Understanding capital gains tax (CGT) and losses

To be a discounted capital gain the capital gain must:

• be made by a resident individual, trust or complying superannuation fund
• result from a CGT event happening after 11.45am on 21 September 1999
• be calculated with reference to an unindexed cost base; and
• result from a CGT event happening to a CGT asset owned by the taxpayer for at least 12 months.

For resident individuals and trusts the CGT discount is 50% and for superannuation funds the discount is 33⅓%. Companies and non-residents are not entitled to receive any discount.

For individuals, a capital loss must be offset against a capital gain before the 50% discount can be applied. The capital loss must therefore be offset against the gross capital gain.

The CGT concession amount represents the non-assessable CGT discount component distributed to investors by listed trusts or unlisted managed funds.  

Such amounts are made through the sale of assets held for at least 12 months. 

This amount may not always be 50% of the gross discountable gain because, for example, of the way in which the product issuer has allocated expenses.

CGT events E4 generally occur in the following circumstances: 

• A trust makes a payment in respect of a unit in the trust, and 
• Some or all of the payment is not included in your assessable income. 

Typically, the trust will distribute tax deferred or return of capital amounts. 

CGT events G1 generally occur in the following circumstances: 

• A company makes a payment in respect of a share in a company 
• Some or all of the payment is not a dividend or a liquidator’s distribution taken to be a dividend, and 
• The payment is not included in the investor’s assessable income. 

Typically, the amount is a return of capital in the hands of the investor.  

Payments from the trust or the company can be made in cash or in-specie (i.e. as a distribution of shares or other property). 

CGT events E4 generally occur: 

• just before the end of the income year in which the trustee makes the payment, or 
• if another CGT event (except CGT event E4) happens in relation to the investors’ unit or part of it after the trust makes the payment but before the end of that income year — just before the time of that other CGT event. 

CGT events G1 generally occur at the time the company makes the payment. 

Where the non-assessable payments reduce the cost base to nil, any further distributions of such amounts will give rise to a capital gain. These capital gains are known as E4 or G1 capital gains.    

You cannot make a capital loss as a result of an E4 or G1 capital gain. 
 

How an E4 or G1 capital gain is taxed

We report E4 and G1 gains resulting in the Tax Report – Detailed in the Excess Assessable Gains section. We’ll also apply the appropriate CGT discount, if applicable, to any such gains.  

The Tax Report – Summary reports any CGT E4 or G1 capital gains in the Capital gains from trust distributions section as discounted, indexed or other capital gains, as appropriate. 

A compensation payment includes any amount (either money or other property) paid to a taxpayer in respect of a right to seek compensation or any proceeding instituted by the taxpayer in respect of that right. The right to seek compensation may arise in relation to any underlying asset.  

Typical compensation payments may be made for: 

• an administrative error on behalf of a fund manager resulting in a loss to an investor 
• the settlement of Class Action proceedings, either in court or out of court 
• a missed opportunity of gain as a result of a delay in processing a buy or sell order
• an incorrect calculation of an interest rate that requires rectification. 

A right to seek compensation is a capital gains tax (CGT) asset for tax purposes. The right to seek compensation is acquired at the time of the compensable wrong and includes all the rights arising during the process of pursuing the compensation claim. The right to seek compensation is disposed of when it’s satisfied, surrendered, released or discharged. 

We’ll endeavour to report compensation payments received by investors in the most accurate way possible for tax purposes, based on information available.  

Where a component of the compensation received is interest, the amount will be reported in our reports as assessable interest income on the date the interest was paid.   

Where the compensation received is income (and replaces lost income), the amount will be reported in our reports as unfranked dividend income and will be reported as assessable on the date the unfranked dividend was paid.  

Where the compensation relates to a CGT event, the amount of the compensation may be reported in one of the following ways: 

• a cost base adjustment in the form of a return of capital 
• in the case of an asset realisation, an adjustment to the capital proceeds 
• a distributed realised capital gain (reported as either discounted, indexed or other depending on the circumstances of the individual investor). 

Where the nature of compensation cannot be determined or has not been disclosed to us, the payment will be treated as a disposal of a right to seek compensation on the date the compensation amount is received.

As the right being disposed of is a capital asset, a capital gain will arise to the extent the capital proceeds (e.g. the settlement amount) exceeds the cost base of the asset (e.g. legal expenses incurred in pursuing compensation). A capital loss will arise to the extent the reduced cost base of the asset exceeds the capital proceeds. 
 

Example

Ann acquired shares in Company X in August 2017. A class action was subsequently brought against Company X, in August 2020 on behalf of investors who purchased or acquired an interest in Company X during the relevant period, which was 7 August 2017 to 15 February 2018. It was alleged Company X breached its obligations of continuous disclosure under the ASX Listing Rules and the Corporations Act and engaged in misleading and deceptive conduct regarding the financial position of the company. Ann incurred $2,000 in legal fees to participate in the class action.  

On 19 June 2021, a settlement was agreed to by all parties. Ann’s share of the settlement was $50,000. On this date, Ann disposed of a CGT asset (being the right to seek compensation). The asset was acquired at the time of the compensable wrong, being when Ann acquired the shares in August 2017. The cost base of the asset will be $2,000 and the proceeds received will be $50,000. Ann’s capital gain therefore is $48,000, which can be discounted as she held the asset for longer than 12 months. 

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 (e.g. 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. 

• The non-portfolio interest test is satisfied where the taxpayer (and any associates) holds an interest of 10% or more in another entity 
• Broadly, the principal asset test is satisfied if the sum (by way of market value) of the entity’s TARP assets is greater than the sum (by way of market value) of the entity’s NTARP assets. 

An Australian resident investor pays tax on both TARP and NTARP capital gains they receive.  

Where the Australian investor is considered to be an intermediary for non-residents, the TARP and NTARP capital gains distinction may be important as this may impact their withholding tax (WHT) obligations in respect of their non-resident beneficiaries/investors.  

Broadly, an entity will be considered an intermediary where they're an Australian resident and they're in the business of predominantly providing custodial or depository services under an Australian Financial Services Licence. 

We disclose the breakdown of TARP and NTARP capital gains on the Tax Report – Summary. 

• For distributions received through unlisted managed funds and listed securities, we rely on the TARP and NTARP breakdown information provided by the product issuer at the time of a distribution 
• Where an investor has disposed of any asset during the year, we assume that any resulting capital gain realised is an NTARP capital gain on the basis that the investor did not pass the non-portfolio interest test. 

We don’t separate any distributed capital gains on the Tax Report – Detailed into TARP and NTARP capital gains.  

Please note that we don’t identify any investor as an intermediary for tax purposes but do provide sufficient information for intermediaries to meet their WHT obligations, if any. 

An investor can carry forward a capital loss indefinitely. 

Investors are required to keep records of all matters that could result in them making a capital gain or loss. Those records must be kept for a minimum of five years after the relevant CGT event has happened.   

We strongly recommend your client seeks independent taxation advice to ensure their underlying cost bases are correct. 

No, Macquarie does not maintain an investor’s capital loss history. This is the responsibility of investors and their tax agents/advisers. 

A capital gains liability may arise following the sale of investments in a client’s account. Capital gains are included in the Fund’s tax liability when it completes its annual tax return. 

The deduction of applicable capital gains tax for a client’s account doesn’t occur at the time of an asset’s sale. Instead, it occurs at the start of each calendar year as part of the Fund’s annual tax adjustment process. 

Where a client makes a full or partial withdrawal, a deduction for tax will generally occur, representing the proportional value of: 

• any CGT on investments that have been sold during the current and previous financial year, or 
• other earnings tax that hasn’t yet been deducted. 

Previous years’ CGT will only be included if the previous year’s annual tax calculation hasn’t been finalised. 

Generally, convertible notes are treated as being on revenue account for income tax purposes. That is, any gains or losses realised upon their disposal, conversion or maturity will be on revenue account. 

However, where an investor converts the note and receives ordinary shares (or other such securities), these shares or securities will be on capital account and subject to the capital gains tax (CGT regime). As such, any gains realised may be able to be reduced by the CGT discount where the relevant conditions are met. Available capital losses may also be used to offset any capital gains. 

In some circumstances, convertible notes may be treated as CGT assets from the date of issue. Common examples of these are hybrid securities issued by banks and financial institutions. The tax treatment in these circumstances is explained in the CGT section. 

An LIC is an Australian resident company, listed on the Australian Securities Exchange (ASX), which carries on the business of managing an investment portfolio. 

To determine whether an investment is classified as an LIC, investors should check the LIC classification list which is published on the ASX website. 

The following tax advantages exist for an investment in an LIC:

1. CGT discount 

The CGT discount is not generally available to companies in respect of any net capital gains they may derive. However, when an LIC derives a capital gain in respect of an asset which has been held for 12 months or more, a special tax treatment may allow the benefit of the CGT discount to flow through to investors (this is achieved via a special treatment of relevant parts of dividend distributions). This treatment provides a broadly similar outcome to any discount a shareholder could have claimed had they owned the underlying asset directly and made a subsequent capital gain. 
 

2. Dividend income

Upon payment of dividends, LICs must separate that part of the dividend which relates to capital gains on assets held for more than 12 months. Dividends sourced from such LIC capital gains are referred to as the “attributable part”. Australian resident individuals and trusts are able to obtain a tax deduction equal to 50% of the attributable part of the dividend. A 33^⅓% deduction referrable to the attributable part of the dividend is available to complying superannuation funds. Franking credits may be available where the dividend is franked. 

When companies are placed in liquidation or administration, the shares they have on issue may become worthless. In this situation, company law may restrict investors being able to transfer these shares to other investors.  
  
A declaration may be issued in writing by either the liquidator or administrator, as relevant, stating: 

• for shares, that there are reasonable grounds to believe there is no likelihood that shareholders in the company will receive any further distribution for their shares. 
• for financial instruments, that the financial instruments have no value or have only negligible value. 

At this point the investor may choose to realise a capital loss on their worthless stock. 

Where the above requirements for declarations are not satisfied, an investor may not claim a capital loss. 

There are generally three options to crystallise a capital loss in respect of worthless shares. These are: 

1. Continue to hold the worthless shares and wait for a court order to be issued cancelling the shares. 
2. Where the relevant declarations have been made by the company administrator or liquidator, an investor may claim a capital loss in the income year the declaration is made. 
3. The investor may be able to sell their shares or financial instruments. Certain organisations such as delisted.com.au provide a service where they will purchase certain worthless shares. 

If no declaration is made by a liquidator or administrator, or the investor hasn’t chosen to make a capital loss following a declaration, an investor may make a capital loss on their worthless shares when a court order is given to dissolve the company and the shares are cancelled. 

Additionally, if a company is wound up voluntarily, shareholders may realise a capital loss either three months after a liquidator lodges a tax return showing that the final meeting of the company has been held, or on another date declared by a court.