CGT and depreciating assets

Under the uniform capital allowance (UCA) system, a capital gain or capital loss from the disposal of a depreciating asset will only arise to the extent that you have used the asset for a non-taxable purpose, for example, for private purposes.

You calculate a capital gain or capital loss from a depreciating asset used for a non-taxable purpose using the UCA concepts of cost and termination value, not the concepts of capital proceeds and cost base found in the CGT provisions.

If a balancing adjustment event occurs for a depreciating asset that you have at some time used for a non-taxable purpose, a CGT event happens; see CGT event K7 in appendix 1. The most common balancing adjustment event for a depreciating asset occurs when you stop holding it (for example, you sell, lose or destroy it) or stop using it.

Calculating a capital gain or capital loss for a depreciating asset

You make a capital gain if the termination value of your depreciating asset is greater than its cost. You make a capital loss if the reverse is the case, the asset’s cost is more than its termination value.

You use different formulas to calculate a capital gain or capital loss depending on whether the asset is in a low-value pool or not.

Depreciating asset not in a low-value pool: capital gain

If your depreciating asset is not a pooled asset, you calculate the capital gain as follows:

(termination value − cost) × (sum of reductions note 1 ÷ total decline note 2)

Depreciating asset not in a low-value pool: capital loss

You calculate the capital loss from a depreciating asset that is not a pooled asset as follows:

(cost − termination value) × (sum of reductions (note 1 ÷ total decline note 2)

Depreciating asset in a low-value pool: capital gain

You calculate the capital gain from a depreciating asset in a low-value pool as follows:

(termination value − cost) × (1 − taxable use fraction)

Depreciating asset in a low-value pool: capital loss

You calculate the capital loss from a depreciating asset in a low-value pool as follows:

(cost − termination value) × (1 − taxable use fraction (note 3))

Notes

1. The sum of the reductions in your deductions for the asset’s decline in value that is attributable to your use of the asset, or having it installed ready for use, for a non-taxable purpose.
2. The decline in the value of the depreciating asset since you started to hold it.
3. Taxable use fraction is the percentage of the asset’s use that is for producing your assessable income, expressed as a fraction. This is the percentage you reasonably estimate at the time you allocated the asset to the low-value pool.

Application of CGT concessions

A capital gain from a depreciating asset may qualify for the CGT discount if the relevant conditions are satisfied. If the CGT discount applies, there is no reduction of the capital gain under the indexation method, as detailed in How to work out your capital gain or capital loss.

The small business CGT concessions do not apply to a capital gain made from the disposal of a depreciating asset, because a capital gain can only arise out of an asset’s use for non-taxable purposes (for example, to the extent it is used for private purposes).

Do any CGT exemptions apply to a depreciating asset?

A number of exemptions may apply to a capital gain or capital loss made from the disposal of a depreciating asset:

• pre-CGT assets; you disregard a capital gain or capital loss from a depreciating asset if the asset was acquired before 20 September 1985
• assets of small business entities; you disregard a capital gain or capital loss from a depreciating asset if you are a small business entity and you can deduct an amount for the depreciating asset’s decline in value under the small business entity capital allowance provisions for the income year in which the balancing adjustment event occurred
• personal use asset
  • if a depreciating asset is a personal use asset (that is, one used or kept mainly for personal use and enjoyment), you disregard any capital loss from CGT event K7
  • you also disregard a capital gain under CGT event K7 from a personal use asset costing $10,000 or less
   
• collectables; you disregard a capital gain or a capital loss from a depreciating asset that is a collectable costing $500 or less
• balancing adjustment event and CGT event; you only include a balancing adjustment event that gives rise to a capital gain or capital loss under CGT event K7. However, capital proceeds received under other CGT events (for example, CGT event D1) may still be relevant for a depreciating asset as CGT events are not the equivalent of balancing adjustment events.

Treatment of intellectual property

Under the capital allowance rules intellectual property is a depreciating asset.

If you grant or assign an interest in an item of intellectual property, you are treated as if you had stopped holding part of the item. You are also treated as if, just before you stop holding that part, you had split the original item of intellectual property into two parts, the part you stopped holding and the rest of the original item. You determine a first element of the cost for each part.

This treatment applies if a licence is granted over an item of intellectual property. To this extent, the treatment of intellectual property is different from other depreciating assets. The granting of a licence in respect of other depreciating assets would result in CGT event D1 (about creating contractual rights) happening.

For more information about depreciating assets, see Guide to depreciating assets 2018.