CGT and depreciating assets

The disposal of a depreciating asset you used for a private or other non-taxable purpose is subject to capital gains tax (CGT).

A depreciating asset used solely for business or other taxable purposes is not subject to CGT.

You calculate a capital gain or capital loss from a depreciating asset using the concepts of cost and termination value under the uniform capital allowances system. The capital allowances system is how you calculate deductions for the decline in value of depreciating assets.

When CGT applies

A depreciating asset may be used for both taxable and non-taxable (such as private) purposes. For example:

• the depreciating assets in a holiday home you rent out periodically
• using your business's truck to move your furniture.

If you have used a depreciating asset at some point for a non-taxable purpose, CGT applies when you:

• stop holding it – for example, you sell, lose or destroy it
• stop using it.

The point at which you stop holding or using a depreciating asset is called a 'balancing adjustment event'.

How CGT is calculated

Your capital gain or capital loss is the difference between the asset's cost and its termination value, reduced by the taxable use proportion.

You work out the asset's termination value as follows:

• If you receive a payment for the asset – for example, you sell it or receive an insurance payment – the termination value is:
  • the amount you received
  • less any costs of the transaction, such as broker fees or advertising expenses.
   
• If you do not receive payment for the asset, the termination value is its market value at the time you stopped holding or using it.

The formula you use to calculate your CGT depends on whether or not the asset was in a low-value pool.

Depreciating asset in a low-value pool

If the asset was in a low-value pool at the time you stopped holding or using it, use this formula to calculate your capital gain or loss:

(termination value − cost) (1 − taxable use proportion)

If the result is:

• more than zero – this is your capital gain
• less than zero – this is your capital loss.

The taxable use proportion is the percentage that you reasonably estimated when you allocated it to the low-value pool.

Depreciating asset not in a low-value pool

If the asset was not a pooled asset at the time you stopped holding or using it, use this formula to calculate your capital gain or loss:

(termination value − cost) (sum of reductions total decline)

In this formula:

• 'sum of reductions' is the total of the amounts by which you reduced your deductions for the asset's decline in value because those amounts were attributable to your non-taxable use of the asset
• 'total decline' is the depreciation (decline in value) of the asset during your ownership.

If the result is:

• more than zero – this is your capital gain
• less than zero – this is your capital loss.

CGT concessions and exemptions on depreciating assets

A capital gain from a depreciating asset:

• may be eligible for the CGT discount
• is not eligible for the small business CGT concessions. This is because the gain is generated from non-business use.

Some types of assets are exempt from CGT. These exemptions also apply to depreciating assets. For example, an asset is exempt if it was acquired before 20 September 1985.

In addition, you ignore a capital gain or loss from a depreciating asset if it is depreciated using simplified depreciation for small businesses.

You only include a balancing adjustment event that gives rise to a capital gain or capital loss under CGT event K7 (balancing adjustment events). However, capital proceeds received under other CGT events, such as CGT event D1 (creating contractual or other rights), may still be relevant for a depreciating asset as CGT events are not the equivalent of balancing adjustment events.

CGT on intellectual property

Intellectual property is a depreciating asset under the capital allowance rules.

If you grant or assign an interest in an item of intellectual property, you treat it as if you had stopped holding part of the item.

You need to determine the first element of the cost base (cost of acquisition) for both:

• the part you stopped holding
• the rest of the original item.

Explains when capital gains tax (CGT) applies, how it is calculated and the concessions and exemptions.