Tax Law: Case Studies on CGT Assets and Liability

This article discusses four case studies related to CGT assets and liability under tax law. The cases cover jewellery, second-hand car, shares in BHP, and home. Each case explains the classification of the asset, its liability for CGT, and the applicable exemptions. The article also cites relevant sections of the Income Tax Assessment Act of 1997 and ATO ID 2002/691 to support the explanations.

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TAX LAW
CASE – A: Jewellery Costing $5,000
Case Study
Any piece of Jewellery which a taxpayer acquires as a choice of personal use is termed
as “Collectable” under Section 108-10(2) of Income Tax Assessment Act of 1997
(ITAA, 1997), says Barkoczy, (2015).
As per this section, a personal use item is classified as a collectable if it satisfies any one
of the following definitions –
(a) An artwork, a piece of jewellery, an antique, a coin (including collection of
coins) or a medallion;
(b) A rare folio, manuscript or book or collection of any of these;
(c) A postage stamp or a first day cover.
Provided these items are either used mainly by the taxpayer for own or spouse/
associate's personal enjoyment or use, asserts Barkoczy, (2013).
The main issue of concern in this case is whether the engagement ring, which is worth
$5000, is to be considered as a personal use CGT Asset or as a collectable CGT Asset as
described under s100-10(2) and s108-10(2) of ITAA, 1997. To qualify for Collectable
Item, an asset must satisfy the following two limbs of the law –
 The CGT asset should be used for personal pleasure and use.
 The CGT Asset must have a “unique listing” signifying its artistic, historical or
special significance to the owner.
It is also to be ascertained what will be the treatment given to any capital gain or loss in
case the item is disposed-off as described in ss 100-10(2) and 108-10(2) of ITAA, 1997.
If the purchase cost of the collectable CGT Asset is less than $500, then it will treated as
an Exempt Item from any Capital Gains Tax liability when the owner disposes it off, as
per Nethercott, Devos & Richardson, (2010).

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However, if a CGT asset is purchased or acquired for trading or investment purpose, it
will not be treated as a collectable item for the purpose of determining the liability of
Capital Gains Tax. As explained above, CGT is applicable on all collectables having
value less than $500 only are exempt from capital gains tax and are also eligible for
claim of losses, assert Ault, Arnold & Gest, (2010). Another factor which the taxpayer
has to consider is that while calculating the cost basis of a collectable CGT Asset, one
cannot include any non-capital costs as explained under s 108-17 of ITAA, 1997. All
capital losses on an eligible collectable CGT Asset are allowed to be offset against
future capital gains on collectables only as explained under s108-10(1) & (4) of ITAA,
1997, explains Deutsch et al, (2011).
Conclusion
Hence, in the present case study, the engagement ring will be considered as a collectable
piece of jewellery, but in case it is disposed-off by the owner, it will be subjected to the
effects of capital gain or loss as the cost ($5,000) of the ring is above the threshold limit
of $500 set under the CGT Law. In conclusion it can be testified that the engagement
ring in this case study is a collectable CGT Asset and any capital gain/loss from its sale
will be subjected to a CGT liability, as detailed by Deutsch et al, (2011).
CASE – B: Second-hand Car Purchased for $3,000
Case Study
As explained under s 108-5(1) of ITAA, 1997, all types of property, whether movable
or immovable, including vehicles, land, buildings or shares of a company are considered
as CGT Assets. The law does not consider the ownership status on the basis of age of
the CGT Asset which is being considered for CGT liability purposes. Hence, even a
second hand car will be subjected to the same provisions of the law as a new car bought
first hand by the taxpayer, asserts Barkoczy, (2011).
As per Division 118-100 of ITAA, 1997, an exemption from CGT liability applies for
all types of motor vehicles provided they are put to personal use by the taxpayer. The
exemption is available irrespective of the year in which they were produced, or have
been acquired. Exemption ceases when the vehicle is used for income generating
purposes, such as in carrying passengers or it is of a type which cannot be normally

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used as a personal use vehicle, such as large capacity trucks, dumpers and excavators,
says Barkoczy, (2013).
Normal motor cars, which can be used for personal benefits are, therefore, exempt from
Capital Gains Tax (CGT). This also includes all types of vintage cars. The different
types of cars which are not included in the exemption list are –
 Racing Cars
 Taxi Cabs
 Single Seater Sports Cars
 Vans, Lorries and similar Commercial Vehicles
 Motor Cycles or Scooters with Sidecar attachments
Conclusion
However, even if a motor vehicle has not been included in the CGT-exempt list, a
passenger car is nonetheless can be categorized under the list of ‘machinery’ for CGT
liability purposes and therefore, can be treated as a wasting asset under ‘machinery’
exemptions. In such cases also, the disposal of such vehicles will give rise to a Capital
Gains Tax (CGT) where the owner has been availing the benefits of the tax allowances
or the vehicle was being used for income producing activities and the owner had been
claiming depreciation as part of the business use of the vehicle, as per Barkoczy, (2015).
CASE – C: Shares in BHP
Case Study
According to Subdivision 104-G of ITAA, 1997, the shares of BHP purchased by the
taxpayer are a CGT Asset and cannot be treated either as a collectable or as a personal
use asset. All assets purchased or acquired by a taxpayer, after September 20, 1985, are
to be classified as CGT Assets and will be subjected to CGT as explained under s 108-
5(1) of ITAA, 1997. All types of property, whether movable or immovable, including
vehicles, land, buildings or shares of a company are considered as CGT Assets. Based
on this classification, the shares of BHP acquired by the taxpayer will be considered as a
CGT Asset, asserts Barkoczy et al, (2010).
Under Subdivision 104-G of ITAA, 1997, if the shares are sold or compensated by the
holding company, the transaction under s104-135(1) is termed as CGT event G1. It is

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not considered as disposal of a CGT Asset under CGT Event A1. It is also not covered
under CGT Event C2 which pertains to disposal/transfer of shares, as per CCH, (2015).
Both the events, A1 and C2 are applicable for disposal/transfer of the right to ownership
of shares, whereas when a company buys shares from the taxpayer, the taxpayer is paid
a compensation, which is neither a part of the taxpayer’s assessable income nor it is a
dividend paid by the company. In fact, CGT Event G1 is considered similar to return of
capital, says Cassidy, (2007). Hence, if this non-assessable amount received by the
taxpayer is more than the cost base, a capital gain has taken place. However, the
taxpayer cannot claim a capital loss against its assessable income in case the
compensation received is less than the cost base of the shares, explains Marsden,
(2010).
Under Subdivision 104-G of ITAA, 1997, if the value of the shares becomes zero or
they are no longer traded on the stock exchange, then as per s104-145(1) of ITAA,
1997, CGT Event G3 happens and the taxpayer can claim liquidation as the
administrator classifies the shares as worthless, as per Renton, (2012). Similarly as per s
104-145(4)&(5), if the cost base is less than the market value of the shares, the taxpayer
can declare their value as nil and the shares are treated as non-existent, as per CCH,
(2015). However, in cases where the shares had been acquired before 20 September
1985, the taxpayer cannot claim a loss as detailed under s 104-145(6) of ITAA, 1997 or
if it the acquisition falls under an ESS interest as explained in s 104-145(7) of ITAA,
1997, says Barkoczy, (2015).
Conclusion
In cases where the shares are traded as part of a regular business and a share trading
transaction is occurring, these are not subjected to CGT liability. In fact, such trading
profits are subjected to ordinary income tax laws. Hence, in the present case study, it
has to be ascertained whether CGT Event G1 or G3 took place and accordingly the
liability of the taxpayer will be fixed. If it is not covered by either of these two events,
the sale of BHP shares will be processed as disposal of a CGT asset and CGT Event A1
will be considered, as per Barkoczy, (2015).
CASE – D: Home
Case Study

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A home is neither a personal use CGT Asset nor a collectable CGT Asset, but is simply
a CGT Asset. If it is used as by the taxpayer as his main residence then it is not
subjected to any CGT liability when disposed-off. As per the CGT laws, assets such as
home, vehicle and others which are used only for personal purposes, such as home
furniture and essentials are treated as exempt from CGT liabilities of the taxpayer
provided they are not used for any income producing activities by the taxpayer.
However, a house or land or a building or furniture are to be considered as CGT Asset if
it is used either as a place of business or the items are used for business purposes and
their sale will be subjected to CGT, as per Barkoczy, (2013).
Main residence of a taxpayer has these requisites as per taxation laws –
 the taxpayer and his family have been living in it;
 the taxpayer is the owner of the personal stuff used in the home;
 it is the registered mail address of the taxpayer;
 the taxpayer is a registered voter at the address where the home is located; and
 the taxpayer has contracts of utility services used in the home.
As per Division 118-100 of ITAA, 1997, the main residence of the taxpayer, including
the adjoining land, is not to be subjected to CGT, provided the land is not more than two
hectares as explained under s118-120(3) of ITAA, 1997, assert Barkoczy et al, (2010).
In cases where the home and its adjoining land is partially used for income generating
purposes, pro-rata basis is applicable for usage as main residence. Similarly, if the
adjoining land is above 2 hectares, the excess part of the land is subject to CGT liability,
explain Alexander & Fogarty, (2009). However, the Australian Taxation Office (ATO)
may grant partial exemption in cases where the home was fully used by the taxpayer as
main residence for a long period of time. In cases where the main residence is inherited
by the taxpayer, the application of CGT event will be decided from the acquisition date,
as per Marsden, (2010). In case the inheritance date is before 20 September 1985, the
taxpayer will be granted full exemption from any CGT liability. In case the main
residence is acquired or inherited after 20 September 1985, it will be granted full
exemption from CGT liability provided it was granted the two-year extension in time
period by the Commissioner, assert Ault, Arnold & Gest, (2010).

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If, after the death the previous owner, the taxpayer does not use the main residence for
any income earning activities and it is used as the main residence by the survivor or the
spouse, who has established his/her legal rights on the home and is declared as the
beneficiary, the survivor/spouse shall continue to take the benefits of exemption
provided under law, as per Nethercott, Devos & Richardson, (2010).
Conclusion
The above stated explanations and case laws can be better understood by the example
cited in ATO ID 2002/691. In this case, the taxpayer disposed-off the main residence by
triggering CGT Event A1, where the adjoining land was more than 2 hectares. The ATO
exempted the taxpayer from paying any tax on the sale of the main residence by
including up to 2 hectare of the adjoining land, explains Renton, (2012). The excess
land, above the 2 hectare threshold, was apportioned for CGT liability accordingly and
capital gain was levied.
In the above taken example under ATO ID 2002/691, the home was a CGT Asset and
accordingly was exempt from CGT liability being the proven main residence of the
taxpayer. To fit the requisites as stated above, the home was built on land admeasuring
more than 2 hectares, and hence, as per the law was subjected to a pro-rata
apportionment of the area for levying the liability of payment of capital gain tax by the
taxpayer. However, if the home was determined as not being used as a main residence
by the taxpayer, then all the gain which arises from the disposal of the CGT Asset will
be subjected to CGT liability, as put by Renton, (2012); Barkoczy, (2015).
REFERENCE LIST (Harvard)
Alexander, Dr. R. and Fogarty, H. J. 2009. Australian Master Family Law Guide, 3rd ed.
CCH Australia Limited, Sydney, NSW.
Ault, H. J., Arnold, B. J. and Gest, G. 2010. Comparative income taxation: a structural
analysis. 3rd ed. Kluwer Law International, The Netherlands.

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Barkoczy, S. 2011. Core tax legislation and study guide. CCH Australia Limited, North
Ryde, NSW.
Barkoczy, S. 2013. Foundations of Taxation Law 2012, 5th ed. CCH Australia Limited,
North Ryde, NSW.
Barkoczy, S. 2015. Australian Tax Case book, 12th ed. CCH Australia Limited, North
Ryde, NSW.
Barkoczy, S., Rider, C., Baring, J. and Bellamy, N. 2010. Australian tax casebook, 10th
ed. CCH Australia, North Ryde, NSW.
CCH. 2015. Australian Master Tax Guide 2015. CCH Australia Limited, Sydney, NSW.
Cassidy, J. 2007. Concise Income Tax, 4th ed. Federation Press, Annandale, NSW.
Deutsch, R., Friezer, M., Fullerton, I., Gibson, M., Hanley, P. and Snape, T. (2011)
Australian tax handbook. Thomson Reuters, Pyrmont, NSW.
Marsden, S. J. 2010. Australian Master Bookkeepers Guide, 3rd ed. CCH Australia
Limited, Sydney, NSW.
Nethercott, L., Devos, K. and Richardson, G. 2010. Australian taxation study manual:
questions and suggested solutions, 20th ed. CCH Australia Limited, Sydney, NSW.
Renton, N. E. 2012. Family Trusts: A Plain English Guide for Australian Families of
Average Means, 4th ed. John Wiley & Sons, Milton, QLD.