CGT – What are considered proceeds for CGT purposes?

To compute a capital gain or loss, a taxpayer needs the amount an asset has been sold for. Superficially this appears to be a simple enquiry, but appearance can often be deceiving. This article deals with some of the principles to quantify the proceeds on disposals of capital assets.

Introduction

A capital gain is calculated by deducting from the proceeds on disposal of a capital asset, the base cost of such asset.

Generally speaking this computation does not present challenges in practice. There are however incidences where the legislation makes provision for specific rules that need to be followed.

This article deals with the basic rule as well as an example of a special rule to raise the awareness of the existence of such rules.

The basic rule

The basic rule determines that the proceeds on the disposal of assets is the amount actually received by or accrued to the taxpayer. No surprises there!

It furthermore specifically includes the amount by which any debt owed by a person has been reduced or discharged. A debt cannot therefore simply disappear or be forgiven without a CGT implication for the debtor.

It also includes any amount received by or accrued to a lessee from a lessor of property for improvements affected to the property. In short, if you are being compensated for leasehold improvements affected to a building, the proceeds will trigger a CGT event.

The above is pretty straightforward. Let’s dig a little deeper …

Special rules

Disposal of assets where proceeds accrue in future years of assessment

In arrangements where a capital asset is disposed of in a year of assessment and the proceeds on the disposal only accrues to the seller in subsequent years of assessment, special CGT rules apply.

If the amount that accrues to the taxpayer in the year that the asset is disposed of exceeds the base cost of the asset (i.e. a gain is realised for CGT purposes), the normal CGT rules apply.

The capital gain must be declared in the year of disposal based on the amount that has accrued to the taxpayer in such year of assessment. Any amounts that accrue to the taxpayer in subsequent years of assessment will represent additional capital gains to be declared in such years of assessment.

The situation is however completely different if a capital loss is incurred in the year of disposal …

Where a capital loss is incurred in the year of disposal, the loss cannot be set-off against other capital gains and must be carried forward. Essentially the loss is ring-fenced.

If in a subsequent year of assessment sufficient amounts in respect of the sale of the asset accrue to the taxpayer to create a CGT gain, the gain must be declared in such year of assessment. If the net impact is still a CGT loss, the loss cannot be offset against other capital gains and must be carried forward to subsequent years of assessment

In the year of assessment that all amounts in respect of the sale of the asset have accrued to the taxpayer, the net CGT loss (if still a loss) may be offset against other capital gains in such year of assessment. If a profit, the profit must be declared.

But it does not end there…

If the taxpayer disposes of the right to receive future income before the amounts have accrued to the taxpayer, the taxpayer is regarded as having received such amounts and must account for CGT in the year of assessment that the debt was disposed of.

Nowhere to hide…

There are various other special rules that taxpayers should be aware of. A rule of thumb is that if a taxpayer believes that they have dodged CGT on the sale of a capital asset, they have probably missed one of the special rules.

Summary

This article dealt with the concept of proceeds. In the next article we’ll start looking at specific exemptions from CGT.