making intention
4
Revision
2nd Strand of Myer
Must have:
Assign right to income from property, without assignment of the

property itself
Example of a rental property where you assign the right to
receive rent to someone else for 3 years, without assignment of
the property itself
5
Revision
Lease Incentive
Landlord gives prospective tenant a payment to induce them to
sign lease for a certain period
Often meets the criteria of the 1st strand of Myer
6
Principles of Income Tax Law – Week 4
Will complete Topic 2 this week
Start Capital Gains Tax today – will do Small Business
Concessions in detail next class
7
Lease incentives: cont’d
FCT v Montgomery 1997 (High Court):
Law firm needed to move, asbestos problem;
Moved to 101 Collins St, got lease incentive when entered into
new lease there;
Was ordinary practice in Melbourne at that time to offer
incentive;
HELD: assessable OI.

8
When is Compensation OI?
Remember the basic principle that:
Compensation for lost capital = capital; lost OI = OI;
Meeks (1915)/Dixon (1952): Compensation payment takes on
character of what it replaces.
eg permanent loss of factory, compensation would be capital.
Loss of profit due to factory being burned down, compensation
would be OI; Why?
Profit would have been OI, so compensation for it is OI.
9
When is Compensation OI? cont’d
Let’s look at some different types of compensation:
Compensation in a Business Context:
Contract which goes to fundamental structure of business;
Compensation for cancellation of a contract will be capital if
the contract “goes to the fundamental structure of the business”.
In such an instance the compensation is being given for
destruction of your capital;
So the compensation is capital (loss of capital).
10
Californian Oil v FCT 1934 (High Court):
TP was exclusive distributor of certain products;
This was the TPs only business – it did not buy/sell any other
products (had 5 yr agreement);
The supplier cancelled after 2 yrs into contract and
compensated the TP for this cancellation;

HELD: Compensation was Capital.
The TP had had lost its entire business with the cancellation of
the contract – this action effectively destroyed the business of
TP;
11
So TP was being compensated for loss of capital;
Since contract, was of substantial importance to business,
compensation for its cancellation = capital.
Loss of Trading Contract:
Compensation for loss of trading contract will typically be OI;
Why? Because being compensated for loss of profits. Since
profits = OI, compensation is OI;
This is in contrast to compensation for contracts that “go to the
fundamental structure of the business” which are capital.
12
Allied Mills v FCT (1989):
TP had agreement to be sole distributor of some biscuits,
including Vita Wheat;
This wasn’t the only product that the TP distributed (it had
many other distribution agreements);
The distribution agreement was cancelled (by the seller) & the
taxpayer was compensated for this;
HELD: The compensation was OI.
13
Allied Mills v FCT (1989) cont’d:

This is different from Californian Oil. Contract was not of
“substantial importance to structure of business”.
Their business as a distributor & manufacturer would continue
to exist, they had plenty of other contracts other than the one
that was cancelled;
Cancellation of contract represented a loss of profit making
opportunity rather than a loss of its capital.
Since profit would have been OI, compensation for its
cancellation is OI.
14
So it would appear that if you are a seller of goods and your
contract to purchase goods is cancelled then:
If the contract in question is a normal trading contract then
compensation for its cancellation will be OI (Allied Mills) - the
lost contract was a profit making opportunity - compensation
for loss of profit (OI) = OI.
If contract is of fundamental importance to structure of business
it is capital (eg Californian Oil – cancelled contract was the
only supply contract of the TP);
In such an instance, it destroyed the TP’s capital, so
compensation is itself capital.
15
So if supply contract (contract to purchase goods) is cancelled,
to determine if compensation is capital or OI:
If the contract was of fundamental importance
eg was 100% of its goods OR a very high proportion of its
goods then compensation is capital (Californian Oil);
Otherwise, if just a normal trading contract, then compensation
for its loss would be OI (Allied Mills).

16
This case issue isn’t so simple. Note the previous 2 cases dealt
with purchase contracts, this one is sales:
Heavy Minerals v FCT (1966):
The TP had been a miner of rutile;
Had long term contracts to sell rutile at a set price;
The market price of rutile dropped substantially below contract
price;
The TP had temporarily ceased mining - it was cheaper to buy
rutile on the open market and sell it at contract price to parties
it had long term contract with.
17
Buyers of rutile wanted to get out of their contracts – their
contract price was so much higher than current market value of
rutile;
The TP agreed – as long as buyers compensated them;
Buyers compensated TP for the right to get out of contract to
buy rutile at high price;
What this compensation OI?
HELD: Yes, was OI. Why?
Contracts to sell rutile represented right to OI (fruit);
Whereas the mine & equipment were the capital (tree).
18
Cancellation of the contracts did NOT destroy the business or
substantially alter its capital;
The business still had its mine & plant (though at this point had

chosen to stop using them);
So compensation for the loss of contracts was OI because it was
merely a loss of a profit making opportunity, not loss of capital;
It is true that TP had for the meantime stopped using mine &
operation. But this was due to low rutile prices, not due to
contract cancellation.
19
To sum up:
If you are a miner/manufacturer, compensation for loss of sales
contract will be OI;
It appears that whether the business is buy and sell goods, same
conclusion – compensation for loss of sales contract = OI.
20
Compensation for loss of Capital Asset:
Permanent loss of capital asset = capital (eg factory burns
down);
Temporary loss of capital asset = income (eg factory unusable
for 2 weeks);
Why? Such compensation represents compensation for loss of
profit making opportunity for the lost use of capital asset for
that time period.
21
Glenboig Union Fireclay (English case):
Mining company mined fireclay;
Railway co. had tracks over part of the land to be mined

As a result, TP could not mine that portion of land;
Railway company gave TP compensation ie for loss of use of
part of land;
Compensation amount calculated on the basis of profit TP had
lost due to portion of land not being mine-able;
HELD: Compensation was capital, as was due to loss of capital
asset (ie part of ability to mine land).
22
The fact that the compensation was calculated in reference to
loss of profit did not stop it being compensation for loss of
capital;
Just because compensation is calculated in reference to loss of
profits, doesn’t mean that the compensation is for loss of profits
– it might be for loss of capital (as was the case here);
Why? Often capital items are valued according to their future
profitability (discounted future cash flows).
23
Note: loss of capital doesn’t only apply to physical capital
It can also apply to intangible capital (eg goodwill):
Sydney Refractive Surgery Centre v FCT:
TP was in the business of performing laser eye surgery;
A TV current affairs show made an incorrect story on this clinic
– their business suffered as a result;
The TP successfully sued the TV station for defamation (ie
compensation for loss of reputation);
The compensation was calculated in terms of loss of profit –
how much profit had lost due to bad publicity.
24

Was this compensation OI or capital?
HELD: It was capital.
Compensation was for loss of reputation – reputation is part of
the capital (goodwill);
So compensation itself was capital because it was for loss of
capital;
Again, fact that compensation was calculated in terms of loss of
profit didn’t stop compensation for being for loss of capital.
25
Compensation for loss of Trading Stock:
Compensation for Loss of trading stock (inventory) = OI
Trading stock = ability to make profit;
That profit would have been OI - so compensation for its loss is
OI as well.
26
Compensation in a Personal Context
Same over-riding principle applies:
ie compensation for capital/OI = capital/OI (respectively)
Compensation for loss of salary will be OI (salary = OI, so is
compensation)
Compensation for physical injury will be capital eg loss of use
of arm - compensation for pain, suffering, medical expenses
will be capital
27

If a worker is paid for giving up capital right rather than being
paid for working, then payment will be capital;
Let’s revisit Dixon’s case: FCT v Dixon (1952):
During WWII, employer offered employees ”top up” payments
If they quit & volunteered to fight for army;
“Top-up” payments by ex-employer were held to be OI;
Justice Fullager: Replacement principle (compensation)
Was replacing wages workers would have earned had they not
quit their jobs;
So was OI – because wages were OI, compensation for loss of
wages is OI as well.
28
(2 other judges found it was OI for reasons we learned earlier:
regular, expected, relied upon, will often be OI)
But if replacing a capital item (ie compensation for a change in
work contract (Bennett) compensation will be capital);
In Bennett – compensation for going from one contract to
another with shorter term & less powers, compensation was
capital – because had given up capital rights under contract, so
compensation was capital as well.
29
Principle in McLaurin’s Case:
potentially applies to business & personal compensation
ONLY an issue if compensated for both inc. and capital
The Principle:
If compensation is received for BOTH loss of income & loss of

capital, 2 possibilities exist:
i) All of compensation is capital;
ii) The portion of compensation that represents loss of OI = OI,
the balance is capital;
Whether i) or ii), depends on facts: look at principle in
McLaurin.
30
If compensation is for both OI & capital can only tax income
component as OI if:
clearly separated into capital and income components;
or:
Come up some firm way of calculating separate income &
capital components;
So if have one (or both) of these 2, income component of
compensation = OI
IF don’t have either, the whole/entire compensation amount is
capital.
31
Eg: Factory burns down & compensation received for both loss
of factory (capital) and loss of profit (income);
If compensation documents state:
$10,000 for loss of factory (capital), $5,000 for loss of profit
(income);
Then:
$10,000 would be capital; and $5,000 would be income;
Why?
Because income & capital components are clearly separated, so

income component = OI.
32
But if compensation documents state:
$15,000 for loss of factory & profit (capital & income) ie
an undissected amount that doesn’t state how much
compensation is loss of inc. & how much is loss of capital;
Then:
None would be income – all would be capital;
This would apply even if the party paying compensation had in
its own internal documents how much of 15K was for income &
how much for capital – as long as this wasn’t expressly
communicated to the party being compensated.
33
Revision of Isolated/Extraordinary Transactions
If a business generates revenue that is normal business proceeds
(eg accounting firm charging for accounting services) then is
OI;
An Extraordinary transaction will occur when business
generates revenue which is not normal business proceeds
eg the accounting firm selling its old office;
An isolated transaction occurs when have once-off transaction
without underlying continuing business
eg retired farmer develops & sells his farm.
34
IF you have extraordinary/isolated transaction, will only be OI
if comes under at least one of these 3:

i) Whitfords Beach:
If a transaction is comprehensive/extensive enough eg don’t just
sell old building, knock it down, extensively develop the land
and then sell it, likely to be OI under principle in Whitfords
Beach (though depends on particular facts).
35
ii) 1st strand of Myer:
TO fulfil this, need all of the following:
a) Commercial transaction; AND
b) Profit making intention when ENTER transaction. (If
transaction involves sale of an asset, this means need profit
making intention when BUY asset);
c) Must show the way ended up making profit consistent with
how originally intended to make profit when entered transaction
(Westfield)
36
iii) 2nd strand of Myer (won’t apply often):
Where you sell right to income, but keep capital
eg you own a rental property, you sell the right to collect rent
for next 3 yrs to a third party in exchange for a lump sum of $X;
$X would be OI under 2nd strand of Myers.
37
Examples: Isolated/Extraordinary transactions
1) Someone buys land for farming, and farms it for 10 yrs.
Afterwards, retires from farming; eventually subdivides land,
extensively develops it, builds units on it and sells them at
profit.

This is an isolated transaction, a once-off transaction without an
underlying continuing business;
Is it OI?
38
Whitfords Beach:
Would probably apply due to extensive development of the land
before selling – but ultimately will depend on how extensive
development was - and the extent of the TP’s involvement in
the development;
39
1st strand of Myer:
i) Commercial transaction? – yes;
ii) Profit intention when entered transaction? - yes, bought land
to profit from it;
iii) Is the way A made profit consistent with original intention
(Westfield)? No – when bought land, had intention to farm.
Ended up profiting from selling land; because this is not
fulfilled, 1st strand of Myer is inapplicable;
2nd strand of Myer:
Clearly inapplicable – not selling right to income.
Would most likely be OI – Whitfords Beach.
40
2) B owns a clothing store business. This business buys an
investment property with intention to sell it next year at a

profit; then does so.
An extraordinary transaction; is it OI?
Whitfords Beach: doesn’t apply – no evidence of any
development;
1st Strand of Myer, 3 requirements:
Commercial transaction – yes;
Profit making intention when bought (entered) – yes;
Way made profit consistent with intention? Yes bought to
resell, ended up reselling it;
2nd strand of Myer: inapplicable (not selling right to inc);
would be OI – 1st strand of Myer.
41
3) C buys a house on a big piece of land to live in. After living
in it for 10 yrs, subdivides the land, sells for profit.
Is it OI?
Whitford Beach? No, said that ‘mere subdivision’ is insufficient
to come under principle in Whitfords Beach;
1st Strand of Myer:
Commercial transaction – arguably yes;
Profit making intention when entered transaction (ie bought the
land) – no, bought to live in it;
Way profit made consistent with intention? No.
Hence, 1st strand of Myer inapplicable;
2nd strand of Myer: clearly inapplicable;
Not OI.
42
Final point on Whitfords Beach applicability
NOTE: When extraordinary/isolated transaction is OI due to the
principle in Whitfords Beach, it is the “Net Profit” (NP) that is
assessable;
Taxable inc. (TI) = assessable inc. (AI) – deductions;

In a Whitfords transaction, the court said that NP only (ie gross
revenue – costs) will form part of AI;
This is not the way other types of taxable transaction would be
taxed - in an ordinary transaction, ‘gross revenue’ would be
assessable as AI itself – the TP could then deduct the costs as
‘deductions’.
43
Final point on Whitfords Beach applicability
eg say, gross revenue = $3 million; costs = $1 million.
Usually, in a normal tax assessment situation:
AI = $3m; ded’ns = $1m; thus, TI = AI – ded’ns = $2m
But with a Whitfords Beach transaction:
AI = $2m (NP: Gr. revenue less costs, no further deductions);
not gross revenue – ded’ns;
TI = $2m.
The final result with a Whitfords Beach transaction is the same
but the path taken to get there is different.
44
STATUTORY INCOME
Taxable inc (TI) = assessable inc (AI) – deductions
AI = OI + SI;
SI is when a statutory provision states that something is
assessable;
So if a section(s) of ITAA 1936/1997 says that a gain is
assessable, that gain (by definition) is SI;
Not all gains that are not OI will be SI; some will be, some
won’t be;
If a gain isn’t OI and isn’t SI, it will not be assessable;
We will be reviewing some sections that make gains into SI.

45
STATUTORY INCOME cont’d
Central Provisions:
s6-1 ITAA97: OI includes both SI and OI, but if exempt or
non-assessable and non-exempt then will not be AI (note this
section is ‘guide’, not an operative provision);
s6-10(1) & (2): ITAA97 – SI Included in AI;
What if a gain is potentially both OI and SI?
Is answered in s6-25 (1) & (2);
s6-25(1): If an amount is AI more than once, only include it
once - use the more relevant provision;
To stop someone being taxed twice such a gain is to be taxed
EITHER as OI or SI (unless there is a contrary intention in the
statutory provision);
46
So the question is, which one will the gain be taxed as – OI or
SI??
The rule is as follows:
The default rule is that in such an instance the gain is to be
assessable and taxed as SI rather than OI;
ie the ‘default’ rule is this:
if a gain is BOTH OI and SI, it will still remain as both OI and
SI;
BUT it will ONLY be assessable and taxed as SI, it won’t be
assessable/taxed as OI – this is to avoid double taxation.
47

Sometimes, the above rule won’t apply;
If the statutory provision that potentially makes the gain into SI
has a 'contrary intention' then the gain will be taxed as OI rather
than as SI – in such an instance it won’t constitute SI at all, and
so won’t be taxed as SI;
What is a contrary intention? When the statutory provision that
potentially applies makes it clear that it is only to apply to gains
that are not OI.
eg Contrary intention sections: s15-2(3)(d) 1997; s15-20
1997.
48
Some specific statutory provisions:
(that make certain gains into SI)
Dividends:
Dividends are OI – flow (shares), they are regular, etc;
They are SI as well – because s44 1936 states they are;
S 44(1)(a) ITAA36: resident’s AI includes dividends;
S 44(1)(b) non-resident’s AI includes Aust. source divs;
s44 has no contrary intention in it;
So dividends will constitute both OI and SI under s44(1);
As s44(1) has no contrary intention, it will be assessed & taxed
as SI under s44(1) – because default rule applies
ie if gain is both OI & SI, is taxed as SI.
49
s15-20 Royalties (statutory)
Think back to royalties discussed: Royalties = payment based
on usage;
Royalties based on exploitation of intellectual property (eg paid
on book sales) – are OI;
Gave example of royalty that wasn’t OI: eg someone mines your
land, gives you $X/ton of minerals taken;

PITL brief update Week 6This weekCGT upon DeathCGT.docx

PITL brief update Week 6This weekCGT upon DeathCGT.docx

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