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Draft Taxation Determination

TD 93/D177

Income tax: capital gains: in the case of an involuntary disposal of a post-CGT asset that satisfies section 160ZZK, what is the CGT treatment of the 'notional capital gain' that arises where the compensation or insurance proceeds exceed the indexed cost base?

  • Please note that the PDF version is the authorised version of this draft ruling.
    This document has been finalised by TD 93/178.

FOI status:

draft only - for comment

Preamble

Draft Taxation Determinations (TDs) present the preliminary, though considered, views of the ATO. Draft TDs may not be relied on; only final TDs are authoritative statements of the ATO.

1. Section 160ZZK is a roll-over provision which potentially provides a deferral of the tax liability that might otherwise arise on the involuntary disposal of a post-CGT asset until the replacement asset is disposed of. The extent to which the tax liability is deferred depends on the difference between the amount of the compensation or insurance proceeds and the cost of the replacement asset (subsection 160ZZK(6)).

2.

(a)
If the compensation or insurance proceeds is less than the cost of the replacement asset, the cost of the replacement asset is reduced by the notional capital gain (example 1).
(b)
If the compensation or insurance proceeds is more than the cost of the replacement asset, and

(i)
the notional capital gain is more than that excess, the excess is treated as a capital gain and the cost of the replacement asset is reduced by the balance of the notional capital gain (example 2); or
(ii)
the notional capital gain is less than that excess, the notional capital gain is treated as a capital gain (example 3).

Description Example 1 Example 2 Example 3
(a) Indexed cost base of original asset $100,000 $100,000 $100,000
(b) Compensation or insurance proceeds $120,000 $120,000 $120,000
(c) Cost of replacement asset $130,000 $110,000 $90,000
(d) Notional Capital gain $20,000 {(b)-(a)} $20,000 {(b)-(a)} $20,000 {(b)-(a)}
(e) Capital gain Nil $10,000 {(b)-(c)} $20,000 (d)
(f) Reduction to cost of replacement asset $20,000 (d) $10,000 {(d)-((b)-(c))} Nil

[Note: In practical terms, the notional capital gain is used to reduce the cost of the replacement asset to the level of the indexed cost base of the original asset. Any balance is treated as a capital gain.]

Note: For the purposes of subsection 160ZZK(6), the 'notional capital gain' refers to the amount that, but for section 160ZZK, would have been for Part IIIA, a capital gain on the disposal of the post-CGT asset.

Commissioner of Taxation
15/7/93

References


BO UMG0039 (CGTDET 75)

ISSN 1038 - 8982

Subject References:
capital gains
compensation
cost base
insurance proceeds
involuntary disposal
notional capital gain
replacement asset

Legislative References:
ITAA Pt IIIA Div 17
ITAA 160ZZK
ITAA 160ZZK(6)


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