Any piece of Jewellery which a taxpayer acquires as a choice of personal use is termed as “Collectable” under Section 108-10(2) of Income Tax Assessment Act of 1997 (ITAA, 1997), says Barkoczy, (2015).
As per this section, a personal use item is classified as a collectable if it satisfies any one of the following definitions –
Provided these items are either used mainly by the taxpayer for own or spouse/ associate’s personal enjoyment or use, asserts Barkoczy, (2013).
The main issue of concern in this case is whether the engagement ring, which is worth $5000, is to be considered as a personal use CGT Asset or as a collectable CGT Asset as described under s100-10(2) and s108-10(2) of ITAA, 1997. To qualify for Collectable Item, an asset must satisfy the following two limbs of the law –
It is also to be ascertained what will be the treatment given to any capital gain or loss in case the item is disposed-off as described in ss 100-10(2) and 108-10(2) of ITAA, 1997. If the purchase cost of the collectable CGT Asset is less than $500, then it will treated as an Exempt Item from any Capital Gains Tax liability when the owner disposes it off, as per Nethercott, Devos & Richardson, (2010).
However, if a CGT asset is purchased or acquired for trading or investment purpose, it will not be treated as a collectable item for the purpose of determining the liability of Capital Gains Tax. As explained above, CGT is applicable on all collectables having value less than $500 only are exempt from capital gains tax and are also eligible for claim of losses, assert Ault, Arnold & Gest, (2010). Another factor which the taxpayer has to consider is that while calculating the cost basis of a collectable CGT Asset, one cannot include any non-capital costs as explained under s 108-17 of ITAA, 1997. All capital losses on an eligible collectable CGT Asset are allowed to be offset against future capital gains on collectables only as explained under s108-10(1) & (4) of ITAA, 1997, explains Deutsch et al, (2011).
Hence, in the present case study, the engagement ring will be considered as a collectable piece of jewellery, but in case it is disposed-off by the owner, it will be subjected to the effects of capital gain or loss as the cost ($5,000) of the ring is above the threshold limit of $500 set under the CGT Law. In conclusion it can be testified that the engagement ring in this case study is a collectable CGT Asset and any capital gain/loss from its sale will be subjected to a CGT liability, as detailed by Deutsch et al, (2011).
CASE – B: Second-hand Car Purchased for $3,000
As explained under s 108-5(1) of ITAA, 1997, all types of property, whether movable or immovable, including vehicles, land, buildings or shares of a company are considered as CGT Assets. The law does not consider the ownership status on the basis of age of the CGT Asset which is being considered for CGT liability purposes. Hence, even a second hand car will be subjected to the same provisions of the law as a new car bought first hand by the taxpayer, asserts Barkoczy, (2011).
As per Division 118-100 of ITAA, 1997, an exemption from CGT liability applies for all types of motor vehicles provided they are put to personal use by the taxpayer. The exemption is available irrespective of the year in which they were produced, or have been acquired. Exemption ceases when the vehicle is used for income generating purposes, such as in carrying passengers or it is of a type which cannot be normally used as a personal use vehicle, such as large capacity trucks, dumpers and excavators, says Barkoczy, (2013).
Normal motor cars, which can be used for personal benefits are, therefore, exempt from Capital Gains Tax (CGT). This also includes all types of vintage cars. The different types of cars which are not included in the exemption list are –
However, even if a motor vehicle has not been included in the CGT-exempt list, a passenger car is nonetheless can be categorized under the list of ‘machinery’ for CGT liability purposes and therefore, can be treated as a wasting asset under ‘machinery’ exemptions. In such cases also, the disposal of such vehicles will give rise to a Capital Gains Tax (CGT) where the owner has been availing the benefits of the tax allowances or the vehicle was being used for income producing activities and the owner had been claiming depreciation as part of the business use of the vehicle, as per Barkoczy, (2015).
Case Study
According to Subdivision 104-G of ITAA, 1997, the shares of BHP purchased by the taxpayer are a CGT Asset and cannot be treated either as a collectable or as a personal use asset. All assets purchased or acquired by a taxpayer, after September 20, 1985, are to be classified as CGT Assets and will be subjected to CGT as explained under s 108-5(1) of ITAA, 1997. All types of property, whether movable or immovable, including vehicles, land, buildings or shares of a company are considered as CGT Assets. Based on this classification, the shares of BHP acquired by the taxpayer will be considered as a CGT Asset, asserts Barkoczy et al, (2010).
Under Subdivision 104-G of ITAA, 1997, if the shares are sold or compensated by the holding company, the transaction under s104-135(1) is termed as CGT event G1. It is not considered as disposal of a CGT Asset under CGT Event A1. It is also not covered under CGT Event C2 which pertains to disposal/transfer of shares, as per CCH, (2015). Both the events, A1 and C2 are applicable for disposal/transfer of the right to ownership of shares, whereas when a company buys shares from the taxpayer, the taxpayer is paid a compensation, which is neither a part of the taxpayer’s assessable income nor it is a dividend paid by the company. In fact, CGT Event G1 is considered similar to return of capital, says Cassidy, (2007). Hence, if this non-assessable amount received by the taxpayer is more than the cost base, a capital gain has taken place. However, the taxpayer cannot claim a capital loss against its assessable income in case the compensation received is less than the cost base of the shares, explains Marsden, (2010).
Under Subdivision 104-G of ITAA, 1997, if the value of the shares becomes zero or they are no longer traded on the stock exchange, then as per s104-145(1) of ITAA, 1997, CGT Event G3 happens and the taxpayer can claim liquidation as the administrator classifies the shares as worthless, as per Renton, (2012). Similarly as per s 104-145(4)&(5), if the cost base is less than the market value of the shares, the taxpayer can declare their value as nil and the shares are treated as non-existent, as per CCH, (2015). However, in cases where the shares had been acquired before 20 September 1985, the taxpayer cannot claim a loss as detailed under s 104-145(6) of ITAA, 1997 or if it the acquisition falls under an ESS interest as explained in s 104-145(7) of ITAA, 1997, says Barkoczy, (2015).
In cases where the shares are traded as part of a regular business and a share trading transaction is occurring, these are not subjected to CGT liability. In fact, such trading profits are subjected to ordinary income tax laws. Hence, in the present case study, it has to be ascertained whether CGT Event G1 or G3 took place and accordingly the liability of the taxpayer will be fixed. If it is not covered by either of these two events, the sale of BHP shares will be processed as disposal of a CGT asset and CGT Event A1 will be considered, as per Barkoczy, (2015).
Case Study
A home is neither a personal use CGT Asset nor a collectable CGT Asset, but is simply a CGT Asset. If it is used as by the taxpayer as his main residence then it is not subjected to any CGT liability when disposed-off. As per the CGT laws, assets such as home, vehicle and others which are used only for personal purposes, such as home furniture and essentials are treated as exempt from CGT liabilities of the taxpayer provided they are not used for any income producing activities by the taxpayer. However, a house or land or a building or furniture are to be considered as CGT Asset if it is used either as a place of business or the items are used for business purposes and their sale will be subjected to CGT, as per Barkoczy, (2013).
Main residence of a taxpayer has these requisites as per taxation laws –
As per Division 118-100 of ITAA, 1997, the main residence of the taxpayer, including the adjoining land, is not to be subjected to CGT, provided the land is not more than two hectares as explained under s118-120(3) of ITAA, 1997, assert Barkoczy et al, (2010). In cases where the home and its adjoining land is partially used for income generating purposes, pro-rata basis is applicable for usage as main residence. Similarly, if the adjoining land is above 2 hectares, the excess part of the land is subject to CGT liability, explain Alexander & Fogarty, (2009). However, the Australian Taxation Office (ATO) may grant partial exemption in cases where the home was fully used by the taxpayer as main residence for a long period of time. In cases where the main residence is inherited by the taxpayer, the application of CGT event will be decided from the acquisition date, as per Marsden, (2010). In case the inheritance date is before 20 September 1985, the taxpayer will be granted full exemption from any CGT liability. In case the main residence is acquired or inherited after 20 September 1985, it will be granted full exemption from CGT liability provided it was granted the two-year extension in time period by the Commissioner, assert Ault, Arnold & Gest, (2010).
If, after the death the previous owner, the taxpayer does not use the main residence for any income earning activities and it is used as the main residence by the survivor or the spouse, who has established his/her legal rights on the home and is declared as the beneficiary, the survivor/spouse shall continue to take the benefits of exemption provided under law, as per Nethercott, Devos & Richardson, (2010).
Conclusion
The above stated explanations and case laws can be better understood by the example cited in ATO ID 2002/691. In this case, the taxpayer disposed-off the main residence by triggering CGT Event A1, where the adjoining land was more than 2 hectares. The ATO exempted the taxpayer from paying any tax on the sale of the main residence by including up to 2 hectare of the adjoining land, explains Renton, (2012). The excess land, above the 2 hectare threshold, was apportioned for CGT liability accordingly and capital gain was levied.
In the above taken example under ATO ID 2002/691, the home was a CGT Asset and accordingly was exempt from CGT liability being the proven main residence of the taxpayer. To fit the requisites as stated above, the home was built on land admeasuring more than 2 hectares, and hence, as per the law was subjected to a pro-rata apportionment of the area for levying the liability of payment of capital gain tax by the taxpayer. However, if the home was determined as not being used as a main residence by the taxpayer, then all the gain which arises from the disposal of the CGT Asset will be subjected to CGT liability, as put by Renton, (2012); Barkoczy, (2015).
References
Alexander, Dr. R. and Fogarty, H. J. 2009. Australian Master Family Law Guide, 3rd ed.
CCH Australia Limited, Sydney, NSW.
Ault, H. J., Arnold, B. J. and Gest, G. 2010. Comparative income taxation: a structural analysis. 3rd ed. Kluwer Law International, The Netherlands.
Barkoczy, S. 2011. Core tax legislation and study guide. CCH Australia Limited, North Ryde, NSW.
Barkoczy, S. 2013. Foundations of Taxation Law 2012, 5th ed. CCH Australia Limited, North Ryde, NSW.
Barkoczy, S. 2015. Australian Tax Case book, 12th ed. CCH Australia Limited, North Ryde, NSW.
Barkoczy, S., Rider, C., Baring, J. and Bellamy, N. 2010. Australian tax casebook, 10th ed. CCH Australia, North Ryde, NSW.
CCH. 2015. Australian Master Tax Guide 2015. CCH Australia Limited, Sydney, NSW.
Cassidy, J. 2007. Concise Income Tax, 4th ed. Federation Press, Annandale, NSW.
Deutsch, R., Friezer, M., Fullerton, I., Gibson, M., Hanley, P. and Snape, T. (2011) Australian tax handbook. Thomson Reuters, Pyrmont, NSW.
Marsden, S. J. 2010. Australian Master Bookkeepers Guide, 3rd ed. CCH Australia Limited, Sydney, NSW.
Nethercott, L., Devos, K. and Richardson, G. 2010. Australian taxation study manual: questions and suggested solutions, 20th ed. CCH Australia Limited, Sydney, NSW.
Renton, N. E. 2012. Family Trusts: A Plain English Guide for Australian Families of Average Means, 4th ed. John Wiley & Sons, Milton, QLD.
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