• Capital gains tax and depreciating assets

    Introduction

    Under the uniform capital allowance (UCA) system, a capital gain or capital loss from the disposal of a depreciating asset will only arise to the extent that you have used the asset for a non-taxable purpose (for example, used for private purposes).

    You calculate a capital gain or capital loss from a depreciating asset used for a non-taxable purpose using the UCA concepts of cost and termination value – see the Guide to depreciating assets – and not the concepts of capital proceeds and cost base found in the capital gains tax (CGT) provisions.

    If a balancing adjustment event occurs for a depreciating asset you have at some time used for a non-taxable purpose, a CGT event happens. The most common balancing adjustment event for a depreciating asset occurs when you stop holding it (for example, you sell, lose or destroy it) or stop using it.

    Calculating a capital gain or capital loss for a depreciating asset

    You make a capital gain if the termination value of your depreciating asset is greater than its cost. You make a capital loss if the reverse is the case that is, the asset’s cost is more than its termination value.

    You use different formulas to calculate a capital gain or capital loss depending on whether the asset is in a low-value pool or not.

    Depreciating asset not in a low-value pool: capital gain

    If your depreciating asset is not a pooled asset, you calculate the capital gain as follows:

    (termination value – cost)

    x

    sum of reductions
    total decline

    Depreciating asset not in a low-value pool: capital loss

    You calculate the capital loss from a depreciating asset that is not a pooled asset as follows:

    (cost – termination value)

    x

    sum of reductions
    total decline

    Sum of reductions is the sum of the reductions in your deductions for the asset's decline in value that is attributable to your use of the asset, or you having it installed ready for use, for a non-taxable purpose.

    Total decline is the decline in value of the depreciating asset since you started to hold it.

    Example

    Capital gain on depreciating asset

    Larry purchased a truck in August 2014 for $5,000 and sold it in June 2016 for $7,000. He used the truck 10% of the time for private purposes. The decline in value of the truck under the UCA system up to the date of sale was $2,000. Therefore, the sum of his reductions relating to his private use is $200 (10% of $2,000). Larry calculates his capital gain from CGT event K7 as follows:

    ($7,000 – $5,000)

    x

    200
    2,000

    Capital gain from CGT event K7 = $200 (before applying any discount)

    Note: As Larry is not registered for GST, the elements of the cost base are not reduced by the amount of any GST input tax credits included in the cost.

    End of example

    Depreciating asset in a low-value pool: capital gain

    You calculate the capital gain from a depreciating asset in a low-value pool as follows:

    (termination value – cost)

    x

    (1 – taxable use fraction)

    Depreciating asset in a low-value pool: capital loss

    You calculate the capital loss from a depreciating asset in a low-value pool as follows:

    (cost – termination value)

    x

    (1 – taxable use fraction)

    Taxable use fraction is the percentage of use of an asset that will be for a taxable purpose (producing your assessable income), expressed as a fraction. This is the percentage you reasonably estimate for the asset at the time you allocated it to the low-value pool.

    Application of CGT concessions

    A capital gain from a depreciating asset may qualify for the CGT discount if the relevant conditions are satisfied. If the CGT discount applies, there is no reduction of the capital gain under the indexation method.

    The small business CGT concessions do not apply to a capital gain made from the disposal of a depreciating asset, because a capital gain only arises in respect of the use of the depreciating asset for non-taxable purposes (for example, to the extent it is used for private purposes).

    Do any CGT exemptions apply to a depreciating asset?

    The following exemptions may apply to a capital gain or capital loss made from the disposal of a depreciating asset:

    • Pre-CGT assets: you disregard a capital gain or capital loss from a depreciating asset if the asset was acquired before 20 September 1985.
    • Assets of small business entities: you disregard a capital gain or capital loss from a depreciating asset if you are a small business entity and you can deduct an amount for the depreciating asset's decline in value under the small business entity capital allowance provisions for the income year in which the balancing adjustment event occurred.
    • Personal use asset: if a depreciating asset is a personal use asset (that is, one used or kept mainly for personal use and enjoyment), you disregard any capital loss from CGT event K7. You also disregard a capital gain under CGT event K7 from a personal use asset costing $10,000 or less.
    • Collectables: you disregard a capital gain or a capital loss from a depreciating asset that is a collectable costing $500 or less.
    • Balancing adjustment event and CGT event: you only include a balancing adjustment event that gives rise to a capital gain or capital loss under CGT event K7. However, capital proceeds received under other CGT events, for example, CGT event D1, may still be relevant for a depreciating asset as CGT events are not the equivalent of balancing adjustment events.

    Treatment of intellectual property

    Under the capital allowance rules intellectual property is a depreciating asset.

    If you grant or assign an interest in an item of intellectual property, you are treated as if you had stopped holding part of the item. You are also treated as if, just before you stop holding that part, you had split the original item of intellectual property into two parts, the part you stopped holding and the rest of the original item. You determine a first element of the cost for each part.

    This treatment applies if a licence is granted over an item of intellectual property. To this extent, the treatment of intellectual property is different from other depreciating assets. The grant of a licence in respect of other depreciating assets would result in CGT event D1 (about creating contractual rights) happening.

    See also:

    For help applying this to your own situation, phone 13 28 61

      Last modified: 21 Jun 2016QC 17163