Asset Classification under Australian Taxation Law - A Report

This report provides a detailed analysis of asset classification under Australian taxation law, focusing on the distinctions between Capital Gains Tax (CGT) assets, collectibles, and personal assets. It examines specific scenarios, including an engagement ring, BHP shares, and a residential property, to illustrate the application of Sections 108 and 118 of the Income Tax Assessment Act 1977 (ITAA 1977). The report concludes that the engagement ring is classified as a personal asset due to its value and intended use, while the BHP shares and the home are categorized as CGT assets. The classification guides taxpayers in determining the appropriate tax treatment for their assets, ensuring accurate tax returns and financial record-keeping. The report references key sources in Australian taxation law to support its analysis and conclusions.

Taxation Law
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Contents
Introduction...........................................................................................................................................2
(a) An engagement ring which costs $5,000...................................................................................2
(b) Shares in BHP.............................................................................................................................3
(c) Your home.................................................................................................................................3
Conclusion.............................................................................................................................................4
References.............................................................................................................................................5
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Introduction
Under Australian taxation system, the assets are classified in6to various categories for
determining the taxability or tax treatment of such assets. There are some fixed assets held by
an individual taxpayer or a company or any other taxpayer which were purchased and are
held for personal or business use. When such assets are sold the owner might incur profit or
loss on sale and such profit will be considered as the income of the taxpayer which will be
taxable. Such types of assets are known as capital assets and the profit or loss on sale of such
assets is capital gain or loss. Similarly there are certain assets which are held by the taxpayer
out of his hobby, passion or for some other reason and are not generally sold. Such assets are
classified as collectables. Also there are some other assets which are kept only for personal
use by the taxpayer and are the personal assets. The discussion of classification of three
different assets in these categories is included in this report under the approach which defines
the issue, specifies the law applicable, application of the legal principle or law and the
conclusion of the case.
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(a) An engagement ring which costs $5,000
The issue is the classification of an engagement ring costing $5,000 as collectable, personal
asset or CGT asset. This relates to determining the nature of the ring so as to ascertain the tax
treatment of the ring for the owner who is the taxpayer. As per the provisions of Section 118
of ITAA 1977, jewellery is considered as the collectable as far as investment for the purchase
of jewellery is made only for the purpose of retaining the same for retirement and not to be
used for any benefit at present. Also the CGT assets which have a cost or value less than
$10,000 are in any case regarded as the personal assets of the taxpayer. The engagement ring
has been purchased by the taxpayer for present day benefit since it has to be worn at
engagement day and afterwards. Therefore, this asset is for current use rather than for
retention and thus, cannot be regarded as collectible under section 118 of ITAA 1977. Now,
the cost of engagement ring is $5,000 which is lesser then the limit of /410,000 and therefore
it cannot be classified as the CGT asset. Hence the ring will be the personal asset for the
taxpayer (Mariotti, et.al, 2015). It can be concluded that the engagement ring with the cost of
$5,000 will be regarded as the personal asset since the ring has a low value which exempts it
from being the CGT asset and the ring is not for retention to be used in retirement or held as
investment which prevents it from being the collectible.
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(b) Shares in BHP
The issue for the share held by the taxpayer in BHP is that whether the shares will be
classified as CGT assets on which the profit is taxable as capital gain, collectible which is
held for retention till retirement or as a personal asset which is currently used by the owner.
As per Section 108 of Income Tax Assessment Act 1977, a CGT asset is defined as any kind
of property which is held by the owner or any legal or equitable right owned. Also this
section provides examples of type of assets which are specifically regarded as CGT assets.
These examples include land, buildings, shares held in a company or a trust, units held in a
trust, options in derivatives, debts owed to the taxpayer, any right enforced upon the taxpayer,
any contractual obligation and foreign currency. The shares held in BHP are the shares of a
company held by the owner and therefore these shares will be included in the examples of
CGT assets. Therefore shares in BHP will be classified as CGT assets. These shares cannot
be regarded as collectibles since they are neither included in the list of assets classified as
collectible by Section 118 of ITAA 1977 nor held for retirement rather used for earning
dividends and similarly they cannot be regarded as personal assets since they are not held for
personal use currently but will be used in future for earning profit from selling (Lustig, 2014).
It can be concluded that BHP shares are CGT assets for the owner of such shares issued by
BHP. When the owner of such shares will sell these shares in the market, he will incur capital
gain in the form of profit and capital loss in the form of loss.
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(c) Your home
The issue is that the residential property or the house in which the taxpayer lives will be
classified as collectible, personal asset or CGT asset. A collectible is an asset including
artwork, jewellery, vehicles, boats and wine in which the investment is made by the owner
for holding the asset genuinely for the purpose of retirement rather than for use at present as
defined under Section 118 of ITAA 1977. A personal asset is defined as the asset which is
purchased and used for incurring present day benefits by the taxpayer or the owner. As per
Section 108 of ITAA 1977, CGT asset is any property or any right and it includes land and
buildings. The home which is owned by a taxpayer is a building which is included in the
examples of CGT assets specified in Section 108 of ITAA 1977. In this way the home of the
taxpayer will be regarded as the CGT asset. It will be not regarded as personal asset since it is
specifically covered under CGT asset by Income Tax Assessment Act 1977 and will
definitely have a high value not exempting it from being the CGT asset (Clark, 2014). Apart
from this is not covered under the list of collectibles specified in the Act; however it will be
held till the retirement of the taxpayer but will also be used for present day benefit and will be
used continuously thereafter. Thus, it can be concluded that the residential property of the
taxpayer is considered as the CGT asset since it is included in the examples of CGT assets
mentioned in the ITAA 1977.
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Conclusion
From the discussion of the classification of assets of the taxpayer into three different
categories specified under tax provisions including collectibles, personal assets and CGT
assets, it can be concluded that the engagement ring which costs $5,000 is considered as
personal asset whereas the other two assets shares in BHP and home of the taxpayer will be
considered as the CGT asset for tax purposes. It can be further concluded that the
classification has been made in accordance with the provisions of Section 118 and Section
108 of Income Tax Assessment Act 1977. It can also be concluded that the classification of
assets into the CGT asset or collectibles or personal assets help the taxpayer in determining
the tax treatment which has to be made for the asset in preparing his tax returns or recording
in his books of accounts. This, the classification of all the assets owned by the taxpayer shall
be done for proper tax treatment of the assets owned by the taxpayer.
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References
Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2012. Australian taxation
law. CCH Australia.
Clark, J., 2014. Capital gains tax: historical trends and forecasting frameworks. Economic
Round-up, (2), p.35.
Mariotti, F., Mumford, K. and Pena‐Boquete, Y., 2015. Household Asset‐Holding
Diversification in Australia. Australian Economic Review, 48(1), pp.43-64.
Lustig, Y., 2014. The Investment Assets Handbook: A definitive practical guide to asset
classes. Harriman House Limited.
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