Capital gains tax: CGT concession amount of discount capital gain - net exempt income

Does the CGT concession amount of a discount capital gain form part of a taxpayer's 'net exempt income' in terms of section 36-20 of the Income Tax Assessment Act 1997 (ITAA 1997) against which the taxpayer must first offset tax losses in accordance with section 36-15 of the ITAA 1997?

No. The CGT concession amount of a discount capital gain is not considered to be 'exempt income' and therefore does not form part of the taxpayer's 'net exempt income' under section 36-20 of the ITAA 1997. Accordingly, the taxpayer is not required to offset their tax losses against this amount.

The taxpayer (an individual and an Australian resident) acquired a CGT asset in the 2001 income year.

The taxpayer disposed of the asset in the 2004 income year and made a capital gain of $60,000. The capital gain satisfied all the requirements in section 115-5 of the ITAA 1997 to be a discount capital gain.

The taxpayer made no other capital gains or losses in the 2004 income year. Nor did they have any net capital losses carried forward from prior years.

However, the taxpayer had a revenue loss (that is, a tax loss) of $20,000, carried forward from a prior income year.

In the 2004 income year, the taxpayer's total assessable income exceeded their deductions (ignoring the prior year tax loss).

A taxpayer who wishes to deduct a prior year tax loss in an income year must first offset the tax loss against their 'net exempt income' for that year (before they can offset the loss against any assessable income): subsection 36-15 of the ITAA 1997.

Section 36-20 of the ITAA 1997 provides that the 'net exempt income' of an Australian resident is the amount by which their total 'exempt income' from all sources (except excluded exempt income) exceeds the total of: • the losses and outgoings (except capital losses and outgoings) incurred in deriving that exempt income, and • any taxes payable outside Australia on that exempt income.

An amount of ordinary income or statutory income is 'exempt income' if it is made exempt from income tax by a provision of the ITAA or another Commonwealth law (section 6-20 of the ITAA 1997). Before an amount can be exempt, it must first be identified as either ordinary or statutory income. Division 11 of the ITAA 1997, which is a Guide, lists classes of exempt income.

Ordinary income is income according to ordinary concepts and is included in a taxpayer's assessable income (subsection 6-5(1) of the ITAA 1997).

Some amounts that are not ordinary income but are included in assessable income by provisions of the ITAA are called statutory income: subsections 6-10(1) and 6-10(2) of the ITAA 1997. Section 102-5 of the ITAA 1997 provides that a taxpayer's assessable income includes a net capital gain worked out in accordance with the method statement provided in the section. Thus, a net capital gain (and not any particular capital gain) is statutory income.

Step 3 of the method statement in subsection 102-5(1) of the ITAA 1997 requires that each amount of a discount capital gain that remains after applying current year capital losses and prior year net capital losses at step 2 is reduced by the discount percentage. The amount that is disregarded is commonly referred to as the CGT concession amount.

Although step 3 of the method statement in subsection 102-5(1) of the ITAA 1997 reduces a capital gain by the CGT concession amount, it does not have the effect of making the concession amount 'exempt income'. Only the net capital gain is statutory income, whereas the concession amount is removed from the capital gain which is not statutory income.

Similarly, no other provision in the ITAA 1997 which disregards a capital gain would have the effect of making the disregarded amount 'exempt income'. The issue of exempt income would arise in a CGT context only in the case of a provision that exempted an amount of a taxpayer's net capital gain.

In this case, the taxpayer made a capital gain on the sale of an asset. The capital gain met all the requirements in section 115-5 of the ITAA 1997 to be a discount capital gain and, as the taxpayer is an individual, 50% of the capital gain is disregarded in accordance with step 3 of the method statement in subsection 102-5(1) of the ITAA 1997. Because the taxpayer has no other capital gains or losses for the income year, or net capital losses from prior years, their net capital gain for the 2004 income year is $30,000. This amount is included in their assessable income. The CGT concession amount is also $30,000. As this amount does not form part of the taxpayer's exempt income it cannot form part of their net exempt income.

Accordingly, the taxpayer is not required to first offset their $20,000 prior year tax loss against the CGT concession amount. The full amount of the taxpayer's prior year tax loss can be offset against the part of their assessable income that exceeds their other deductions.