A comprehensive capital gains tax (CGT) regime generally applies to CGT events which involve the receipt of capital amounts by a taxpayer. However, there is generally an exception for pre-CGT assets (ie assets acquired by a taxpayer before 20 September 1985). The CGT provisions are found in ITAA97 Pt 3-1 and 3-3 . Part 3-1 , which is covered in this Chapter, contains the general rules for calculating capital gains and losses. Part 3-3 , which is covered in Chapter 13, contains special rules that may apply in relation to the calculation of capital gains and losses. Part 3-5 contains special rules that apply for companies only. These rules may affect the calculation of net capital gains and losses for companies. The provisions that are relevant for CGT purposes address the continuity of ownership test, the continuity of business test, the injection tests and the transfer of net capital losses between group companies.

The CGT provisions are catch-all provisions. They catch all gains that arise as a result of a CGT event happening (whether or not the gains are of a capital nature), subject to certain exemptions and exceptions and to territorial and temporal limitations. However, where a capital gain arises to a taxpayer from a CGT event and an amount is assessable under some other (non-CGT) provision, double taxation is avoided by reducing or eliminating the amount of the capital gain.

The CGT rules affect a taxpayer's income tax liability because assessable income includes a net capital gain for the income year, ie CGT is not a tax separate from income tax. A net capital gain is the total of a taxpayer's capital gains for an income year, reduced by certain capital losses made by the taxpayer. A capital loss cannot be deducted from a taxpayer's assessable income, but it can reduce a capital gain in the current income year or a later income year.

Companies can only offset a net capital loss against a capital gain if it passes either the continuity of ownership test or the continuity of business test in relation to both the capital loss year and the capital gain year. Further, if they fail both the continuity of ownership test and the continuity of business test in an income year, they must work out net capital gains and losses in a special way.

A net capital loss incurred by a resident company in an income year may be transferred, in whole or in part, to another resident company in the same wholly-owned group for offset against that company's capital gains in the same or a later income year.

A net capital loss of any taxpayer may be reduced if it has a commercial debt forgiven.

A taxpayer can only make a capital gain or loss if a CGT event happens. The specific time when a CGT event happens is important for various reasons. In particular, the timing is relevant for working out whether a capital gain or loss from the event affects your income tax for the current income year or another income year. If a CGT event involves a contract, the time of the event is usually when the contract is made, not when it is completed.

For most CGT events, a capital gain arises if a taxpayer receives amounts from the CGT event which exceed the taxpayer's costs associated with that event. Conversely, a capital loss arises if the taxpayer's costs associated with the CGT event exceed the amounts received from it.

The amounts received from a CGT event are generally called the capital proceeds . The taxpayer's total costs associated with a CGT event are usually worked out in two different ways. For the purpose of working out a capital gain, those costs are called the cost base of the CGT asset. For the purpose of working out a capital loss, those costs are called the reduced cost base of the asset. One of the main differences is that the costs are indexed for inflation in working out a capital gain (which reduces the size of the gain), but not in working out a capital loss.

To work out a capital gain, the cost base for the CGT asset is subtracted from the capital proceeds from the CGT event. If the capital proceeds exceed the cost base, the difference is a capital gain. If there is no capital gain, the capital proceeds from the CGT event are subtracted from the reduced cost base of the asset. If the reduced cost base exceeds the capital proceeds, the difference is a capital loss. If the capital proceeds are less than the cost base but more than the reduced cost base, there is neither a capital gain nor a capital loss.

Where a capital gain or loss arises from a CGT event, an exception or exemption could apply to reduce or eliminate that gain or loss. Most of the exceptions are in ITAA97 Div 104 while the exemptions are in ITAA97 Div 118 .