Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)CHANGE OF TITLE - TAX LAW IMPROVEMENT BILL (No. 1) 1998 - SENATE - Explanatory Memorandum.
Chapter 2.6 - CGT assets
Overview
This segment deals with Division 108 covering the three categories of assets that are relevant to capital gains and capital losses:
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- CGT assets;
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- collectables;
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- and personal use assets.
It explains the circumstances in which land, buildings and other capital improvements are treated as separate CGT assets.
It indicates how capital losses from collectables and personal use assets are relevant in working out a net capital gain or loss.
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- Part A summarises Division 108.
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- Part B explains the changes to the 1936 Act.
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- Part C explains why some provisions of the 1936 Acthave not been rewritten.
A. Summary of the new law
Division 108 defines three categories of assets:
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- CGT assets;
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- collectibles; and
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- personal use assets.
These are key components in working out whether the taxpayer has a capital gain or loss. It has rules for taking capital losses from collectables into account in working out a net capital gain or loss.
It also contains the rules for determining when land, buildings and improvements are taken to be separate CGT assets. [section 108-11]
A CGT asset is defined as property, or a legal or equitable right that is not property. To avoid any doubt, CGT assets are stated to specifically include:
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- a part of a CGT asset or an interest in one;
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- goodwill, or an interest in goodwill;
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- an interest in a partnership asset; and
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- any other interest in a partnership.
[section 108-5]
Individuals who own a CGT asset as joint tenants are treated as if they each owned a separate asset corresponding to their share in the asset. [section 108-7]
Collectables are the following categories of CGT assets (or interests in them) that are used or kept mainly for personal use or enjoyment:
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- artwork, jewellery, antiques or a coin or medallion;
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- a rare folio, manuscript or book;
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- a postage stamp or first day cover.
[subsections 108-10(2) and (3)]
Capital losses from collectables can only reduce capital gains from collectables.
If a capital loss from a collectable exceeds capital gains from collectables in an income year, the excess is carried forward to be applied against future gains from collectables. Unapplied net capital losses from collectables are applied in the order in which they were made. [subsections108-10(1) and (4)]
The cost base of a collectable does not include non-capital costs of ownership. [section 108-17, subsection 110-25(4)]
Section 118-10 exempts collectables that are acquired for $500 or less. To prevent manipulation of this limit there are special rules for collectables that would ordinarily be disposed of as a set. [section 108-15]
There are four categories of personal use asset:
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- a CGT asset (other than a collectable) used or kept mainly for personal use or enjoyment;
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- an option or right to acquire such an asset;
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- a debt arising from a CGT event affecting such an asset; and
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- a debt arising other than in the course of gaining or producing assessable income or from carrying on a business.
[subsection 108-20(2)]
They do not include land, or a building that is taken to be a separate asset under Subdivision 108-D.
[subsection108-20(3)]
Losses from personal use assets
Capital losses from personal use assets are disregarded in working out a net capital gain or loss. [subsection 108-20(1)]
Cost base of a personal use asset
The cost base of a personal use asset does not include non-capital costs of ownership. [section 108-30, subsection110-25(4)]
Subsection 118-10(3) exempts personal use assets that are acquired for $10,000 or less. To prevent manipulation of this limit there are special rules for personal use assets that would ordinarily be disposed of as a set. [section 108-25]
Subdivision 108-D sets out cases in which an asset that would generally be regarded as a single asset is to be treated as more than one asset for CGT purposes. [section 108-50]
When a building is a separate asset from land
A building constructed on post-CGT land is treated as a separate CGT asset, only if it is subject to balancing adjustment provisions. [subsection 108-55(1)]
A post-CGT building constructed on pre-CGT land is always treated as a separate CGT asset. [subsection 108-55(2)]
A unit of plant that becomes part of a building is also treated as a separate asset. [section 108-60]
When a capital improvement is a separate asset
Any capital improvement to pre or post-CGT land is treated as a separate CGT asset if it is subject to balancing adjustment provisions. [subsection 108-70(1)]
A major capital improvement made to a pre-CGT asset is treated as a separate asset if:
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- the cost base of each unrelated improvement exceeds the threshold test; or
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- the total of the cost bases of all related improvements does so.
[subsections 108-70(2) & (3)] When a capital improvement is not a separate asset
Separate asset treatment does not apply to:
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- pre-CGT improvements; [subsection 108-70(4)]
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- repairs or restorations made to a pre-CGT asset that is subject to roll-over relief under Subdivision 124-B. [subsection 108-70(6)]
The amount of the improvement threshold for the 1997-98 income year is $89,992. This amount is indexed for inflation and published annually. [section 108-85]
Factors to be taken into account in determining whether improvements are related include:
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- the nature of the CGT asset;
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- the extent to which improvements depend on each other; and
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- how close in time the improvements are made.
[section 108-80]
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- Crown leases;
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- mining or prospecting rights;
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- statutory licences
Major capital improvements made to one of these three categories of pre-CGT asset, for which roll-over relief may be available, are treated as separate CGT assets. [section 108-75]
If the title to post-CGT land is amalgamated with pre-CGT land, the post-CGT land will be treated as a separate asset. [section 108-65]
B. Discussion of changes
Section 995-1 of the Income Tax Assessment Act 1997 will be amended to insert additional definitions in the Dictionary. Some of the changes in terminology affect the operation of the law. These changes are explained in the notes that follow the table below.
The definitions, and their equivalents in the old law, are explained in the following table:
| New term | Old term | Commentary |
|---|---|---|
| CGT asset | asset (in Part IIIA) | New label for an existing concept in section160A. See Section 108-5 - CGT assets below for clarifications made. |
| collectable | listed personal-use asset | New label for an existing definition in subsection 160B(2). |
| improvement threshold | (no equivalent) | New label for existing concept in section160Q. |
| personal use asset | non-listed personal-use asset | New label for an existing definition in subsection 160B(3). |
This section defines the term CGT asset. The term is defined differently from the definition of 'asset' in the existing law. However, the outcome is not a substantive change to the law.
The new definition will include within its scope certain motor vehicles, or interests in motor vehicles, that are not assets for the purposes of the existing law.
Although the rewritten law will treat these motor vehicles as assets, the change is not one of substance. Paragraph118-5(a) specifically exempts any capital gain or loss from these vehicles.
The rewritten provision will also put beyond doubt that a divided part of a CGT asset and an undivided interest in a CGT asset are also CGT assets.
The 1936 Act states only that the disposal of a part of an asset is included within the meaning of a disposal of an asset. The rewrite states expressly that parts of CGT assets and interests in CGT assets are also CGT assets.
Section 108-10 Losses from collectables offset only against gains from collectables
The definitions of collectable and personal use asset are mutually exclusive.
Under existing law listed personal-use assets are a sub-set of the wider category of personal-use asset. This overlap gives rise to the possibility that a collectable that is not a listed personal-use asset because it was acquired for $500 or less, could be treated as a non-listed personal-use asset. The rewritten law prevents this.
Section 108-20 Losses from personal use assets disregarded
Capital gains on personal use assets are exempt if the personal use asset is acquired for $10,000 or less.
Under existing law, capital gains on non-listed personal-use assets are effectively exempt unless consideration on disposal exceeds $10,000. This is achieved by deeming both the disposal consideration and the cost base of a non-listed personal-use asset to be a minimum of $10,000. Strictly, this imposes onerous record-keeping obligations for virtually all non-listed personal-use assets.
Changing the exemption to one based on the amount paid for the personal use asset simplifies their treatment.
Section 108-55 When is a building a separate asset?
Section 108-70 When is a capital improvement a separate asset?
These sections specify the circumstances in which a building or other capital improvement is treated as a CGT asset separate from the land on which it is constructed.
The sections specify that a building [section 108-55] or capital improvement [section 108-70] is only treated as a separate CGT asset if it is subject to a balancing adjustment provision.
Under property law, land and improvements are treated as one. For CGT purposes, any improvements for which an income tax deduction is available are treated as separate CGT assets. When improved land is sold, the proceeds must be apportioned and capital gain or loss calculations made for each separate asset.
Under the 1936 Act, this separate asset treatment often imposes additional record-keeping requirements on the landowner. The rewritten provisions limit the separate asset treatment only to cases where balancing adjustment provisions apply. Improvements that entitle owners to a deduction for capital works expenditure are no longer treated as assets separate from the land. This approach reduces compliance costs by simplifying calculations and record-keeping.
Section 108-65 Land adjacent to land acquired before 20 September 1985
Separate asset treatment applies where post-CGT land and adjacent pre-CGT land are consolidated into one title.
Under property law, if a taxpayer acquires land adjacent to an existing holding, both properties are treated as separate, unless the titles are amalgamated or consolidated. Under the proposed section, even if the titles are amalgamated the pre-CGT land retains its separate status as does the post-CGT land. This approach follows administrative practice.
Section 108-70 When is a capital improvement a separate asset?
Section 108-75 Capital improvements to CGT assets for which roll-over relief may be available
These sections specify when capital improvements to pre-CGT assets are treated as separate CGT assets.
For improvements made to pre-CGT assets [section 108-70] or pre-CGT assets for which roll-over relief may be available [section 108-75] , the rewrite distinguishes between related and unrelated improvements when applying threshold tests.
There is uncertainty whether all improvements are taken into account in determining if the threshold tests for the application of the existing provisions have been met. The rewritten provisions make it clear that only related improvements are to be considered. This is consistent with administrative practice.
Section 108-80 Deciding if capital improvements are related
This section lists the factors that establish whether capital improvements are related for the purposes of sections 108-70 and 108-75.
This is a new provision.
This section gives legislative guidance for determining whether particular capital improvements are related. It adopts the factors currently applied administratively.
C. Provisions of the old law that have not been rewritten
Some provisions of the existing law are redundant and have not been included in the new law. They are summarised in the following table:
| Provision | Subject | Reason for omission |
|---|---|---|
| 160B(1A) | Definition of listed personal-use asset | Collectables are defined in one subsection instead of two. |
| 160B(3) | Definition of non-listed personal-use asset | Personal use assets are defined independently of collectables. |
| 160K(1) | Definition of building | There is no need for this definition. The new approach follows the ordinary meaning of the terms building and structure. |
| Provision | Subject | Reason for omission |
| 160ZE | Consideration on disposal of non-listed personal-use assets | The deeming of a minimum disposal consideration is made redundant by the proposed change to the exemption for personal use assets. |
| 160ZG | Cost base of non-listed personal-use assets | The deeming of a minimum cost base or indexed cost base is also redundant because of the change to the exemption for personal use assets. |
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