ATO Interpretative Decision
ATO ID 2004/244 (Withdrawn)
Income Tax
Capital gains tax: cost base of CGT asset owned by a company - requirement to index cost baseFOI status: may be released
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This ATOID is withdrawn because the ATO view on this matter is now included in the Guide to capital gains tax 2005-06.This document incorporates revisions made since original publication. View its history and amending notices, if applicable.
Status of this decision: Decision Withdrawn 3 November 2006
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Is a company required, by section 110-25 of the Income Tax Assessment Act 1997 (ITAA 1997), to work out the cost base of a CGT asset it acquired before 21 September 1999 and which it owned for at least 12 months by indexing the relevant elements of the cost base?
Decision
Yes. As the taxpayer is a company, it must index expenditure incurred before 21 September 1999 in calculating the cost base of the CGT asset under section 110-25 of the ITAA 1997.
Facts
The taxpayer is a company (but not a listed investment company (LIC)) and purchased land prior to 21 September 1999.
The company sold the land in the 2004 income year and made a capital gain.
The directors of the company are considering retiring and wish to wind up the company.
The directors do not wish to use the indexation method to calculate the company's capital gain on the disposal of the land so they may maximise the amount which can be paid out of the company and treated as exempt under the retirement exemption in Subdivision 152-D of the ITAA 1997.
Reasons for Decision
CGT event A1 happens if a taxpayer disposes of a CGT asset (subsection 104-10(1) of the ITAA 1997). The taxpayer makes a capital gain if the capital proceeds from the disposal are more than the asset's cost base (subsection 104-10(4) of the ITAA 1997).
The rules about the cost base of a CGT asset are set out in Division 110 of the ITAA 1997. The cost base of a CGT asset is made up of five elements.
The cost base of an asset acquired at or before 11.45am on 21 September 1999 also includes indexation of the elements of the cost base (except the third element) if the requirements of Division 114 of the ITAA 1997 are met (subsection 110-25(7) of the ITAA 1997).
However, some entities, namely, individuals, complying superannuation entities, trusts and LICs can choose whether the cost base includes indexation (subsection 110-25(8) of the ITAA 1997). A company (other than a LIC) however, cannot choose whether the cost base includes indexation, as it is not an entity mentioned in the table in subsection 110-25(8) of the ITAA 1997.
Accordingly, the cost base of an asset acquired by a company (other than a LIC) at or before 11.45am on 21 September 1999 includes indexation of the elements of the cost base (except the third element) if the requirements of Division 114 are met.
Subsection 114-10(1) of the ITAA 1997 provides that you only index expenditure in the cost base of a CGT asset if you acquired the asset before 21 September 1999 and at least 12 months before the time of the CGT event. Indexation is only relevant if the cost base of a CGT asset is relevant to a CGT event (subsection 114-5(1) of the ITAA 1997).
In this case, the company owned the CGT asset for more than 12 months. Indexation is relevant in this case as CGT event A1 happened and subsection 104-10(4) of the ITAA 1997 provides that the cost base is relevant in determining your capital gain from this event.
Accordingly, as all the requirements in Division 114 of the ITAA 1997 are satisfied, in this case the company must include indexation in the cost base of their land when calculating their capital gain from CGT event A1.
Year of income: Year ended 30 June 2004
Legislative References:
Income Tax Assessment Act 1997
subsection 104-10(1)
subsection 104-10(4)
section 110-25
subsection 110-25(7)
subsection 110-25(8)
Division 114
subsection 114-5(1)
subsection 114-10(1)
Keywords
capital gains
capital gains tax
CGT assets
CGT cost base
CGT event A1-disposal of a CGT asset
CGT frozen indexed cost base
CGT indexation
CGT indexed cost base
frozen indexation
ISSN: 1445-2782
| Date: | Version: | |
| 3 February 2004 | Original statement | |
| You are here → | 3 November 2006 | Archived |