Taxation Ruling TR 92/12
Date of effect: 1 July 1983

What this ruling is about: [Note: This is a consolidated version of this document. Refer to the Tax Office Legal Database (http://law.ato.gov.au) to check its currency and to view the details of all changes.]


Ruling: 6. Unless paragraph 4 applies, the rate of tax payable by taxpayers (other than certain minors) whose taxable income includes a net capital gain or an amount of abnormal income is calculated by following the steps outlined in Attachment A to this Ruling. 7. Division 6AA of Part III of the ITAA applies to certain minors, i.e. children under the age of 18 who receive eligible taxable income during the year and who satisfy the other requirements of section 102AC. Eligible taxable income is defined in section 102AD. Broadly speaking, it is unearned income of minors which is taxed at special rates of tax. The rate of tax payable by Division 6AA minors whose taxable income includes a net capital gain or an amount of abnormal income is calculated by following the steps outlined in Attachment B to this Ruling. 8. Notional averaging of net capital gains and abnormal income received by a taxpayer whose income is subject to the averaging provisions is based on average income rather than taxable income. In broad terms, Division 16 applies to primary producers carrying on a business in a year of income who have at least two average years and have not withdrawn from the averaging system. Average income is used whenever Division 16 of Part III of the ITAA applies to the taxpayer, even if there is a primary production loss for the year. 9. The rate of tax calculated by the methods outlined in the attachments to this Ruling is applied to the whole of the taxpayer's taxable income to determine the amount of tax payable (excluding Medicare levy). The total amount of tax payable is calculated by adding the Medicare levy to this amount, and subtracting any rebates or credits. Primary producers also need to add any complementary tax payable under section 156 of the ITAA.

Examples: Example 1: net salary and net capital gain Example 1: net salary and net capital gain $70,000 - $50,000 = $20,000 ($2,920 + $18,370)/$70,000 = 30.41428 cents | Example 2: net capital gain only Example 2: net capital gain only (0 + $4,600)/$50,000 = 9.2 cents | Example 3: business loss and net capital gain Example 3: business loss and net capital gain | Example 4: minor with net capital gain and other income Example 4: minor with net capital gain and other income $28,000 - $20,000 = $8,000 ($520 + zero + $9,400)/$28,000 = 35.42857 cents 'Example 4A (variation of Example 4) ($520 + zero + $385.44)/$9,000 = 10.06044 cents' | Example 5: minor with net capital gain only Example 5: minor with net capital gain only (zero + zero + $940)/$2,000 = 47 cents 'Example 5A (variation of Example 5) (zero + zero + $385.44) / $1,000 = 38.544 cents' | Example 6: primary producer (whose income is subject to the averaging provisions) with a net capital gain Example 6: primary producer (whose income is subject to the averaging provisions) with a net capital gain (i) Net primary production profit $40,000 - $10,000 = $30,000 ($6,594 + $3,800)/$40,000 = 25.985 cents (0 + $3,040)/$8,000 = 38 cents | Example 7: abnormal income Example 7: abnormal income (i) Abnormal income only $30,000 - $20,000 = $10,000 ($920 + $4,000)/$30,000 = 16.4 cents $35,000 - $25,000 = $10,000 ($920 + $5,000)/$35,000 = 16.91428 cents Commissioner of Taxation 22 October 1992 RATE OF TAX PAYABLE ON NET CAPITAL GAINS OR ABNORMAL INCOME BY TAXPAYERS OTHER THAN CERTAIN MINORS - SCHEDULE 7 OF ITRA The rate of tax payable by taxpayers who are not covered by Attachment B to this Ruling and whose taxable income includes a net capital gain or an amount of abnormal income (but no notional income) is calculated according to the formula (A+B)/C in clauses 2 and 3 of Part I (residents) and clauses 2 and 3 of Part II (non-residents) of Schedule 7 of the ITRA. The calculation is made by applying the following steps: Step 1 Calculate the special income component ( SIC ). SIC is: Step 2 Calculate the reduced taxable income ( RTI ): Step 3 Calculate Component A . Component A is the amount of tax payable on RTI at ordinary rates of tax (i.e. the tax payable on taxable income reduced by net capital gains and abnormal income). Step 4 Calculate Component B . (Basically, Component B is the tax payable on the net capital gain and abnormal income). The calculation of Component B depends on whether Division 16 of Part III of the ITAA applies (i.e. generally whether the taxpayer is a primary producer or not). 5 x ( Amount X - Component A ) 5 x ( Amount Y - Amount Z ) Step 5 Calculate the rate of tax applicable to the total taxable income: Rate of tax = (Component A + Component B )/ Component C ( Component C is the amount of taxable income). ( Component C is the amount of taxable income). RATE OF TAX PAYABLE ON NET CAPITAL GAINS OR ABNORMAL INCOME BY CERTAIN MINORS - SCHEDULE 11 OF ITRA The rate of tax payable by minors assessable under Division 6AA who receive more than $416 of eligible taxable income during the year and whose taxable income includes a net capital gain or an amount of abnormal income (but no notional income) is calculated according to the formula (A+B+C)/D Step 1 Calculate the special income component ( SIC ). SIC is: Step 2 Calculate the reduced taxable income ( RTI ): RTI is taxable income minus SIC . Step 3 Calculate Component A (subject to the note at the end of this Attachment) . Component A is the amount of tax a minor would pay on income equal to RTI at the rate of 47% on eligible taxable income, e.g. dividends, and at ordinary rates of tax on income other than eligible taxable income, e.g. salary. Step 4 Calculate Component B . (Basically, Component B is the tax payable on the net capital gain and abnormal income). It is calculated as follows: 5 x ( Amount X - Amount Y ) This amount is Component B . This amount is Component B . Step 5 Calculate Component C (subject to the note at the end of this Attachment) . Component C is 47% of the part of SIC which is eligible taxable income of the minor (explained in paragraph 11). Step 6 Calculate the rate of tax applicable to the total taxable income: Rate of tax = (Component A + Component B + Component C ) / Component D ( Component D is the amount of taxable income). ( Component D is the amount of taxable income). Previously released in draft form as EDR 79



What this Ruling is about | What this Ruling is about: 1. This Ruling explains the method for calculating the rate of tax on taxable income which includes a net capital gain or abnormal income or both. It also explains how the calculation applies to primary producers whose income is subject to the averaging provisions and to minors. | 2. The method of calculation explained in this Ruling is provided by Schedule 7 and Schedule 11 (minors) of the Income Tax Rates Act 1986 (ITRA). It only applies to individual taxpayers (i.e. it does not apply to calculate the rate of tax payable on capital gains included in the income of companies or trusts). The method applies to both residents of Australia and non-residents. | 3. The method involves the notional averaging of net capital gains or abnormal income (or both) to calculate the rate of tax. Notional averaging alleviates the effect of including in a taxpayer's assessable income of a particular year income which may be attributable to previous years. | 4. This Ruling does not apply to taxpayers who receive notional income in terms of sections 59AB and 86 of the Income Tax Assessment Act 1936 (ITAA), which is subject to tax at the rate prescribed in Schedule 9 of the ITRA. | 5. Some of the terms used in this Ruling are defined in paragraph 11. | Date of effect: 10. This Ruling sets out the current practice of the Australian Taxation Office and is not concerned with a change in interpretation. Consequently, it applies (subject to any limitations imposed by statute) for years of income commencing both before and after the date on which it is issued. | Definitions: 11. Terms used in this Ruling have the following meanings: | Calculation of special income component (SIC) and reduced taxable income (RTI) where net capital gain or abnormal income is greater than taxable income: 12. The definition of SIC in section 3 of the ITRA provides that if the net capital gain or abnormal income (or the sum of both) is greater than taxable income for the income year, SIC equals taxable income. For example, that would be the case if the taxpayer has incurred a revenue loss during the income year. In that case, as SIC and taxable income are the same, RTI is nil. In other words, the lowest figure RTI can be is zero. | Notional averaging for primary producers: 13. Division 16 of Part III of the ITAA generally provides for the averaging of income from primary production. It applies if a taxpayer is a primary producer (section 157) who is actively carrying on a business (section 152) and who has had at least two average years (section 158). Division 16 applies even when the taxpayer has made an overall primary production loss for the year of income. For example, section 153 specifically provides that any year in which a taxpayer was carrying on business but had no taxable income is capable of being an average year. Thus, Division 16 applies to the taxpayer's income unless the person has specifically elected under section 158A that the Division is not to apply. The effect of such an election is that the Division does not apply to the year of income in which the election is made and all subsequent years of income. | 14. Under section 149A, net capital gains and abnormal income are excluded from the taxpayer's assessable income and taxable income in calculating the taxpayer's rebate or complementary (extra) tax payable under section 156. However, net capital gains are included in the taxpayer's assessable income and taxable income for the general purposes of the ITAA (section 160ZO). | 15. Clause 3 of Part 1 of Schedule 7 of the ITRA provides a method for calculating the rate of tax payable if: | In the case of a primary producer with an overall primary production loss and a net capital gain, the taxpayer's taxable income (as defined in subsection 6(1) of the ITAA) includes a special income component (the net capital gain). As stated in paragraph 13, the averaging provisions apply if the taxpayer is actively carrying on a primary production business, has at least two average years and has not opted out of the averaging system. Therefore the calculation method in Schedule 7 of the ITRA applies to such a taxpayer. | 16. The fact that, under Schedule 7 of the ITRA, tax on net capital gains and abnormal income of primary producers is calculated by reference to the taxpayer's average income (rather than taxable income) means that the taxpayer pays more or less tax on that income in any one year, depending on whether average income is more or less than taxable income. | 17. This outcome is due to a fundamental change in the averaging provisions that has applied since 1 July 1983. That change altered the averaging system from one where primary producers paid no greater tax in any year to one which ensured that primary producers pay no greater tax over time than other taxpayers. | 18. There may be cases in which a primary producer would derive no long-term benefit from the averaging rules applying to his or her net capital gains and abnormal income. In that case, it may be appropriate to withdraw from the averaging system (refer section 158A of the ITAA). For example, that may be the case if the primary producer is selling assets while withdrawing from primary production activities. | Examples: 19. The following examples illustrate the method outlined in Attachments A and B to calculate the rate of tax on taxable income which includes a net capital gain or abnormal income. The rates of tax used are those applicable to residents of Australia. | The rate of tax Anna will pay on her taxable income is calculated as follows: | Anna's SIC is the amount of her net capital gain, i.e. $50,000 | Component A is the amount of tax payable on Anna's RTI ($20,000) at ordinary rates, i.e. $2,920 | Ellen's taxable income for the 1991/92 financial year was $50,000. This consisted solely of a net capital gain. | The rate of tax Ellen will pay on her taxable income is calculated as follows: | Ellen's SIC is the amount of her taxable income (which is also the amount of her net capital gain), i.e. $50,000 | Ellen's RTI is her taxable income minus SIC , i.e. zero | Component A is the amount of tax payable on Ellen's RTI at ordinary rates. Because Ellen's RTI is zero, Component A is also zero. | Cynthia runs her own business (as a sole trader) which made a loss in the 1991/92 financial year of $5,000. During the year she also received a net capital gain of $20,000. | The rate of tax Cynthia will pay on her taxable income is calculated as follows: | Cynthia's SIC is the amount of her taxable income, i.e. $15,000 | Cynthia's RTI is her taxable income minus SIC , i.e. zero | Component A is the amount of tax payable on Cynthia's RTI at ordinary rates. Because Cynthia's RTI is zero, Component A is also zero. | Because Component A and Component B are both zero, Cynthia will not pay any tax on her taxable income. | Frank is 16 years old and has a part-time job at a supermarket from which he earned $8,000 during the 1991/92 financial year. He also received a net capital gain of $20,000 from the share portfolio which had been given to him by his parents. This capital gain is eligible taxable income. | The rate of tax Frank will pay on his taxable income is calculated as follows: | Frank's SIC is the amount of his net capital gain, i.e. $20,000 | Component A is the amount of tax a minor would pay on Frank's RTI ($8,000). Because this is employment income it is taxed at ordinary rates. Therefore Component A is $520. | Component C is 47% x $20,000, i.e. $9,400 | Frances is 14 years old and is a full-time student. During the 1991/92 financial year she received a net capital gain of $2,000 from the sale of shares. This capital gain is eligible taxable income (unearned income). She received no other income during the year. Thus her taxable income for the year was $2,000. | The rate of tax Frances will pay on her taxable income is calculated as follows: | Frances' SIC is the amount of her net capital gain, i.e. $2,000 | Frances' RTI is her taxable income minus SIC , i.e. zero | Component A is the amount of tax a minor would pay on Frances' RTI . Because Frances' RTI is zero, Component A is also zero. | Component C is 47% x $2,000, i.e. $940 | Boris' primary production income was higher than in previous years. His average income is $25,000. | The rate of tax Boris will pay on his taxable income is calculated as follows: | Boris' SIC is the amount of his net capital gain, i.e. $10,000 | Component A is the amount of tax payable on Boris' RTI ($30,000) at ordinary rates, i.e. $6,594 | The rate of tax Dolores will now pay on her taxable income is calculated as follows: | Dolores' SIC is the amount of her taxable income, i.e. $8,000 | Dolores' RTI is her taxable income minus SIC , i.e. zero | Component A is the amount of tax payable on Dolores' RTI at ordinary rates. Because Dolores' RTI is zero, Component A is also zero. | Daniel is an author whose taxable income for the 1991/92 financial year, derived from writing, was $30,000. Daniel's average income is $10,000, therefore the remaining $20,000 is abnormal income. | The rate of tax Daniel will pay on his taxable income is calculated as follows: | Daniel's SIC is the amount of his abnormal income, i.e. $20,000 | Component A is the amount of tax payable on Daniel's RTI ($10,000) at ordinary rates, i.e. $920 | The rate of tax Daniel will now pay on his taxable income is calculated as follows: | Daniel's SIC is the amount of his net capital gain plus abnormal income, i.e. $25,000


Legislative references: - Income Tax Rates Act 1986, Schedules 7, 9 and 11 - ITAA 102AD; ITAA 156; ITAA 158L
Subject references: - abnormal income - Division 6AA - eligible persons - eligible taxable income - income averaging - minors - net capital gain - notional averaging - primary producers - rate of tax - reduced taxable income - special income component