• Money received exceeds the cost of repair or replacement

    Attention

    Warning:

    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

    End of attention

    If you do not use all of the money you received to repair or replace the original asset, the amount of capital gain you must include in your assessable income on your tax return depends on whether the capital gain is more or less than the difference between the amount you received and the cost of the repair or replacement.

    If the capital gain is more than that difference, your capital gain is reduced to the amount of the excess. Include this amount on your tax return n the year the event happens. This gain may be eligible for the 50 per cent CGT discount.

    When a later CGT event happens, the expenditure to include in the cost base of the asset is reduced by the amount by which the gain - before it was reduced - is more than the excess. This has the effect of deferring part of the capital gains tax liability until a later CGT event happens.

    Example

    Money received is more than the expenditure incurred

    On 28 December 1999, Patrick received $120,000 from his insurance company in compensation for the loss of his yacht, which sank on 22 October 1999 after hitting a reef and could not be salvaged. He spent $110,000 to purchase a replacement yacht.

    Patrick made a capital gain (non-indexed) of $15,000 on the original yacht. This was the difference between its cost base of $105,000 and the amount he received from the insurance company.

     

    $

     

    $

    Money received

    120,000

    Money received

    120,000

    Cost base

    105,000

    Replacement expenditure

    110,000

    Capital gain

    15,000

    Excess

    10,000

    The compensation money ($120,000) exceeds the replacement expenditure ($110,000) by $10,000. The capital gain ($15,000) is $5,000 more than the excess of $10,000. The capital gain is reduced to the excess amount of $10,000 and Patrick must include this amount as a capital gain in his assessable income in his 1999-2000 tax return.

    If Patrick is eligible for the 50 per cent CGT discount, the $10,000 excess is Patrick's nominal capital gain. Therefore, Patrick must include $5,000 ($10,000 x 50%) in the calculation of his net capital gain/loss for the 1999-2000 income year.

    As well, the expenditure he incurred on the replacement asset is reduced by the balance of the capital gain ($5,000) to $105,000. In this way $5,000 of the capital gain is deferred.

    If the capital gain is less than or equal to the excess (the compensation amount less the cost of the repair or replacement), the capital gain and the expenditure on the repair or replacement are not reduced.

    Last modified: 18 Sep 2009QC 18323