This is a method of determining the timing of the receipt of income for tax purposes. Under this method, income is included in the taxable income of the recipient in the year when the right to receive it comes into being.
A common example for individuals is income received from managed funds which is taxed in the year in which the individual becomes entitled to the income, not when the cash is received.
This is the amount of income that contributes to taxable income, upon which a taxpayer pays tax. Assessable income includes your regular income (such as salary) plus other amounts specifically included by the tax laws (such as capital gains).
A person entitled to receive income and capital distributions from a trust and for whom the assets of the trust are held on behalf of by the trustee.
A capital gain is calculated as the difference between the cost base of the asset (generally the costs of acquisition plus incidental costs) and the capital proceeds (generally the cash or property received on disposal). A capital gain will arise to the extent the capital proceeds exceed the cost base. A capital loss will arise to the extent the reduced cost base exceeds the capital proceeds.
When a trustee makes a capital gain on assets held for greater than 12 months, the taxable gain may be reduced by 50 per cent using the discount method. The non-assessable portion of the distribution can be distributed tax free to a beneficiary and is referred to as the ‘CGT concession’.
The CGT concession is not always 50 per cent of the gross capital gain distributed. This may be because of the way in which fund managers may allocate expenses.
A CGT event happens where a CGT asset ends or is disposed of. Common examples include:
CGT event E4 occurs when unitholders in a trust receive distributions that include non-assessable components such as tax deferred or return of capital amounts. These are deducted from the cost base of an investor’s unit in the trust. If the total of the non-assessable amounts received over the ownership period exceed the cost base, the resulting gain is taxable as an E4 event.
An E4 capital gain arises when the non-assessable distributions are accrued.
CGT event G1 occurs when shareholders of a company receive return of capital amounts in relation to their shares. The amounts received are deducted from the cost base of an investor’s share. If the total capital payments received over the ownership period exceed the share's cost base, the resulting gain is taxable as a G1 event.
A G1 capital gain arises when the non-assessable distributions are paid.
Generally, a capital loss is made as a result of a Capital Gains Tax (CGT) event where the capital proceeds received by the taxpayer are less than the reduced cost base of the asset (ie broadly, what was paid for the asset).
The capital loss will be equal to the difference between the reduced cost base and the capital proceeds.
Capital proceeds are the total the investor receives as a result of a Capital Gains Tax (CGT) event (eg a disposal). For most CGT events, the capital proceeds are an amount of money and/or the market value of any property received in respect of the disposal.
This is a method of determining the timing of the receipt of income for tax purposes. Under the cash method, income is included in the taxable income of the recipient in the year when the cash is actually received.
The cost base of an asset is broadly made up of the purchase price of the asset, any incidental costs incurred in acquiring the asset and any capital costs incurred in maintaining the asset. The cost base is deducted from the proceeds received upon disposal of an asset to calculate the capital gain or loss.
A tax deduction may result when expenses are incurred in deriving assessable income. Deductions are subtracted from assessable income to calculate taxable income.
A company may restructure by splitting its operations into two or more entities. Where certain conditions are satisfied, any capital gain or capital loss recognised by an investor as a result of the demerger can be deferred until the investor ultimately sells their interest in the company.
Franking credits that were received but cannot be included in the income tax return of the investor because they have failed anti-avoidance measures. This includes the 45- or 90-day holding period rules or the dividend washing integrity rule (see ‘Dividend washing’).
To be a discounted capital gain the capital gain must:
For resident individuals and trusts the CGT discount is 50% and for superannuation funds the discount is 33.33%. Companies and non-residents are not entitled to receive any discount.
Dividend washing occurs when investors seek to claim two sets of franking credits on what is effectively the same parcel of shares. From 1 July 2013, a specific integrity rule was enacted that denies the benefit of additional franking credits where dividends are received as a result of dividend washing.
Australia has DTAs with more than 40 countries that aim to reduce double taxation, allocate taxing rights between countries over different categories of income and prevent avoidance and evasion of tax on income flowing between countries. Withholding tax rates are usually contained within the DTA for certain types of income moving into or out of Australia.
Australia has signed a number of EOI agreements and these seek to ensure the exchange of correct tax information relevant to the administration and enforcement of the parties respective tax laws.
An EOI agreements differs from a DTA as it, among other things, does not contain any provisions concerning the allocation of taxing rights over income. Further to this, the information exchanged can only relate to a specific investigation occurring at the time.
A FITO may be available for foreign tax that has been withheld by foreign entities on foreign income an Australian resident may have derived. If the foreign income is assessable income in the hands of the investor in Australia, the total tax payable may be reduced by up to the FITO amount. The amount of the FITO available is the lower of the amount of foreign tax paid or the Australian tax otherwise payable on the income.
The imputation system allows the tax paid by a company on its profits to be passed through to shareholders. The amounts take the form of a franking credit attached to the dividends paid by the company. Investors are taxed on the total value of the dividend (the actual dividend received plus the franking credit) and they may claim a tax offset for the amount of the franking credit.
Franking credits over and above those you need to reduce your tax payable to zero may be refunded by the Australian Taxation Office (ATO) depending on the entity type.
To be eligible for a tax offset for franking credits you are required to hold the shares 'at risk' for at least 45 days (90 days for preference shares and not counting the day of acquisition or disposal).
The indexation method is one of the ways to calculate capital gains. It allows investors to increase the cost base of a CGT asset by applying an indexation factor based on increases in the consumer price index. The indexation factor was frozen as at 30 September 1999 and this method is now only available for assets acquired before 21 September 1999.
Non-assessable amounts form part of a distribution an investor may receive. These amounts are not assessable to the recipient and examples include tax deferred, tax free or capital return amounts. Receipt of non-assessable amounts may trigger CGT event E4 or G1 (see above).
Any assets acquired before 20 September 1985 will generally be treated as pre-CGT assets. This means any capital gain or capital loss arising will be disregarded and no gains or losses will be reported in respect of these assets on the Tax Reports.
The reduced cost base is used to calculate the amount of any capital loss made on the sale of a CGT asset. It’s calculated by adjusting the acquisition cost for any tax deferred, tax free or return of capital amounts received during the period of ownership.
If a shareholder (or unitholder) exchanges their shares (or units) in a company (or trust) for similar shares (or units) in another company (or trust), provided certain conditions are met, they may be entitled to scrip for scrip rollover relief. Under the rules, the shareholder (or unitholder) can disregard any capital gain until the ultimate disposal of the exchanged shares (or units). The acquisition date and the cost base of the original asset becomes the cost base of the replacement asset.
Since December 2006, capital gain categories have been further sub-classified as Taxable Australian Real Property (TARP) capital gains or Non-Taxable Australian Real Property (NTARP) capital gains.
TARP capital gains refer to capital gains made upon the disposal of interests in Australian real property. TARP capital gains may arise from a direct or indirect interest in real property.
A direct interest in real property is simply a direct ownership interest in Australian real property, for example, an interest in an investment property. Broadly, an indirect interest in Australian real property is an interest in an entity which passes BOTH the non-portfolio interest test and the principal asset test.
A dividend payment that does not have any attached franking credit.
WHT is the tax deducted from certain types of investment income paid to non-residents or where the investor has not provided a Tax File Number (TFN), Australian Business Number (ABN) or exemption reason. The tax is withheld by the payer of the investment income before it’s paid to the investor.
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