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Calculating your capital gain or loss

Basic method

Description of method - Basic method of subtracting the cost base from the capital proceeds.

When to use the method - Use when the discount method does not apply (for example, if you have bought and sold an asset within 12 months).

How to calculate your capital gain using the method - Subtract the cost base (or the amount specified by the relevant CGT event) from the capital proceeds.

Example

Property purchased and sold within 12 months

Marie-Anne bought a property for $250,000 under a contract dated 24 June 2009. The contract provided for the payment of a deposit of $25,000 on that date, with the balance of $225,000 to be paid on settlement on 4 August 2009.

Marie-Anne paid stamp duty of $5,000 on 20 July 2009. On 4 August 2009, she received an account for solicitor's fees of $2,000 which she paid as part of the settlement process.

Marie-Anne sold the property on 16 October 2009 (the day the contracts were exchanged) for $315,000. She incurred costs of $1,500 in solicitor's fees and $4,000 in agent's commission.
 
As she bought and sold her property within 12 months, Marie-Anne must use the 'other' method to calculate her capital gain.

Deposit                                                                  $25,000+
Balance                                                               $225,000+
Stamp duty $5,000+
Solicitor's fees for purchase of property                      $2,000+
Solicitor's fees for sale of property                             $1,500+
Agent's commission                                                 $4,000+
Cost base (total)                                                  $262,500

Marie-Anne works out her capital gain as follows:
Capital proceeds                                                   $315,000
less
cost base                                                     ($262,500)
Capital gain calculated using the 'other' method $52,500

Assuming Marie-Anne has not made any other capital losses or capital gains in the 2009-10 income year, and does not have any unapplied net capital losses from earlier years, the net capital gain to be included on her tax return is $52,500.

Discount method – use if property held for 12 months

Description of method - Allows you to discount your capital gain (by 50% for individuals and trusts, and 33 1/3% for complying superannuation funds).

When to use the method - Use for an asset held for 12 months (between date of entry of Contract for purchase and date of entry of Contract for sale)

How to calculate your capital gain using the method - Subtract the cost base from the capital proceeds, deduct any capital losses, then reduce by the relevant discount percentage. Apply this to the Example, the Capital gain calculated of $52,500 is halved to $26,250 and that amount is included in Marie-Anne’s tax return.

Source:
http://www.ato.gov.au/individuals/content.aspx?doc=/content/36581.htm
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Commentary

The sale price that appears on the Contract for Sale invariably represents more than the owner is to receive from the sale of the property.

Simple costs such as real estate agents commission and conveyancing costs on the sale will need to be deducted from the sale price that appears on the Contract, to arrive at what the ATO describes as capital proceeds, which is the starting point for the calculation of a capital gain.

In more complex transactions, the deductions from the price that appears on the Contract for Sale might include purchaser expenses that a seller agrees to pay out of the price, and the profit ‘uplift’ between what a seller has agreed to accept on the sale, and the amount a buyer has agreed to pay, which represents a transaction engineer’s profit such as is found in a Sandwich Lease Option.

The seller’s tax position is that the seller has to include in the capital gains tax calculation, what they receive (the capital proceeds), not the price that appears on the Contract for Sale.

This is how the ATO puts the position –

What are capital proceeds?

Whatever you receive as a result of a CGT event is referred to as your ‘capital proceeds’. For most CGT events, your capital proceeds are an amount of money or the value of any property you:

  • receive, or
  • are entitled to receive.

Source:
http://www.ato.gov.au/individuals/content.aspx?doc=/content/36556.htm

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