Tax Law: Case Studies on CGT Assets and Liability

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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