Explanatory Memorandum
(Circulated by the authority of the Treasurer,the Hon. J. Kerin, M.P.)Chapter 12 Capital Gains Tax Cost Base
Overview
Allows costs such as interest, repairs and rates and land taxes to be deducted from a capital gain made on the disposal of most assets, where those costs are not otherwise allowable as a tax deduction.
The change applies to assets acquired on or after 21 August 1991.
Summary of proposed amendments
12.1. The Bill will amend the CGT cost base provisions to allow costs such as interest, rates and land taxes, repairs and insurance premiums to be taken into account in working out the taxable capital gain made on disposal of an asset.
Background to the legislation
12.2. The taxable capital gain or allowable capital loss made on the disposal of an asset is calculated by reference to the asset's cost base. In working out a capital gain on an asset owned for more than 12 months, the cost base is "indexed" to account for inflation. A capital loss is determined by reference to the asset's reduced cost base, ie. the amount of the cost base, less any part of the cost base allowed as a deduction.
12.3. Broadly speaking, the types of expenses that can be included in an asset's cost base are capital costs of acquiring, maintaining title to or improving the asset. They also include non-deductible incidental costs of acquisition or disposal of the asset. Other expenses of a non-capital or "revenue" nature (eg. interest on money borrowed to purchase an asset) cannot be included in the asset's cost base under the present law.
Explanation of the proposed amendments
What costs can now be included in the cost base?
12.4. The amendments will enable other non-capital costs of ownership of an asset to be added to its costs base in certain circumstances. Examples of such costs include interest on money borrowed to purchase the asset, repairs and maintenance, insurance premiums and, in the case of land, rates and land taxes. [Clause 64]
12.5. These costs can only be added to the cost base of the asset if they are not otherwise deductible under another provision of the income tax law. They will not be taken into account in working out a capital loss nor will they be eligible for indexation.
12.6. The unindexed amount of the non-capital and non-deductible costs of ownership of the asset will be included in working out the cost base or indexed cost base of an asset. However, no additional amounts will be added to an asset's reduced cost base nor will the costs be taken into account in working out the cost base or indexed cost base of a personal-use asset.
What types of assets are affected by the changes?
12.7. All types of assets except personal-use assets could be affect by the changes. Personal-use assets are assets used primarily for a person's private use and enjoyment and include things like household furniture, televisions, stereos, jewellery, works of art and antiques.
How do the changes affect investments?
12.8. If an asset is used for income producing purposes (eg. a rental property) you can claim a tax deduction for non-capital ownership costs such as interest, rates, land taxes and repairs. You cannot add any expense to an asset's cost base if you have already claimed a tax deduction for it.
12.9. In practice, only non-income producing assets are likely to be affected. Examples of such assets including holiday homes (except to the extent used to produce income) and vacant land.
Do the changes apply to all costs incurred on or after 21 August 1991?
12.10. No. The changes only apply to costs on assets acquired on or after 21 August 1991. If you bought an asset before that date, you cannot add your non-capital expenses to its costs base, even where the expenses were incurred on or after 21 August 1991.
Commencement date
12.11. The amendments apply to an asset acquired on or after 21 August 1991.
Clauses involved in the proposed amendments
Clause 64 : amends subsections 160ZH(1) and (2) and inserts new subsections 160ZH(6A) and (6B).
Subclause 85(12) : contains the application provisions
(Editorial note: *Amendment - Inclusion of provision to enable shareholders in companies in liquidation to realise capital losses on valueless shares (Introduced during passage through Parliament - refer page 10 of Supplementary EM)*)