Edited version of private advice

Authorisation Number: 1051895820704

Date of advice: 23 September 2021

Ruling

Subject: CGT- personal use assets

Question 1

Will the disposal of the game components be taxed on capital account and not on revenue account?

Answer

Yes.

Question 2

If the answer to Question 1 is yes, are the game components personal use assets under subsection 108-20(2) of the ITAA 1997?

Answer

Yes.

Question 3

If the answer to Question 1 is yes, are the game components collectables under subsection 108-10(2) of the ITAA 1997?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You have been acquiring cards with artworks that is specific to games and competitions in which the cards (game components) are used for a number of years, and you estimate that you acquired most of the game components for under $500.

You are not carrying on a business of buying and selling the game components.

However, between 20XX and 20XX you acquired a small number of the game components that were each individually worth more than $500 at the time. You acquired these game components through a number if means including trading a collection of smaller game components for some of them, winning some via playing in the relevant competitions, and the majority through private sale with people over the internet.

You only acquired all of the game components you owned in order to play in the relevant games and competitions, and not to sell the game components at a future date in order to make profit. As such you did not make any efforts to record exact purchase prices or specific dates you acquired the game components.

The value of expensive game components fluctuates and is heavily impacted by the exact condition of the individual game components. As such, it is very difficult to give an accurate estimate of the exact value of the game components when you acquired them.

In mid-20XX you sold the small number of game components that were each individually worth more than $500 at the time you acquired them for a significant amount to a company that specialises in buying and selling the game components. In the same transaction you also sold a high volume of other game components which all had a cost base of less than $500, with the combined sale proceeds being a significant amount.

None of the game components that were sold were sold as a set, and nor did any of them belong to a set.

You have no immediate plans to sell any of your other game components as you will be continuing to use them in future games and competitions.

You used the game components in the games and competitions which took place on a monthly basis, however not every game components was used at every event.

You chose to sell the game components in mid-20XX as you were not playing in the events as often as you used to do.

You owned the physical copies of the game components, however the ownership of rights and content of the game components sat with the creator.

When you weren't using the game components in the games and competitions, they were stored in boxes at your house.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-5(1)

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 108-20

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

Income Tax Assessment Act 1997 Section 109-5

Income Tax Assessment Act 1997 Subsection 118-10(1)

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

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Question 1

Summary

The sale of the game components is capital in nature.

You have only sold the game components recently via the one sale transaction, and you have no immediate plans to sell any of your other game components as you will be using them in future games and competitions, therefore the activity will not possess the necessary elements of periodicity, recurrence or regularity that are common to receipts of revenue.

Further, the sale of the game components will not constitute income from the provision of personal services and are not derived directly from a business activity.

As such any income you receive from the sale of the game components will not be assessable as ordinary income and you will not be entitled to a deduction for related expenses. Any gains will be dealt with under the Capital Gains Tax (CGT) provisions.

Detailed reasoning

Subsection 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states that your assessable income includes income according to ordinary concepts. This ordinary income includes amongst other things, income from salary and wages and business operations.

Section 8-1 of the ITAA 1997 allows you to claim a deduction for a loss or outgoing that is incurred in gaining or producing your assessable income, or necessarily incurred in carrying on a business to gain or produce assessable income. These deductions are limited by the exclusion of losses or outgoings that are capital, private or domestic in nature.

Subsection 6-10(2) of the ITAA 1997 states that if you receive amounts that are not ordinary income they may be included in your assessable income as statutory income.

A list of what constitutes statutory income is provided under section 10-5 of the ITAA 1997 which includes capital gains as a source of statutory income.

Revenue vs Capital

There are three ways profits from the game components can be treated for taxation purposes:

1. As ordinary income under section 6-5, on revenue account, as a result of carrying on a business; or

2. As ordinary income under section 6-5, on revenue account, as a result of an isolated business transaction entered into by a non-business taxpayer, or outside the ordinary course of business of a taxpayer carrying on a business, which is the commercial exploitation of an asset acquired for a profit making purpose; or

3. As statutory income under the capital gains tax legislation.

Are you carrying on business?

You have advised that you are not carrying on a business of buying and selling the game components. As such the receipts from the sale of the game components are not assessable under subsection 6-5(1) of the ITAA 1997 as a result of carrying on a business.

Profit making Undertaking or Plan

Profits arising from the carrying on or carrying out of a profit-making undertaking or plan is assessable income according to Section 6-5 ITAA 1997.

We look at Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income states that a profit from an isolated transaction is generally income when both of the following elements are present

a) The intention was to make a profit or gain, and

b) It was entered into and a profit was made in the course of carrying out a business operation or commercial transaction

While not necessarily the sole intention, the activity must have profit-making as a significant purpose.

In your case, you only acquired all of the game components you owned in order to play in the games and competitions, and not to sell the game components at a future date in order to make profit, and the reason for selling the game components was only due to the fact that you were not playing in the events as often as you used to do.

Therefore, your activities do not amount to carrying on a business and that any amounts received on the sale of the game components will not be the result of a profit-making undertaking or plan.

As such, any gains from the sale of the game components will be dealt with under the CGT provisions.

Capital Account

The basic CGT provisions are contained in Part 3-1 of the ITAA 1997. Broadly, these provisions include in your assessable income any assessable gain made when a CGT event happens to a CGT asset that you own (to the extent they are not reduced by capital losses).

A CGT asset is any kind of property or a legal or equitable right that is not property. The game components are CGT assets. CGT event A1 under section 104-10 happens if you dispose a CGT asset. You make a capital gain if your capital proceeds exceed the CGT asset's cost base.

In your case and as noted above the gain from the sale of game components will not be realised on revenue account and the gain is only assessable under Part 3-1 ITAA 1997 (the CGT provisions).

Division 108 of ITAA 1997 defines the various categories of assets that are relevant to working out a taxpayer's capital gains and losses.

It is important to classify CGT assets into their relevant categories as special rules apply to each. The relevant categories of assets in Division 108 are:

•         CGT assets

•         Collectables

•         Personal use assets.

Each CGT asset needs to be classified into one of the three categories because special rules apply to personal use assets and collectables.

Question 2

Summary

The game components are personal use assets.

Detailed reasoning

Section 108-20 ITAA 1997 says that Personal use assets are CGT assets, other than collectables, that are used or kept mainly for the personal use or enjoyment of you or your associates.

When the CGT provisions of the ITAA 1936 were enacted, the following kinds of property were given as being examples of personal use assets - clothing, white goods, furniture, sporting equipment, cameras and boats.

Sets of personal use assets

Section 108-25 of the ITAA 1997 provides that where you dispose of personal use assets individually that are part of a set and would ordinarily be disposed of as part of a set, the exemption contained in section 118-10 of the ITAA 1997 will only apply where the set was acquired for less than $10,000.

Mainly used or kept

ATO Interpretative Decision ATO ID 2002/795 - Are unused marble floor tiles 'personal use assets' as defined in subsection 108-20(2) of the Income Tax Assessment Act 1997 (ITAA 1997)? states it does not matter if the assets are actually used for the purpose for which they had acquired, it is the intent of the purchase and the purpose for which an asset is mainly kept that is key to if an asset is a "personal use" asset.

ATO ID 2002/795 defines mainly as meaning predominantly, chiefly, principally, or for the most part.

Personal use or Enjoyment

An asset has to provide an individual with a source of pleasure or relate directly to that individual to be a "personal use" asset.

An asset cannot be a personal use asset if it is mainly acquired, kept or used as an investment, or as part of a business or for a profit-making purpose. The categories are mutually exclusive.

Taxation Determination TD 2014/26 Income tax: is bitcoin a 'CGT asset' for the purposes of subsection 108-5(1) of the Income Tax Assessment Act 1997? provides guidance on whether an asset is kept or used mainly for your personal use or enjoyment, and the following paragraphs (19,20 and 21) from TD 2014/26 are relevant:

19. Bitcoin that is kept or used mainly to make purchases of items for personal use or consumption ordinarily will be kept or used mainly for personal use. Bitcoin that is kept or used mainly for the purpose of profit-making or investment, or to facilitate purchases or sales in the course of carrying on business is not used or kept mainly for personal use. Other categories of use conceivably could exist; taxpayers in these cases should seek private rulings.

20. An example of where bitcoin would be considered to be a personal use asset is

where an individual taxpayer purchased bitcoin from a Bitcoin exchange and uses the bitcoin to make online purchases for their personal needs, for example clothing or music. If the bitcoin were instead purchased to facilitate the purchase of income producing investments, they would not be personal use assets.

21. Another example of where bitcoin would not be a personal use asset is where an individual taxpayer mines bitcoin and keeps those bitcoin for a number of years with the intention of selling them at opportune times based on favourable rates of exchange.

Timing

Generally, the relevant time for determining whether or not an asset is a personal use asset is at the time of its disposal.

Application to your circumstances

In your case, you only acquired all the game components you owned in order to play in the relevant games and competitions, and not to sell the game components at a future date in order to make profit.

As such, when you initially acquired the game components you had no intention of selling them, given your initial motivation for acquiring them.

You used the game components in the games and competitions which took place on a monthly basis, however not every game component was used at every event.

You then chose to sell the game components as you were not playing in the events as often as you used to do.

When you weren't using the game components in the games and competitions, they were stored in boxes at your house.

The definition of a personal use asset also has regard to the purpose for which an asset is kept. In your case you only acquired all the game components you owned in order to play in the games and competitions.

Despite the fact that you have held the game components that have now been sold for a number of years, your overall circumstances demonstrates that the game components have been held 'mainly' for personal use, given the fact that they were all originally acquired for this purpose (in reference to paragraph 19 of TD 2014/26).

In addition, the only reason that you sold the game components in mid-2021 was because you were no longer playing in the events as often as you used to do.

In addition, when the CGT provisions of the ITAA 1936 were enacted, the following kinds of property were given as being examples of personal use assets - clothing, white goods, furniture, sporting equipment, cameras and boats. The game components you sold were used for your own recreational purposes.

As such, the game components can be classed as assets that are similar to these types of assets and able to provide similar sorts of benefits to holders of these types of assets.

These factors above override the fact that the game components can potentially also be viewed as an asset that has some potential for increases in value over time, which is dependent on the physical condition of the game components.

As such your game components are personal use assets as defined in subsection 108-20(2) of the ITAA 1997 and therefore the exemption for personal use assets in subsection 118-10(3) of the ITAA 1997 will apply to disregard any capital gains derived by you upon the disposal of the game components where they had a CGT cost base of less than $10,000 (for each individual game component), or if the game components were part of a set (i.e. if the game components sold were acquired as a set and not individually), this exemption would only apply where the set was acquired for less than $10,000.

However, as subsection 108-20(2) of the ITAA 1997 provides that a personal use asset is a CGT asset (except a collectable), we now need to examine whether the game components are also defined as collectables.

Question 3

Summary

The game components are not collectables. They are not specifically included in the relevant list of items that are defined as collectables in the applicable tax legislation.

Detailed reasoning

A collectable is defined in subsection 108-10(2) of the ITAA 1997 as:

(a) artwork, jewellery, an antique or a coin or medallion; or

(b) a rare folio, manuscript or book; or

(c) a postage stamp or first day cover.

In addition, for an item to be a collectable it must be used or kept mainly for (or your associate's) personal use or enjoyment. This means that the collectable must also be classed as a 'personal use asset' in order to be defined as a 'collectable', and in your case (as noted above) the game components are classed as 'personal use assets'.

Section 118-15 of the ITAA 1997 goes further to explain that collections acquired in sets for $500 or less are also exempt from capital gains tax.

Exemption for low-cost collectables

Subsection 118-10(1) of the ITAA 1997 disregards a capital gain or capital loss from collectables which were acquired for $500 or less.

Furthermore, a capital gain or capital loss made from an interest in a collectable is disregarded if its market value when acquired was $500 or less.

It is important to note that the list in subsection 108-10(2) of the ITAA 1997 is complete and exhaustive. For an asset to be a collectable it must be a kind falling within this specified list.

The game components are not included in the list of items defined as a collectable in subsection 108-10(2) of the ITAA 1997. When examining this list of items, 'artwork' would be most applicable to the gaming components as they possess distinct artistic expression.

'Artwork' is defined in section 995-1 of the ITAA 1997 as meaning:

(a) a painting, sculpture, drawing, engraving or photograph; or

(b) a reproduction of such a thing; or

(c) property of a similar description or use.

Whilst the game components do indicate qualities of 'artwork', and some are considered 'rare' (insofar as to their availability, and difficulties to source and acquire them), the intrinsic value appears not in the artwork itself but primarily in their use in competitions. The game components are primarily used in games and competitions, and they incidentally possess distinct artwork.

In addition, none of the other categories contained in subsection 108-10(2) of the ITAA are applicable when determining whether the game components are collectables.

As such, your game components are not collectables.

Conclusion

Given the fact your game components are not collectables, along with the fact that each of the game components sold are personal use assets, the exemption for personal use assets in subsection 118-10(3) of the ITAA 1997 would apply to disregard any capital gains derived by you upon the disposal of the game components where they have a CGT cost base of less than $10,000 (for each individual game component), or where the game components were part of a set, where the set was acquired for less than $10,000.