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Capital Gains Tax Record Keeping Tips

Discussion in 'Articles' started by NickM, 28th Aug, 2005.

  1. NickM

    NickM Co-founder Staff Member

    Joined:
    20th Jun, 2005
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    Location:
    Sydney

    Introduction

    While good record keeping practices are often very hard to find, record keeping in relation to Capital Gains Tax (CGT) must be one of the least thought about areas. Often, it is years after a transaction that the records required to calculate the cost base are needed and dug out of a dusty old box – if that box can ever be found. In addition, there may have been a series of events that have occurred since the original transaction (improvements, capital allowances, value shifting) that have had an effect on the cost base of a CGT asset and records on each of these issues must also be found.

    These problems arise because we are often too busy handling today’s issues rather than worrying about records we may need in the future. Likewise, we may not want to spend time calculating a change in the cost base of an asset, when we may only need that information should the event actually arise. But we all know the problems involved in having to find these records when they were not collected at the time of the original transaction.
    I have summarised below the main record keeping requirements in relation to CGT and how the process can be simplified.
     
    Last edited by a moderator: 17th Oct, 2009
  2. NickM

    NickM Co-founder Staff Member

    Joined:
    20th Jun, 2005
    Posts:
    321
    Location:
    Sydney
    Record Keeping

    Record Keeping

    The Record Keeping Rules

    Similar to other record keeping requirements in the taxation legislation, the CGT provisions require records to be kept for five years. However, the five years does not start from when you acquire the asset – in some cases, it does not even start when you sell the asset.

    If you make a capital gain, you must keep the appropriate records for at least five years after the last relevant CGT event.

    What records should I keep?

    The Australian Taxation Office states that you need to keep records of, “every act, transaction, event or circumstance that may be relevant to working out whether you have made a capital gain or loss from any CGT event”. This should include:
    • The nature of the act, transaction, event or circumstance
    • When It happened
    • Who were the parties to the act, transaction, event or circumstance
    This could include the receipts of purchase or transfer; details of interest on money borrowed relating to this asset; records of agent, accountant, legal and advertising cost; receipts from land rates or taxes; receipts for repairs and maintenance, and whether an income tax deduction for an item of expenditure was claimed (in most cases, if you have claimed a deduction for an amount, it cannot be taken into account for CGT purposes).

    Inheriting an asset

    The record keeping requirements are even more detailed where there is an inheritance of an asset. If the asset was acquired by the deceased person before 20 September 1985, the beneficiary is taken to have acquired the asset for the market value of the asset at the date of the person’s death (including relevant costs by the executor or trustee).

    The beneficiary has the same cost base as the deceased person if the asset was acquired by the deceased person on or after 20 September 1985. Also, if after 20 August 1996, a taxpayer inherits an asset that was the family home of the deceased and it was not regarded as being used to produce income at the time of death, the beneficiary will be taken to have acquired the house at its market value at the date of death.

    In all these cases, it is fundamentally important to obtain these details from the executor, because it is unlikely that, if the records are not obtained during the work of the executor, you will never be able to obtain the records. If a market valuation is required, it would be best to obtain it at that time.

    Main Residence

    While CGT is often not payable on properties under the main residence exemption in section 118-110 of the Income Tax Assessment Act 1997 (ITAA97), there are often times where the main residence of a taxpayer is not exempt and appropriate records are required to be stored.

    For example, if after 20 August 1996 a taxpayer used their home from income-producing purposes for the first time, they are taken to have acquired their home at that time and the first element of the cost base is its market value.

    Once this has occurred, it is important to keep a record of capital expenditure on improvements, non capital costs and capital expenditure on maintaining title or rights to the asset because these costs may form part of the cost base.

    However, you may include only non-capital costs incurred on ownership of CGT asset acquired on or after 21 August 1991 and only if you are not entitled to a tax deduction for them.
     
  3. NickM

    NickM Co-founder Staff Member

    Joined:
    20th Jun, 2005
    Posts:
    321
    Location:
    Sydney
    Summary

    Summary

    There are many situations where records may get lost, or where the records on hand are simply inadequate for the demands of taxation. This can lead to financial disadvantage in the future, so some work now to obtain and keep good records about your assets, is well worth the effort – even if only for your family’s benefit when you die. Capital Gains Tax is a frequently misunderstood issue, so it pays to treat it with caution and obtain sound professional advice in dealing with assets that may be subject to CGT.

    See also