Capital gains tax: anti-overlap provisions - effect of CGT discount in working out a net capital gain

Does subsection 118-20(1) of the Income Tax Assessment Act 1997 (ITAA 1997) apply before applying the CGT discount in working out a taxpayer's net capital gain?

Yes. Subsection 118-20(1) of the ITAA 1997 (which reduces a capital gain that is otherwise assessable) applies before applying the CGT discount in working out a taxpayer's net capital gain.

A taxpayer acquired an asset after 19 September 1985 for the purpose of profit making by sale. The taxpayer sold the asset and included the profit in their assessable income under section 6-5 of the ITAA 1997.

The taxpayer also made a capital gain from the sale of the asset which exceeded the amount of the profit. The capital gain qualified for the CGT discount.

Subsection 102-5(1) of the ITAA 1997 provides a five step process to work out a taxpayer's net capital gain. Relevantly step 1 requires the taxpayer to reduce the capital gains they made during the income year by any capital losses made during the income year. Step 3 reduces any capital gain remaining after steps 1 and 2 by the CGT discount.

'Note 2' under step 1 of subsection 102-5(1) points out that Divisions 104, 118 and Subdivision 152-B require the taxpayer to disregard certain capital gains or capital losses when working out their net capital gain.

To prevent double taxation, section 118-20 of the ITAA 1997 reduces a capital gain to the extent that it is otherwise included in assessable or exempt income. Section 118-20 applies to reduce a capital gain prior to the five step net capital gain calculation process.

Since the profit arising from the sale of the asset has been included in the taxpayer's assessable income under section 6-5 of the ITAA 1997, the taxpayer, in working out their net capital gain, reduces the amount of the capital gain by the amount so assessable before applying the CGT discount.