No.26: Record keeping for Capital Gains Tax

As another financial year comes to a close taxpayers should be mindful that the law requires you to keep all documentation which relates to your capital gains tax assets for at least five years after their disposal. The ATO regularly conducts audits, including business record keeping audits and substantiation audits, over a wide range of taxpayers and it is essential that all supporting documentation is retained for the five years to enable the details in your tax return to be verified.

Records should always be kept for every act, transaction, event or circumstance that may be relevant to working out whether you have made a capital gain or capital loss from a Capital Gains Tax (CGT) event. Penalties can apply if you do not keep the records for at least five years after the relevant CGT event.

Keeping adequate records for the cost bases of assets which fall under the CGT regime will help you work out your capital gain or capital loss correctly when a CGT event happens. It will also help make sure you do not pay more CGT than is necessary.

Good records can also help your beneficiaries deal with the impact of CGT should you pass away. If you leave an asset to a beneficiary, it may be subject to CGT as a result of a future CGT event.

Capital Losses – Longer record keeping time requirements

You should also keep records relating to a net capital loss you carry forward, which you may be able to apply against a capital gain in a later year. There is no time limit on how long you can carry forward a net capital loss. If you have applied a net capital loss, you must keep your records of the CGT event that resulted in the loss for the greater of –

  • five years from the sale; or
  • until the end of any period of review for the income year in which the net capital loss is fully applied.

The period of review rules are –

  • Two years (unless you are a four year period of review taxpayer – see below)
  • Four years if you are a taxpayer that:
  • carries on a business (or is a partner in a business) unless the taxpayer is a small business;
  • is in the capacity of a trustee of a trust;
  • who is a beneficiary of a trust unless the trust is a small business entity;
  • who (either alone or with others) entered into or carried out a scheme for the sole or dominant purpose of obtaining a scheme benefit; and
  • is in a high risk category or special case prescribed by the regulations (eg. fraud or evasion).

Records to be kept

Your records must show:

  • the nature of the act, transaction, event or circumstances;
  • the date it happened;
  • the parties to the transaction; and
  • how the act, transaction, event or circumstances are relevant to working out the capital gain or capital loss.

The following are examples of the types of records you may need to keep:

  • receipts of purchase or transfer;
  • details of interest on money you borrowed relating to the asset;
  • records of agent, accountant, legal and advertising costs;
  • receipts for insurance costs, rates and land taxes;
  • any market valuations;
  • receipts for the cost of maintenance, repairs and modifications; and
  • accounts showing brokerage fees on shares.

You should also keep records to establish whether you have claimed an income tax deduction for an item of expenditure. In many cases, if you have claimed a deduction for an amount, you can’t also include the expenditure in the cost base or reduced cost base of a CGT asset.

Reconstructing your records

If you acquired assets after CGT started (that is, after 19 September 1985) and did not keep records, or your records have inadvertently been destroyed, you can still do something about it.

  • If you bought real estate, your solicitor or estate agent may have copies of most of the records you need. You should be able to get copies if you ask for them.
  • If you made improvements to an investment property, for example, if you built an extension, ask the builder for a copy of the receipt for payment.
  • If you bought shares in a company or units in a unit trust, your stockbroker or investment adviser may be able to give you the information you need.
  • If you received an asset as a gift and you did not get a market valuation at the time, a professional valuer can tell you what its market value was at the relevant date.
  • If you inherit a post CGT asset from a deceased estate you may need the original cost base details of the asset, this may involve going back to the executor of the deceased estate for the original cost base details.

If you need any assistance in understanding your record keeping requirements for taxation purposes please contact your Blaze Acumen advisor.