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 2.10 - Indexation of cost base
Overview
This segment covers the rules in Division 114 for indexing the cost base of a CGT asset for inflation. Part A summarises these rules. Part B explains the changes to the 1936 Act.
A. Summary of the new law
Division 114: Indexation of cost base
The cost base of a CGT asset consists of five elements, each of which is an amount of expenditure. You are entitled to index each element, other than element 3 - non-capital costs of ownership of the asset. [section 114-1]
Indexation of the cost base occurs when the cost base of the asset is taken into account on the happening of a CGT event. [section 114-5]
Expenditure in the cost base of an asset is only indexed for inflation if the taxpayer had owned the unit for at least 12 months. [section 114-10]
Exceptions to the 12 month rule
There are five exceptions. The first exception is when CGT event E8 (disposal by beneficiary of a capital interest) occurs within 12 months of the trustee acquiring an asset. The beneficiary can index the cost base of the asset if he or she acquired an interest in the trust capital at least 12 months before the event. [subsection 114-10(3)]
The second is when a replacement asset roll-over or a same asset roll-over occurs.
For a same asset roll-over, indexation is available for both the entity that owned the asset before the roll-over and the successor entity, if the combined ownership periods are at least 12 months. [subsection 114-10(4)]
For a replacement asset roll-over, indexation is available if your ownership periods for both the original asset and the replacement asset together reach 12 months. [subsection 114-10(5)]
The exception equally applies to an unbroken chain of roll-overs. [subsections 114-10(4), (5)]
The third and fourth exceptions apply where an individual dies. Where an asset devolves to a legal personal representative or passes to a beneficiary, the period that the deceased owned the asset is included in measuring the 12 month requirement. Similarly, a surviving joint tenant can take into account the period that the deceased held his or her interest. [subsections 114-10(6), (7)]
The fifth exception is when CGT event J1 [section 104-175] happens. For the purpose of indexation, the recipient company is not taken to have acquired the unit at break-up time. [subsection 114-10(8)]
Indexation and cost base modifications
There are a number of cases where modifications are required in indexing the cost base of CGT assets. The effects of these modifications are in sections 112-20 and 112-35, and Subdivisions 112-B, 112-C and 112-D. [section 114-15]
Indexation where cost base element is substituted
If a modification replaces (or includes an amount in) an element of the cost base, the substituted amount is indexed as if it had been incurred at the time of the modification. [subsection 114-15(2)]
Indexation where modification reduces the cost base
If a modification reduces the cost base, the new element is indexed as if it had been incurred at the time of the modification. [subsection 114-15(3)]
Indexation where cost base of original asset or roll-over asset is adopted for the new asset
Where the whole cost base of an original asset or roll-over asset becomes the first element of the cost base of a new CGT asset, it is indexed as if it had been incurred when the roll-over happened. [section 114-20]
B. Discussion of changes
Section 114-10 Requirement for 12 months ownership
Clarify that indexation is available (with certain exceptions) only if the CGT asset was acquired at least 12 months before a CGT event happens in relation to the asset.
Sections 160ZX and 160ZZT of the 1936 Act only refer to indexed cost base in working out whether a capital gain or loss is made. No reference is made (unlike other sections) to cost base or reduced cost base. This has led to uncertainty as to the period over which assets affected by these sections can be indexed. The rewritten provision clarifies that indexation is available where the asset was acquired at least 12 months before the relevant CGT event.
Allow indexation of the cost base of a replacement asset (for a replacement-asset roll-over) where a CGT event happens to that asset within 12 months of the roll-over, but at least 12 months after the original asset was acquired.
The 1936 Act does not permit indexation if a CGT event happens to a replacement asset within 12 months of its acquisition (the roll-over). To be consistent with the general design of the roll-over provisions which transfer the CGT attributes of the original asset to the replacement asset, indexation should be allowed for this period.
Similarly, allow indexation of the cost base of a roll-over asset to which a CGT event happens within 12 months of the roll-over, but at least 12 months after the transferor acquired the roll-over asset.
Again this extension brings greater consistency to the indexation rules.
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