Tax Law Improvement Act (No. 1) 1998 (46 of 1998)
Schedule 1 Amendment of the Income Tax Assessment Act 1997
1 Part 3-1 Division 114
Division 114 - Indexation of cost base
Table of sections
114-1 Indexing elements of cost base
114-5 When indexation relevant
114-10 Requirement for 12 months ownership
114-15 Cost base modifications
114-20 When expenditure is incurred for roll-overs
114-1 Indexing elements of cost base
In working out the *cost base of a *CGT asset, index expenditure in each element. (The expenditure can include giving property: see section 103-5).
Note 1: Subdivision 960-M shows you how to index amounts.
Note 2: You have to work out the cost base of a CGT asset if a CGT event happens in relation to it or if there is a cost base modification.
Note 3: You cannot index expenditure in the third element (non-capital costs of ownership): see subsection 960-275(4).
Example: Peter purchases a building as an investment on 1 January 1994 for $250,000. This amount forms the first element of his cost base.
He sold the building on 1 February 1996.
The index number for the quarter in which he sold the building (the March quarter 1996) is 119.0. The index number for the quarter in which he purchased the building (the March quarter 1994) is 110.4.
Applying section 960-275, work out the indexation factor as follows:
(119.0 / 110.4) = 1.078
The indexed first element of Peter's cost base is:
$250,000 * 1.078 = $269,500
114-5 When indexation relevant
Indexation is only relevant if the *cost base of a *CGT asset is relevant to a *CGT event.
Note 1: The table in section 110-10 sets out the CGT events for which cost base is not relevant.
Note 2: Indexation is not relevant to the reduced cost base of a CGT asset.
114-10 Requirement for 12 months ownership
(1) You only index expenditure in the *cost base of a *CGT asset for a *CGT event happening in relation to the asset if you, or the entity whose cost base is being worked out, had *acquired the asset at least 12 months before the time of that *CGT event.
Note: Generally, expenditure is indexed from when it is incurred: see subsection 960-275(2). The exception is when there is an acquisition that did not result from a CGT event. The first element in this case is indexed from when the expenditure was paid: see subsection 960-275(3).
(2) There are 5 exceptions:
• one for *CGT event E8: see subsection (3); and
• one for roll-overs: see subsections (4) and (5); and
• one for deceased estates: see subsection (6); and
• one for a surviving joint tenant: see subsection (7); and
• one for *CGT event J1: see subsection (8).
CGT event E8
(3) For *CGT event E8, the beneficiary indexes the *cost bases of the *CGT assets of the trust only if the beneficiary *acquired the *CGT asset that is the interest in the trust capital at least 12 months before *disposing of it.
It does not matter (for indexation from the beneficiary's point of view) how long the trustee owned any of the assets of the trust.
Same asset roll-overs
(4) The 12 month rule is satisfied for both the entity that owned a *CGT asset before a *same-asset roll-over and the entity that owned it after the roll-over if the sum of their periods of ownership of the asset (and the sum of the periods of ownership of the asset of other entities involved in an unbroken series of roll-overs) is at least 12 months.
Replacement asset roll-overs
(5) The 12 month rule is satisfied for an entity obtaining a *replacement-asset roll-over for a *CGT event happening in relation to a *CGT asset if the period of the entity's ownership of the original asset (and of other assets for an unbroken series of replacement-asset roll-overs) and of the replacement asset are together at least 12 months.
Example: Company A transfers a CGT asset to Company B (which is a member of the same wholly-owned group) 5 months after acquiring it. There is a roll-over for the transfer under Subdivision 126-B.
Company B sells the asset 8 months after the transfer.
Company A indexes expenditure in its cost base up to the transfer. That cost base becomes the first element of Company B's cost base. Company B indexes its cost base from the transfer to the sale.
Deceased estates
(6) If a *CGT asset you owned just before dying devolves to your *legal personal representative or *passes to a beneficiary in your estate, the 12 month rule applies to the legal personal representative or the beneficiary as if that entity had *acquired the asset when you acquired it.
Surviving joint tenant
(7) If individuals own a *CGT asset as joint tenants and one of them dies, the 12 month rule applies to the surviving joint tenant as if the surviving joint tenant had *acquired the deceased's interest in the asset when the deceased acquired it.
Note: The surviving joint tenant is taken to have acquired the deceased's interest in the asset: see section 128-50.
CGT event J1
(8) If *CGT event J1 happens, the company that owns the roll-over asset ignores (for indexation purposes) the acquisition rule in subsection 104-175(8).
114-15 Cost base modifications
(1) There are a number of modifications to the *cost base of *CGT assets (see sections 112-20 and 112-35 and Subdivisions 112-B, 112-C and 112-D). These affect the way indexation works.
(2) If a cost base modification replaces an element of the *cost base of a *CGT asset with an amount, or includes an amount in such an element, you index the element or the amount as if expenditure equal to the amount had been incurred in the quarter in which the modification occurred.
Example: A trust is declared over a CGT asset (an example of CGT event E1). The first element of the cost base in the hands of the trustee is its market value. The trustee indexes that market value from the quarter in which the trust was declared.
(3) A different rule applies if a cost base modification reduces the total *cost base of a *CGT asset.
Method statement
Step 1. Work out the *cost base (all elements) of the asset as at the quarter in which the modification occurred.
Step 2. Subtract the amount of the reduction.
Step 3. The Step 2 amount forms a new first element of your *cost base, and is later indexed as if you had incurred expenditure equal to that amount in the quarter in which the modification occurred.
Example: Margaret receives a capital payment of $1,000 for shares (an example of CGT event G1). The first element of her cost base is $10,250 (indexed to the quarter in which the payment was made) and the second element (similarly indexed) is $210. Add those amounts ($10,460) and subtract the $1,000. Her new first element of the cost base is $9,460. There are no other elements at that time.
114-20 When expenditure is incurred for roll-overs
If there is a roll-over for a *CGT event happening in relation to a *CGT asset and the first element of the *cost base of the asset is the whole of the cost base of:
(a) for a *replacement-asset roll-over, the original asset; or
(b) for a *same-asset roll-over, the CGT asset;
you index that element as if expenditure equal to the amount in that element had been incurred in the quarter in which the CGT event happened.