The taxation of a 'profit-making scheme' (2) - Tax regimes step 3: Reducing the capital gain under the ‘anti-overlap rule’

A profit-making scheme is taxed under both regular income tax rules and capital gains tax (CGT) rules. However, there's a rule called S.118-20 that makes sure you're not taxed twice on the same profit.

Here's how it works:

1. Apply any specific exemptions, like the main residence exemption or small business 15-year exemption, to reduce the capital gain.
2. Subtract the net profit amount from your assessable income. If the profit is more than the capital gain, the capital gain becomes zero.
3. Reduce the capital gain further by any capital losses or other CGT concessions.
4. If there's still a capital gain left, it's included in your assessable income in the year you entered into the contract to sell the property, not when it's settled.

For example:

Paul bought land for $400,000 in 2000. In 2019, he developed it as part of a profit-making scheme. The land was worth $750,000, and development costs were $450,000 with $20,000 in interest. He sold all lots for $2 million in 2020, with settlements in 2021.

Step 1: Calculate the net profit under S.6-5.

Step 2: Calculate the capital gain.

Step 3: Reduce the capital gain by the net profit.

Step 4: Apply any CGT discounts.

Step 5: Include the net profit in the year of settlement and the net capital gain in the year of contract.

Got questions? Reach out to Tax Ideas Accountants & Advisers at +61 2 83181545 or book an appointment on our live calendar.