Capital gains tax in Australia

Last updated

Capital gains tax (CGT), in the context of the Australian taxation system, is a tax applied to the capital gain made on the disposal of any asset, with a number of specific exemptions, the most significant one being the family home. Rollover provisions apply to some disposals, one of the most significant of which are transfers to beneficiaries on death, so that the CGT is not a quasi estate tax.

A capital gains tax (CGT) is a tax on capital gains, the profit realized on the sale of a non-inventory asset that was greater than the amount realized on the sale. The most common capital gains are realized from the sale of stocks, bonds, precious metals, and property. Not all countries implement a capital gains tax and most have different rates of taxation for individuals and corporations.

Taxation in Australia

Income taxes are the most significant form of taxation in Australia, and collected by the federal government through the Australian Taxation Office. Australian GST revenue is collected by the Federal government, and then paid to the states under a distribution formula determined by the Commonwealth Grants Commission.

Contents

CGT operates by treating net capital gains as taxable income in the tax year in which an asset is sold or otherwise disposed of. If an asset is held for at least 1 year then any gain is first discounted by 50% for individual taxpayers, or by 33.3% for superannuation funds. Capital losses can be offset against capital gains. Net capital losses in a tax year cannot be offset against normal income, but may be carried forward indefinitely.

Taxable income refers to the base upon which an income tax system imposes tax. Generally, it includes some or all items of income and is reduced by expenses and other deductions. The amounts included as income, expenses, and other deductions vary by country or system. Many systems provide that some types of income are not taxable and some expenditures not deductible in computing taxable income. Some systems base tax on taxable income of the current period, and some on prior periods. Taxable income may refer to the income of any taxpayer, including individuals and corporations, as well as entities that themselves do not pay tax, such as partnerships, in which case it may be called “net profit”.

Personal use assets and collectables are treated as separate categories and losses, which are quarantined so they can only be applied against gains in the same category, not other gains. This works to stop taxpayers subsidising hobbies from their investment earnings.

History

A capital gains tax (CGT) was introduced in Australia on 20 September 1985, one of a number of tax reforms by the Hawke/Keating government. The CGT applied only to assets acquired on or after that date, with gains (or losses) on assets owned on that date, called pre-CGT assets, not being subject to the CGT. In calculating the capital gain, the cost of assets held for 1 year or more was indexed by the consumer price index (CPI), which meant that the part of the gain which was due to inflation was not taxed. Indexation was not used if an asset was held for less than 12 months or a sale results in a capital loss. Also, an averaging process was used to calculate the CGT. 20% of a taxpayer's net capital gain was included in income to calculate the taxpayer's average tax rate, and the average rate was then applied to all the taxpayer's gross income (i.e., including the capital gain in full). So if a large capital gain were to push a taxpayer into a higher tax bracket in the tax year of sale, the brackets was stretched out, allowing the taxpayer to be taxed at their average tax rate.

Bob Hawke Australian politician, 23rd Prime Minister of Australia

Robert James Lee Hawke, is an Australian former politician who was the 23rd Prime Minister of Australia and the Leader of the Labor Party from 1983 to 1991. He is the longest-serving Labor Party Prime Minister.

Paul Keating Australian politician, 24th Prime Minister of Australia

Paul John Keating is a former Australian politician who served as the 24th Prime Minister of Australia, in office from 1991 to 1996 as leader of the Labor Party. He had earlier served as Treasurer in the Hawke Government from 1983 to 1991.

Consumer price index indices tracking prices of consumer goods as an economic measure


A Consumer Price Index (CPI) measures changes in the price level of market basket of consumer goods and services purchased by households.

From 20 September 1999, the Howard Government discontinued indexation of the cost base and (subject to a transitional arrangement) introduced a 50% discount on the capital gain for individual taxpayers. Assets acquired before 21 September 1985 continued to be CGT-free. For assets acquired between 20 September 1985 and 20 September 1999, the taxpayer had an option of using indexation (up to the CPI as at 30 September 1999) or using the 50% discount method. Also from 21 September 1999, small business CGT concessions were introduced (below), reducing tax on small business owners retiring, and on active assets being sold, and allowing a rollover when selling one active asset to buy another. The 50% CGT discount is not available to companies. Superannuation funds are entitled only to a 33% CGT discount.

Howard Government

The Howard Government refers to the federal executive government of Australia led by Prime Minister John Howard between 11 March 1996 and 3 December 2007. It was made up of members of the Liberal–National Coalition, which won a majority of seats in the House of Representatives at four successive elections. The Howard Government commenced following victory over the Keating Government at the 1996 federal election. It concluded with its defeat at the 2007 federal election by the Australian Labor Party, whose leader Kevin Rudd then formed the First Rudd Government. It was the second-longest government under a single Prime Minister, with the longest having been the second Menzies Government (1949–1966).

Exemptions

The law is framed so as to apply to all assets, except those specifically exempted. It applies both to assets owned outright and to a partial interest in an asset, and to both tangible and intangible assets. Current exemptions, in approximate order of significance are:

Hectare metric unit of area

The hectare is an SI accepted metric system unit of area equal to a square with 100-metre sides, or 10,000 m2, and is primarily used in the measurement of land. There are 100 hectares in one square kilometre. An acre is about 0.405 hectare and one hectare contains about 2.47 acres.

Gambling wagering of money on a game of chance or event with an uncertain outcome

Gambling is the wagering of money or something of value on an event with an uncertain outcome, with the primary intent of winning money or material goods. Gambling thus requires three elements be present: consideration, risk (chance), and a prize. The outcome of the wager is often immediate, such as a single roll of dice, a spin of a roulette wheel, or a horse crossing the finish line, but longer time frames are also common, allowing wagers on the outcome of a future sports contest or even an entire sports season.

Bond (finance) instrument of indebtedness

The bond is a debt security, under which the issuer owes the holders a debt and is obliged to pay them interest or to repay the principal at a later date, termed the maturity date. Interest is usually payable at fixed intervals. Very often the bond is negotiable, that is, the ownership of the instrument can be transferred in the secondary market. This means that once the transfer agents at the bank medallion stamp the bond, it is highly liquid on the secondary market.

Trading stock is not regarded as an asset and instead comes under ordinary income tax. Items of plant being depreciated are subject to CGT, but only in the unusual case that they are sold for more than original cost (see Depreciating assets below)

Operation

The capital gains tax law is expressed in terms of a set of 52 CGT events (see ITAA 1997 section 104-5), each of which specifies results such as gain, loss, or what cost base adjustment are to be made, and how to determine the date to use for the transaction.

The most common event is A1, the disposal of an asset. On disposal a capital gain arises if the proceeds are greater than the cost base, a capital loss arises if less than the reduced cost base. The date to be used is the date of the contract of sale (even if payment is not until later), or if no such contract exists then the date the taxpayer stopped being the owner (e.g. if an asset is lost).

The cost base of an asset is the amount paid for it, including associated costs such as agent's commissions. However, there are three forms, from lowest to highest amount:

On disposal then:

Capital gains and losses in a given tax year are totalled, but in three separate categories according to the class of the asset:

The existence of separate categories for collectibles and personal items works to prevent losses from them being offset against other gains such as from investments. In effect it prevents hobbies being subsidised.

Net losses in each category can be carried forward to future years, in their respective categories, but cannot be offset against ordinary income, or each other.

Capital losses are applied before the capital gains discount:

An individual makes a capital gain of $100 eligible for 50% discount = $50 net capital gain. If the person also had capital losses of $50, the losses would apply first and there would be $50 capital gains left over eligible for 50% discount = $25 net capital gain.

Reduced cost base

When a CGT event takes place on a CGT asset and the cost base is greater than the capital proceeds, then the taxpayer needs to calculate the asset's reduced cost base to work out whether there was a capital loss. The reduced cost base of a CGT asset has the same five elements as the cost base, except for the third element. [1]

Common example of reduced cost base:

Greg acquired a rental property on 1 July 1998 for $300,000 and makes improvements of $50,000. Before disposing of the property on 30 June 2011, he had claimed $20,000 in capital works deductions. At the time of disposal, the cost base of the property was $350,000. The reduced cost base of the property is reduced by $20,000 to $330,000.

Prior to 1 July 2001, distributions from property trusts commonly included a so-called "tax free" portion which was subtracted from the reduced cost base but not the cost base, in a similar way. (See Property trust distributions below.)

Indexed cost base method

For assets acquired between 20 September 1985 and 20 September 1999 the taxpayer may choose between two methods of calculating a capital gain – the discount method described above, or the indexation method – whichever method results in the least tax. The indexation method is as follows:

For example: Individual purchased shares in 1987. The Indexed capital gain is $5,000 or Gross Discounted capital gain is $7,500. The capital losses are $4,000:

  1. $5,000 Indexed Gain Outcome: Losses of $4,000 applied = $1,000 net capital gain
  2. $7,500 Discounted Gain Outcome: Losses of $4,000 applied gives a balance of $3,500, which multiplied by 50% discount = $1,750 net capital gain

With only capital gains - the discount method is usually better (note indexation is better for small (perhaps only very small) gains). The choice is essentially between reducing the capital gain by the CPI rise of the cost base, or halving it outright. CPI indexation may be small, but if the proceeds are below it then there's no CGT. When the gain is above twice the indexation result, then the discount method is better.

Specific assets

The following are matters relating to specific asset classes.

Gifts

A gift made by a living person is treated as a disposal at current market value. The giver is taxed for a disposal at that price, the receiver gets that as their cost base. (s112-20(1) ITAA 1997)

Testamentary gifts, i.e. made upon death under a will or under the laws of intestacy, are instead subject to rollover provisions in most cases (see Death below).

Part paid shares

When a shareholder is called to pay a further installment on part-paid shares, the amount paid is added to the cost base and reduced cost base. The date of acquisition of the shares remains unchanged.

Splits

When a company splits its shares, for instance 2 shares for every 1 previously held there is no immediate CGT effect. The taxpayer's date of acquisition and cost base for the holding are unchanged, only it is for the new number of shares. Likewise for a consolidation (reverse split).

Bonus issues

Bonus shares issued by a company from its share capital account are treated the same as splits (above), they only change the number of shares in the holding. However, there are complicated rules to apply when bonus shares are offered in lieu of dividends, or when they're part-paid shares.

Bonus units from a unit trust are similar to bonus shares. Fully paid units with no amount to include in one's accessible income (as advised by the trust), merely change the number of shares in one's holding, otherwise a set of rules apply.

Dividend reinvestment

Some companies offer dividend reinvestment plans allowing a shareholder to elect to receive newly issued shares instead of a cash dividend, often at a small discount to the prevailing market price.

Such a plan is treated as if the shareholder received the dividend and then used the money to buy shares. The dividend is taxed like any other dividend (including with any dividend imputation), and the shares are taken to be acquired for the cash the shareholder did not receive.

The investor would need to keep a record of each parcel of shares received under a dividend reinvestment plan, including issue dates and amounts of dividend applied towards those shares.

Identification of shares

When different parcels of shares (etc.) have been acquired at different times or for different prices, it is necessary to identify which ones are disposed of in a sale, since the capital gain or loss may be different for each.

If share certificates or similar are used then clearly the ones transferred are the parcel. But when shares are held aggregated in bank account style such as in the CHESS system used by the Australian Securities Exchange, then the taxpayer can nominate which of the original purchases it is that are sold.

In both cases the taxpayer can choose to their advantage, such as selling a parcel with a capital loss to realise that immediately, or keeping particular parcels until they reach 1 year old to get the 50% discount on gains.

A further option is available for parcels of the same shares acquired all on one day. If desired they can be aggregated to make one parcel with the total of the costs, i.e. averaging out the prices paid. This reduces paperwork if for example shares are bought at a range of prices through the course of a day.

Stapled shares

Some listed companies are set up so that their securities are "stapled" together. For example, each unit of the Westfield Group is three parts, a share in Westfield Limited, a unit in the Westfield Australia Trust, and a unit in the Westfield America Trust.

Taxpayers treat each part of a stapled security separately for capital gains tax purposes, i.e. calculate a gain or loss on each separately. But since stapled securities trade with only a price for the bundle, the taxpayer must use some "reasonable" method for apportioning the price across the parts. The Westfield Group for example recommends on their securities using the ratios of the net tangible asset backing (NTA) of each part.

Building allowances

A building allowance of 2.5% (or 4% in certain cases) of the original construction cost of a building is allowed as a deduction against income each year (until the original cost is exhausted). The amounts claimed as a deduction are subtracted from the cost base and reduced cost base of the building. (Note the allowance is calculated on the original construction cost, not a price later paid, and note also a building is a separate CGT asset from the land it stands on, and only the building cost base is affected.)

Building allowance works as a kind of depreciation, representing progressive decline over the lifetime of a building. But unlike the way depreciation has a final balancing adjustment against income, the building allowance instead gets that as capital gain (or loss) through it lowering the cost base.

As an example, if it is assuming a building is worth nothing at the end of the 40 years implied by the 2.5% a year allowance, the owner has had deductions progressively over those years instead of only realising the whole lot in one big capital loss at the end.

Property trust distributions

Distributions from property trusts (both listed and unlisted) commonly include two amounts which affect capital gains tax,

The investor subtracts the tax deferred part of a distribution from their cost base (and reduced cost base). It is called tax deferred because the investor pays no tax on the amount immediately, but will pay capital gains tax on it when they later sell the units, because it has lowered their cost basis.

Tax deferred amounts generally arise from building allowances, the same as for direct property ownership (see above). At its simplest it works as follows. Suppose a trust earns rental income of $100 and has building allowance deductions of $20. Then the net taxable income is $80 and that amount is distributed to unitholders to be included in their income. The remaining $20 of cash is distributed to the unitholders too, but it is regarded as a return of capital.

An investor's cost base cannot go below zero. If tax deferred amounts have reduced it to zero, then any excess must be declared as a capital gain in the year received. This is an unusual situation, generally it can not occur unless an investor has been able to get trust units for much less than the value of the buildings.

Capital gains distributed by a trust arise from the trust selling assets. They're taxed in the investor's hands the same as other gains. When there's a choice of discount or indexation method, the trust manager makes that choice.

Discount capital gains are distributed in already discounted form, i.e. already reduced by 50% for assets held at least 1 year. The investor must gross it up by doubling, apply any capital losses, then re-discount the remainder. (If one has no capital losses to apply then there's no change and the amount received is the amount taxed.)

Options

For the option holder, i.e. the taker,

For the option writer, i.e. grantor,

Share rights

Rights or options issued by the company allowing existing shareholders to buy new shares are treated as being acquired for nil cost at the same time as the shares were acquired. If sold then the proceeds are a capital gain (or not a capital gain if those shares were pre-CGT).

If the rights are exercised then the new shares are taken to be acquired for the amount paid and on the date exercised. If the shares were pre-CGT then the market value of the rights at the time of exercise must be added to the cost base of the new shares too.

Company issued rights or options bought from someone else (i.e. not issued direct from the company) are treated like options above.

Demutualisation

When a mutual society such as an insurance company demutualises by converting memberships to shareholdings, the company advises members of a cost base and reduced cost base for their new shares. That cost base represents "embedded value". The ATO publishes cost bases for significant recent demutualisations, such as AMP Limited and Insurance Australia Group. When shares are later sold a capital gain or loss occurs in the usual way.

Worthless shares

When a company is being wound up or goes into administration, the liquidator, receiver or administrator may make a formal declaration that they expect no residual distribution to shareholders (all money being exhausted paying creditors first). Shareholders may then, if they wish, claim a capital loss on the shares as if they disposed of them for nil consideration. If a subsequent liquidation distribution does occur then it is treated as a capital gain.

Liquidators were granted the power to make such declarations from 11 November 1991, and other insolvency practitioners from 11 May 1991. Of course a shareholder may always sell apparently worthless shares to a third party for a nominal sum to realise a loss.

Short selling

Short selling is covered under ordinary income tax, not capital gains tax. The reason for this is that in the first leg, i.e. the sale, the investor is not disposing of an asset they own.

Depreciating assets

When deductions are claimed for depreciation of an asset, and it is later sold, there a balancing adjustment to be made for the proceeds versus the written-down value. In the usual case that the proceeds are less than the original cost, then any difference between proceeds and written-down value is income or further deduction and CGT does not apply.

If however, the proceeds are greater than the original cost, then the amount between the written-down value and the original cost is income, and the proceeds above that are a capital gain. Effectively deductions allowed in past years are reversed then the usual CGT applies.

Share traders

A person for whom buying and selling shares or other assets is a business treats those assets as trading stock, and gains or losses on them are ordinary income rather than capital gains. The taxpayer needs to determine whether they fall into the category of a share trader or not.

There's no specific law on share traders, but the ATO publishes a fact sheet with guidelines based on court rulings . It includes examples of definitely trading, and definitely not. Factors include whether the intention is to profit, the repetition and regularity of the activity, and whether organised in a businesslike manner. (At worst a taxpayer can use the system of private rulings to get an ATO determination on particular circumstances they're in or are contemplating.)

A trader has the advantage that losses can be offset against other income (dividends for instance), and has a choice of valuing each share at either cost price or market price each year, so unrealised losses can be booked immediately but unrealised gains held back. The disadvantage for a trader is that the 50% discount on CGT gains for assets held 1 year or more is not available.

Prior to the introduction of capital gains tax in 1985, section 52 of the ITAA 1936 required taxpayers to declare (on their next return) assets they had acquired for trading. This was known as declaring oneself a share trader, but now there's no such election.

Rollovers

Rollover provisions allow the deferral of capital gain, either by letting a new owner keep the previous owner's cost base, or by letting an owner switch to a new similar asset and keep the old cost base.

Death

On death, CGT assets transferred to beneficiaries (either directly or first to an executor) are not treated as disposed of by the deceased, but instead the beneficiaries are taken to have acquired them at the deceased's date of death and with cost base and reduced cost base as at that date.

This rollover does not apply if the beneficiary is not an Australian resident, or is a tax-advantaged entity such as a superannuation fund. In such cases the deceased is taken to have sold to the beneficiary at market value at the date of death, and the usual capital gains tax applies. Churches and charities are regarded as tax-advantaged too, but bequests to registered "Deductible Gift Recipients" are not taxed. Gifts under the Cultural Bequests Program are not subject to tax either.

Also, this rollover does not apply to pre-CGT assets (i.e. acquired by the deceased before 20 September 1985), in that case assets are taken to be disposed of at market value to the beneficiary, at the deceased's date of death. Being pre-CGT, there is no capital gains tax to the estate, but the pre-CGT status of the asset is lost.

Notice that for both pre and post CGT assets there are no tax liabilities to the deceased's estate for the usual case of transferring to an individual Australian beneficiary. This means in the majority of cases capital gains tax does not operate as a proxy for death duties or estate tax.

Unused net capital losses carried forward by the deceased from past tax years are lost with their death. These losses cannot be recouped by the estate or the beneficiaries (TD 95/47).

Marriage breakdown

When assets are transferred between spouses under a court-approved settlement following marriage breakdown, certain rollover provisions automatically apply. Essentially the spouse receiving the asset keeps the original cost base and acquisition date. Newly created intangible assets like rights or options have a cost base of only what was actually spent in creating them (solicitor's fees for instance).

Transfers not made under court approval are not subject to rollover, the normal CGT rules apply to any disposals. And if assets are not transferred at market value and not in an "arms length" transaction then for CGT purposes the transfer will be treated as having been made at market value.

Takeovers

"Scrip for scrip" rollover may be available for a takeover or merger where a shareholder receives new shares or new trust units rather than cash. When rollover is available the new shareholding is treated as a continuation of the old, with the same cost base and date of acquisition. Scrip for scrip rollover is available when:

The shareholder can elect not to utilise scrip for scrip rollover, and instead treat it as a disposal of their original holding for the value of the new shares, realising a capital gain. The shareholder can choose rollover on a portion of the shareholding.

Under Australian companies' law, if a bidder gains 90% acceptance it may force remaining shareholders to take the bid. Such holders are in the same position as those who voluntarily accepted (in particular note that the "compulsory acquisition" rollover below does not apply).

Demergers

When a company spins off part of its business as a new separate company and gives shareholders new shares in that new company, the taxpayer's cost base of the original shares is split between the original and the new holding. The company advises the appropriate proportions and the shareholder would allocate the original cost base between the two entities. The new holding is taken to be acquired at the date of demerger. The cost base of the original shareholding is reduced by the cost base of the new shareholding.

In certain eligible demergers rollover relief may be available, the company will generally advise of that. If available and if the taxpayer elects to use it, the new holding is taken to have been acquired at the same date as the original holding, and that includes being pre-CGT if the original was pre-CGT.

Usually rollover relief (when available) is an advantage, it preserves pre-CGT status and helps an individual meet the 1 year time period for the 50% discount on gains. However, on pre-CGT assets where the market value of the new holding is below its cost base, the taxpayer is better off not using the rollover but instead let the new holding be a CGT asset so the capital loss there can be utilised.

Destruction or compulsory acquisition

When an asset is compulsorily acquired by a government agency, or is destroyed and insurance or compensation is received, the taxpayer may choose between,

When rolling-over, there are rules to use when the compensation differs from the replacement or repair cost. And in particular there's a limit of 120% of market value if replacing a pre-CGT asset (so it is not possible to get a substantially bigger asset into pre-CGT status).

Note that these provisions apply only to capital assets, not to trading stock, nor to plant being depreciated.

Small business

Four capital gains tax concessions for small businesses have been available since 21 September 1999.

The key elements of a small business are:

The exemption for gains paid into a superannuation fund is similar to what employees may do with an eligible termination payment (accumulated unused long service leave, etc.) on leaving a job. But the small business case it is only the net gain after applying the CGT discounts which needs to be paid into the fund to escape CGT liability, the remainder can be kept in cash.

Changes have been made by ATO to relax some of these provisions. Check the ATO Website for details.

See also

Notes

  1. Subsection 110-55(2)
  2. Rights or options to acquire shares or units

Related Research Articles

Dividend payment made by a corporation to its shareholders, usually as a distribution of profits

A dividend is a payment made by a corporation to its shareholders, usually as a distribution of profits. When a corporation earns a profit or surplus, the corporation is able to re-invest the profit in the business and pay a proportion of the profit as a dividend to shareholders. Distribution to shareholders may be in cash or, if the corporation has a dividend reinvestment plan, the amount can be paid by the issue of further shares or share repurchase. When dividends are paid, shareholders typically must pay income taxes, and the corporation does not receive a corporate income tax deduction for the dividend payments.

Equity (finance) difference between the value of the assets/interest and the cost of the liabilities of something owned

In accounting, equity is the difference between the value of the assets and the value of the liabilities of something owned. It is governed by the following equation:

Tax deduction is a reduction of income that is able to be taxed and is commonly a result of expenses, particularly those incurred to produce additional income. Tax deductions are a form of tax incentives, along with exemptions and credits. The difference between deductions, exemptions and credits is that deductions and exemptions both reduce taxable income, while credits reduce tax.

Negative gearing is a form of financial leverage whereby an investor borrows money to acquire an income-producing investment and the gross income generated by the investment is less than the cost of owning and managing the investment, including depreciation and interest charged on the loan. The investor may enter into a negatively geared investment expecting tax benefits or the capital gain on the investment after it is sold to exceed the accumulated losses of holding the investment. The investor would take into account the tax treatment of negative gearing, which may generate additional benefits to the investor in the form of tax benefits if the loss on a negatively geared investment is tax-deductible against the investor's other taxable income and if the capital gain on the sale is given a favourable tax treatment.

The retained earnings of a corporation is the accumulated net income of the corporation that is retained by the corporation at a particular point of time, such as at the end of the reporting period. At the end of that period, the net income at that point is transferred from the Profit and Loss Account to the retained earnings account. If the balance of the retained earnings account is negative it may be called accumulated losses, retained losses or accumulated deficit, or similar terminology.

A corporate tax, also called corporation tax or company tax, is a direct tax* imposed by a jurisdiction on the income or capital of corporations or analogous legal entities. Many countries impose such taxes at the national level, and a similar tax may be imposed at state or local levels. The taxes may also be referred to as income tax or capital tax. Partnerships are generally not taxed at the entity level. A country's corporate tax may apply to:

The schedular system of taxation is the system of how the charge to United Kingdom corporation tax is applied. It also applied to United Kingdom income tax before legislation was rewritten by the Tax Law Rewrite Project. Similar systems apply in other jurisdictions that are or were closely related to the United Kingdom, such as Ireland and Jersey.

Consolidation (business) Merger and acquisition of many smaller companies into much larger ones

In business, consolidation or amalgamation is the merger and acquisition of many smaller companies into a few much larger ones. In the context of financial accounting, consolidation refers to the aggregation of financial statements of a group company as consolidated financial statements. The taxation term of consolidation refers to the treatment of a group of companies and other entities as one entity for tax purposes. Under the Halsbury's Laws of England, 'amalgamation' is defined as "a blending together of two or more undertakings into one undertaking, the shareholders of each blending company, becoming, substantially, the shareholders of the blended undertakings. There may be amalgamations, either by transfer of two or more undertakings to a new company, or to the transfer of one or more companies to an existing company".

Gross income is all a person's receipts and gains from all sources, before any deductions. The adjective "gross", as opposed to "net", generally qualifies a word referring to an amount, value, weight, number, or the like, specifying that necessary deductions have not been taken into account.

Income tax in Australia is imposed by the federal government on the taxable income of individuals and corporations. State governments have not imposed income taxes since World War II. On individuals, income tax is levied at progressive rates, and at one of two rates for corporations. The income of partnerships and trusts is not taxed directly, but is taxed on its distribution to the partners or beneficiaries. Income tax is the most important source of revenue for government within the Australian taxation system. Income tax is collected on behalf of the federal government by the Australian Taxation Office.

Under U.S. federal tax law, the tax basis of an asset is generally its cost basis. Determining such cost may require allocations where multiple assets are acquired together. Tax basis may be reduced by allowances for depreciation. Such reduced basis is referred to as the adjusted tax basis. Adjusted tax basis is used in determining gain or loss from disposition of the asset. Tax basis may be relevant in other tax computations.

Basis, as used in United States tax law, is the original cost of property, adjusted for factors such as depreciation. When property is sold, the taxpayer pays/(saves) taxes on a capital gain/(loss) that equals the amount realized on the sale minus the sold property's basis.

The Tax Increase Prevention and Reconciliation Act of 2005 is an American law, which was enacted on May 17, 2006.

For purposes of income tax in the United States, U.S. persons owning shares of a passive foreign investment company (PFIC) may choose between (i) current taxation on the income of the PFIC or (ii) deferral of such income subject to a deemed tax and interest regime. The provision was enacted as part of the Tax Reform Act of 1986 as a way of placing owners of offshore investment funds on a similar footing to owners of U.S. investment funds. The original provisions applied for all foreign corporations meeting either an income or an asset test. However, 1997 amendments limited the application in the case of U.S. Shareholders of controlled foreign corporations.

Corporate tax in the United States

Corporate tax is imposed in the United States at the federal, most state, and some local levels on the income of entities treated for tax purposes as corporations. Since January 1, 2018, the nominal federal corporate tax rate in the United States of America is a flat 21% due to the passage of the Tax Cuts and Jobs Act of 2017. State and local taxes and rules vary by jurisdiction, though many are based on federal concepts and definitions. Taxable income may differ from book income both as to timing of income and tax deductions and as to what is taxable. The corporate Alternative Minimum Tax was also eliminated by the 2017 reform, but some states have alternative taxes. Like individuals, corporations must file tax returns every year. They must make quarterly estimated tax payments. Groups of corporations controlled by the same owners may file a consolidated return.

In the United States of America, individuals and corporations pay U.S. federal income tax on the net total of all their capital gains. The tax rate depends on both the investor's tax bracket and the amount of time the investment was held. Short-term capital gains are taxed at the investor's ordinary income tax rate and are defined as investments held for a year or less before being sold. Long-term capital gains, on dispositions of assets held for more than one year, are taxed at a lower rate.

Taxpayers in the United States may have tax consequences when debt is cancelled. This is commonly known as COD Income. According to the Internal Revenue Code, the discharge of indebtedness must be included in a taxpayer's gross income. There are exceptions to this rule, however, so a careful examination of one's COD income is important to determine any potential tax consequences.

The alternative minimum tax (AMT) is a supplemental income tax imposed by the United States federal government in addition to baseline income tax for certain individuals, corporations, estates, and trusts that have exemptions or special circumstances allowing for lower payments of standard income tax. AMT is imposed at a nearly flat rate on an adjusted amount of taxable income above a certain threshold. This exemption is substantially higher than the exemption from regular income tax.


NOTE: The general information, and the tables in particular, contained in this page was taken from the South African Revenue Service (SARS) website www.sars.gov.za and/or the South African Reserve Bank Website www.resbank.co.za unless specifically noted.

References