Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 10 - Limiting indexation of cost bases of CGT assets
Outline of Chapter
10. 1 Schedule 8 to this Bill amends the ITAA 1997 to prevent indexation of the cost base of CGT assets acquired after 11.45 am AEST on 21 September 1999 (the start time). It also freezes the indexation amount of the cost base of CGT assets acquired at or before the start time and disposed of after that time.
Context of Reform
10. 2 Australia is one of the few countries that allows indexation of an assets cost base. Removing indexation will simplify the law and reduce compliance costs. An alternative relief is provided to individuals, trusts and complying superannuation entities with the introduction of the CGT discount (refer to Chapter 11 of this Explanatory Memorandum).
Summary of new law
10. 3 Indexation of the cost base is not available for assets acquired after the start time. For CGT events happening after the start time to CGT assets acquired at or before that time, an individual, complying superannuation entity or trust may choose either to claim indexation of the cost base in calculating the capital gain or the CGT discount. If the taxpayer chooses to claim the indexation option, indexation is frozen at 30September 1999.
Comparison of key features of new law and current law
10.4 The current law allows an entity who has owned a CGT asset for at least 12 months to adjust the cost base of the asset for inflation in calculating a capital gain made when a CGT event happens to that asset.
10.5 The new law does not allow any indexation for a CGT asset acquired after the start time. It also freezes indexation at the end of the September 1999 quarter in calculating the cost base of a CGT asset acquired at or before the start time.
Detailed explanation of new law
10.6 Indexation is the increase made to the cost base of a CGT asset to take account of inflation. The cost base can only be indexed if the asset has been owned for at least 12 months. Each element of the cost base (other than the third element, e.g. interest, rates and taxes) is increased by an indexation factor. The indexation factor is an amount equal to the CPI figure for the quarter of the year in which the CGT event happened to the asset, divided by the CPI figure for the quarter of the year in which the expenditure was incurred.
10.7 If a CGT event happens to a CGT asset acquired after the start time, the calculation of the capital gain cannot include any indexation of any of the elements of the cost base of the CGT asset. [Item 3, section 114-1]
10.8 For an asset owned at the start time and disposed of after that time, indexation of elements of the cost base at that time will be calculated for the period from the date the expenditure was incurred, up to the end of the September 1999 quarter. Indexation will then be frozen. [Item 6, subsection 960-275(2); item 8, subsection 960-275(3)]
Example 10.1
Penny purchased a parcel of shares in February 1999. She sold them in March 2000. Because she owned the shares for more than 12 months Penny can choose to calculate her gain using frozen indexation. If she makes this choice she indexes the cost base of her shares using the index factor for the September 1999 quarter. Indexation is available because her total period of ownership of the asset is at least 12 months, even though the indexation period is less than 12 months.
10. 9 If an individual, complying superannuation entity or trust owns a CGT asset at the start time and incurs further expenditure in relation to that asset after that time, indexation of that part of the cost base will not be available. [Item 5, subsection 114-10(1), Schedule 10, item 1]
Aaron purchased a property for $180,000 in May 1986. In October 1999 he made capital improvements for a cost of $20,000. In July 2000 Aaron sells the property for $270,000.
Aaron may use either the frozen indexation option or the CGT discount to calculate the capital gain made on sale of the property. If he uses the frozen indexation option he can index the $180,000 purchase price up until 30 September 1999. The $20,000 cannot be indexed.
10.10 If a taxpayer is an entity other than an individual, complying superannuation entity or trust, indexation of the cost base of a CGT asset remains available, frozen at 30 September 1999, providing the entity acquired the asset at or before the start time and owned the asset for at least 12 months.
10.11 Minor changes are made to the guide to capital gains and losses in Division 100. These changes reflect the freezing of indexation at the end of the September 1999 quarter. [Items 1 and 2, subsection 100-40(2)]
10.12 The following notes reflect the change to freeze indexation. Note1 is amended and Note 4 is added to section 114-1 [item 4] . An additional note is added to subsection 960-275(2) [item 7] . An additional note is added to subsection 960-275(3) [item 9] .
Application and transitional provisions
10. 13 The amendments made by this Schedule apply to the calculation of the cost base of an asset for a CGT event occurring after the start time. [Item 10]