New Business Tax System (Capital Allowances - Transitional and Consequential) Act 2001 (77 of 2001)

Schedule 2   General consequential amendments

Income Tax Assessment Act 1997

298   Subsection 124-85(2) (example)

Repeal the example, substitute:

Example: In 1999 Simon bought a small factory. In 2000 a fire destroys part of it. He receives $100,000 under an insurance policy.

The capital gain is worked out under section 112-30.

Suppose the factory's cost base at the time of the fire is $75,000 and the market value of the part that is not destroyed is $150,000. The cost base of the part that is destroyed is:

$75,000 * ($100,000 / [$100,000 + $150,000]) = $30,000

The capital gain is:

$100,000 - $30,000 = $70,000

Case 1

Suppose Simon spent $80,000 on repairing the factory. The money he received under the insurance policy exceeds the repair cost by $20,000. The gain exceeds that by $50,000.

The result is that the gain is reduced to $20,000 and the $80,000 he spent on repairs is reduced to $30,000.

Case 2

Suppose Simon spent $15,000 on repairs instead. The money he received under the policy exceeds that amount by $85,000. This is more than the gain he made.

The gain is relevant to working out Simon's net capital gain or loss for the income year and the $15,000 he spent on repairs forms part of the factory's cost base.

Case 3

Suppose Simon spent $120,000 on repairs instead. The gain is disregarded and the $120,000 is reduced to $50,000.