Edited version of private advice

Authorisation Number: 1012630309450

Ruling

Subject: Tax implications of selling gold acquired over a period of time

Question 1

Are gold nuggets 'personal use assets' under subsection 108-20(2) of the Income Tax Assessment Act 1997 (ITAA 1997) if you have collected them pursuing a hobby and not in the course of carrying on any business or profit making activity?

Answer

Yes

Question 2

Will any capital gain you make on the disposal of a gold nugget, where the first element of the cost base of the gold nugget exceeds $10,000, be disregarded under subsection 118-10(3) of the ITAA 1997?

Answer

No

This ruling applies for the following period

1 July 2009 to 30 June 2014

The scheme commenced on

Mid 1980

Relevant facts

You have engaged in gold prospecting activities as a hobby since mid 1980. This is conducted irregularly on weekends.

You have stated that the gold fossicking is not a business. You do operate any another business on a fulltime basis.

You have found gold nuggets using a metal detector and some of these nuggets may have had a market value in excess of $10,000 at the time you found them.

You do not have a mining lease or licence or any interest associated with gold fossicking other than the compulsory miner's right to fossick/ prospect.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-5

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Subsection 108-20(2)

Income Tax Assessment Act 1997 Section 109-5

Income Tax Assessment Act 1997 subsection 112-20(1)

Income Tax Assessment Act 1997 Subsection 118-10(3)

Income Tax Assessment Act 1997 Section 960-400

Income Tax Assessment Act 1936 Section 160B

Reasons for decision

A capital gain or capital loss is made when a capital gains tax (CGT) event happens to a CGT asset you own section 102-20 of ITAA 1997. A capital gain is made if the amount received (called capital proceeds) from the disposal exceeds the cost base (the cost of the asset and certain other costs associated with acquiring, holding and disposing of the asset) of the CGT asset. The capital gains provisions may apply whenever a CGT event happens.

CGT event A1 occurs when a disposal contract is entered into, or if there is no contract, when an entity stops being an asset's owner (section 104-5 of the ITAA 1997). The time of the event is when you enter into the contract for the disposal of the asset, or if there is no contract, when the change of ownership occurs.

Capital gains tax (CGT) Asset

A CGT asset is defined in section 108-5 of the ITAA 1997 and includes any kind of property or a legal or equitable right that is not property.

CGT assets fall into one of three categories:

• collectables

• personal use assets, or

• other assets.

All assets are subject to the CGT rules unless they are specifically excluded. Capital assets acquired before 20 September 1985 are exempt assets. 

Personal use asset

A personal use asset is:

• a CGT asset, other than a collectable, that you use or keep mainly for your personal use or enjoyment

• an option or a right to acquire a personal use asset

• a debt resulting from a CGT event involving a CGT asset kept mainly for your personal use and enjoyment, or

• a debt resulting from you doing something other than gaining or producing your assessable income or carrying on a business.

ATO Interpretative Decision ATO ID 2003/451 concludes that gold nuggets are 'personal use assets' under subsection 108-20(2) of the ITAA 1997, if they are collected while pursuing a hobby and not used in the course of carrying on a business or profit making activity.

This is confirmed in Favaro v. FC of T (1996) 34 ATR 1; 96 ATC 4975 (Favaro) when Branson J held that Italian currency which was converted to Australian currency was not a 'personal use asset' as defined in subsection 160B(1) of the Income Tax Assessment Act 1936 (ITAA 1936). In making this decision Branson J accepted the Commissioner's argument 'that the expression "personal use" is used in section 160B of the ITAA 1936 in contradistinction to use for business or profit making purposes'.

The word 'contradistinction' means distinction by contrast or opposition (The Australian Oxford Dictionary, 1999, Oxford University Press, Melbourne). Therefore, an asset that is not used for business or profit making purposes is, by default, used or kept mainly for personal use and enjoyment. The two categories are mutually exclusive.

CGT event for a personal use asset

If the first element of the cost base of a personal use asset is $10,000 or less, any capital gain is disregarded (subsection 118-10(3) of the ITAA 1997). Capital losses from personal use assets are also disregarded.

Acquisition of a CGT asset

Section 109-5 of the ITAA 1997 provides the acquisition rules for CGT assets and sets out the specific rules that apply to each event number. In general you acquire a CGT asset when you become its owner or as a result of a CGT event happening.

Market value substitution rule

The market value substitution rule in subsection 112-20(1) of the ITAA 1997 states, that where an asset is acquired by you and you did not incur expenditure to acquire it, the first element of the cost base is the market value of the asset at the time of acquisition.

The term 'market value' is defined by section 960-400 of the ITAA 1997 which states that the term has its ordinary meaning.

Information about market value can be found on the ATO website in the publication - 'Market valuation for tax purposes'.

Ownership of minerals

At common law, the surface owner's rights extend downwards sufficiently to permit extraction of minerals, and to preclude others from interfering with minerals and geothermal resources. Usually, the Crown reserves the rights to minerals when granting land. Gold and silver are also known as "royal" minerals; they remain the property of the Crown, despite grant of the land in which they lie (Wade v. New South Wales Rutile Mining Co Pty Ltd (1969) 121 CLR 177).

Application to your circumstances

Personal use asset

In your case, you have stated that you found gold nuggets pursuing a hobby and not in the course of carrying on any business or profit making activity.

As such, in accordance with the reasoning found in Favaro, it is considered that the gold nuggets you found are personal use assets under paragraph 108-20(2)(a) of the ITAA 1997. If the first element of the cost base of the gold nugget is less than $10,000 any capital gain you may make on disposal of that nugget is disregarded under subsection 118-10(3) of the ITAA 1997.

Cost base of the nugget

The Crown owns the rights to gold. When you found the gold nugget, a change of ownership occurred. You therefore acquired the gold nugget from the Crown when you found it.

You did not incur any expenditure in acquiring the gold nugget; rather, any expense that you did incur was either in the purchase of a fossicker's license or in relation to your hobby activities. The market value substitution rule therefore applies to your acquisition of the nuggets. You have to establish the market value of the nuggets at the time of finding them:

• If this value is $10,000 or less the exemption for personal use assets will apply and there will be no capital gains tax payable when those nuggets are sold.

• If this value is greater than $10,000 the exemption for personal use assets will not apply and these sales will be subject to capital gains on the difference between the cost base and the sale price.

You need to consider how the capital gains tax rules apply to these amounts.