Income Tax Assessment Act 1997

CHAPTER 3 - SPECIALIST LIABILITY RULES

PART 3-1 - CAPITAL GAINS AND LOSSES: GENERAL TOPICS

Division 114 - Indexation of cost base

SECTION 114-15   Cost base modifications

114-15(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.

114-15(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.

114-15(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.

114-15(4)

Despite subsection (2), there are different rules for the exercise of an option or the conversion of a *convertible interest.

Exercise of options

114-15(5)

The amount you paid for the option, and the amount you paid to exercise it, are indexed from the *quarter in which the liabilities to pay the amounts were incurred.
Example:

On 1 April 1997, Robyn grants Andrew an option to buy land she owns. The option fee is \$10,000, and the option is to buy the land on 30 June 1998 for \$100,000.

Andrew exercises the option and acquires the land on 30 June 1998. To work out whether there is a capital gain when Andrew disposes of the land, indexation is available if the land is disposed of 12 months or more after its acquisition.

The \$10,000 option fee can be indexed from 1 April 1997 (when the liability to pay it was incurred). The \$100,000 exercise price can be indexed from 30 June 1998 (when the liability to pay the price was incurred).

Convertible interests

114-15(6)

If you *acquire *shares in a company or units in a unit trust by converting a *convertible interest, the amount paid for the convertible interest, and the amount paid to convert it, are indexed from the *quarter in which the liabilities to pay the amounts were incurred.
Note:

If shares or units are acquired as a result of the exercise of the option or the conversion of the convertible interest, and an amount is paid to the company or trust on the shares or units after the day of acquisition, that amount is indexed from the time it is paid: see subsection 960-275(3) .