CGT assets, collectibles and personal use assets. Wether an item is CGT, collectibles and personal use assets PDF

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CGT Assets Capital gain tax is not a separate tax but a statutory tax which is calculated by income tax department upon selling/ disposing off a capital asset. Those assets that have longer life than one year and is not kept for sale in normal course of business are called capital assets. For example, if a business buys a telephone for official use then it is a capital asset but if the business buys a telephone for selling purpose it is not regarded as capital assets. Capital gains and capital losses only takes place if CGT event takes place. CGT occurs if a person disposes off a CGT assets. Change of ownership of assets is called disposal of assets[ CITATION Sad18 \l 1033 ]. Capital gain takes place if a person sells an asset for more amount compared to buying of assets and capital loss takes place if the person sells it for less than the amount for which he purchased the assets[ CITATION Kra18 \l 1033 ]. The total capital gain of a person is calculated by deducting capital losses from capital gains for the particular year. Capital losses can only be deducted from capital gains but not from assessable income. It can also be carried out in the future to deduct from future capital gains which means it can be rolled over to next year. For example, if a tax payer has a capital loss of $700 it can be rolled over to next year for deducting it from the following years capital gains. Some of the examples of CGT assets are land & buildings, shares of a company, foreign currency and debts which are owned to a tax payer. An item is not regarded as CGT assets if it is the main residence (own house), a vehicle which carries less than 9 passengers, personal use items which is less than $10,000, win or lose from gambling, compensation or damages received for different activities. Losses and gains made from buying and selling of assets before 20th September 1985 are generally exempted from tax.

Collectibles The definition of collectibles as subsection 108-10(2) of ITAA 1997 are those CGT assets which are kept for personal use or enjoyment. As per 108-10(2) ITAA artwork, jewellery, antiques, coins, manuscripts or books and postage stamps are regarded as collectibles. The definition of antique is that it should be artistic and around 100 years old. For example, if a jewellery is bought for investment purpose then it is not regarded as collectibles. For an item to be collectibles it has to be for personal use or enjoyment of the tax payer. Capital gains and losses are disregarded if the collectible is bought for $500 or less. If a person incurs capital loss on collectibles, then it can be taken off from capital gains of any other collectibles as per subsection s108-10 (1) and (4)[ CITATION Sad18 \l 1033 ]. This is called quarantining rule. For example, if a person has a capital gain of $200 from collectible and $300 capital loss from collectibles. The other capital gain is $700. The net capital loss will be $100 since the capital gain of $700 cannot be used as it is not from collectible assets. But the $100 capital loss from collectibles can be rolled over to next year to deduct from capital gains of next year. If a tax payer owns a set of collectibles, then it is treated as a single collectible. For example, if a person buys three jewelleries for a total of $1200 ($400 each). However, the jewellery is taken as a single collectible. The person will not be exempted because she acquired the set of jewellery for more than $500. When finding out the cost base of a collectible, the cost of ownership is disregarded. Personal use Assets As per subsection s 108-20(2) of ITAA personal use assets are the assets bought mainly for the use and personal enjoyment of the tax payer other than collectibles. Personal use assets are a vehicle, household items, bike, television, mobile phone, a yacht for personal enjoyment and furniture. Personal use assets don’t include land and building and also

collectibles. If a personal use asset is bought it should be for the sole purpose of pleasure and not for business activities. If a capital gain is made from any personal use assets which has a base value of $10,000 or less, then it is disregarded. If a tax payer owns a set of personal use assets, then it is treated as a single personal use asset. One of the most important thing about personal use asset is that capital loss from it is always disregarded. It means that the tax payer cannot reduce capital loss from personal use assets to reduce capital gains from the sale of other personal use assets. When finding out the cost base of a personal use assets, the cost of ownership is disregarded.

(a) A jewellery costs $5000- Jewelleries are decorative item worn like necklace, bracelets and rings. Falling in these three categories depends on whether the jewellery is bought for the purpose of business or for the purpose of personal enjoyment. If it is for the purpose of personal enjoyment, then it falls under collectibles as per subsection 108-10(2) of ITAA 1997[ CITATION Sad18 \l 1033 ]. If it is for business, then it is not counted as collectibles. Jewelleries are generally kept for personal use and enjoyment hence making them collectibles[ CITATION Tay18 \l 1033 ]. Since the cost of the jewellery is more than $500 capital gain from this item is not exempted. This means capital gains from the sale of this jewellery is added for tax purposes since it cost $5000. According in ITAA 1997 subsection 108-110 collectible assets are disregarded for tax purposes if they have a value less than $500 but in this case the value of jewellery is a lot i.e. $5000. If a person makes capital gain from selling this asset, then she/he has to pay capital gain tax.

(b) A second-hand car purchased for $3000- A second hand car is generally purchased for own use by a tax payer. The category in which vehicle falls depends on the purpose for which the vehicle is purchased. If a tax payer buys a second hand car for his/her own use, then it falls under personal use assets since it is for the personal use or enjoyment of tax payer and his/her associates. If the vehicle is for business purpose that is buying and selling of vehicles, then it is not a personal use asset. Capital gains and capital losses from selling this vehicle is disregarded in terms of CGT subsection 118-5 of ITTA 1997 as it is a personal use asse[ CITATION Sad18 \l 1033 ]t. A car is a CGT asset under division 108. If a car is an antique, it can be a collectible asset as of section 108-10(2). As explained earlier antique is any artistic item of high value which may be 100 years old. Even if the vehicle is an antique, veteran or a vintage car, the capital gains and capital losses from the car is not disregarded as it falls under collectible assets. The definition of a car according to ITTA is a machine that can carry less than nine people and travel distances. Capital loss from vehicle is disregarded as it is a personal use assets and personal use assets capital loss is disregarded. (c) Shares in BHP – BHP is a multinational company which has its headquarters in Melbourne. Shares in a company are treated as any other assets for capital gain tax purposes. If a person buys a share in BHP, then it is a CGT asset. Because CGT asset include land & buildings, shares of a company, foreign currency and debts. A lot of people these days make capital gains by buying and selling shares, investing in real estates. Shares are the most common CGT assets. However, if a person regularly buys and sell shares which means if it is his/her job to trade shares, then gains and losses from this activity is treated as ordinary income rather than capital gain tax.

Sometimes it may be hard to determine whether a shareholder is investor or carrying on a share trading business. If a person buys a share for the sole purpose of earning income from dividends and receipts and not wholly carrying on share trading, then he is regarded as an investor and is entitled to pay capital gain tax[ CITATION Aus18 \l 1033 ]. If a share of a company was bought before 20 th September 1985 then capital gains or capital losses from selling the shares is disregarded. But if the shares are in relation to pooled development fund (PDF) then capital gains and losses are disregarded. Let us consider the shares are for investing purpose, then it is CGT asset. If there is a capital loss from shares it can be deducted from capital gains of other capital gain tax assets. If there are no capital gain tax assets, then it can be rolled over and deducted from next year capital gains if any.

(d) Your Home-It is exempted from CGT. For the exemption to be valid, the property owner must live in it. It shouldn’t be empty. A house is regarded as personal if the property owner/family live in it, mails get delivered in that address, other belongings of the property owner is inside the house and if gas and power are connected. One person cannot hold more than one house. But if a person is buying a new house then she/he can treat both his/her new and old house as main residence for up to six months of time. If done, then the other house will not be exempted CGT when CGT event takes place[ CITATION Sad18 \l 1033 ]. Foreign residents are not eligible to claim for main residence exemption. The main residence test cannot be determined by only one factor but it depends on various factors like length of stay, intention of stay and number of people living. Full main residence exemption is given if the house is in a land of two hectares or less, if it has been a place of residence for the tax payer

and his/her family for the whole time they have owned it and if doesn’t generate any assessable income. If full exemption is given to any tax payer, then she/he doesn’t have to pay taxes on capital gains nor can she/he deduct capital loss from the income. If a tax payer is seen renting rooms or generating any kind of assessable income from the house, then full exemption of main residence is not provided.

So depending on the nature of the assets, the above four different assets falls under different category which is capital gain tax asset, collectibles and personal use assets. If shares are bought by people who trade shares regularly then it is income and not capital gains. Whereas if people invest in shares not with the intent of doing share business then there is capital gain tax. Also with car, if it bought for business, then it is a part of income whereas if it bought for personal use it falls under personal use assets. Likewise, capital gains and capital loss from gambling and other type of activities is disregarded. But if gambling is a part of business then it is does not fall under capital gain tax. This basically explains whether a receipt from different activity is income or capital. Depending on the nature the above falls in these two categories. Tax payers are affected by capital gains and losses since capital gains are added to the income and capital losses are taken off from capital gains[ CITATION Kra18 \l 1033 ]. Based on the net amount from this two activities tax payable amount by an individual is determined.

REFRENCES Anon., 2018. Australian taxation office. [Online] Available at: https://www.ato.gov.au/general/capital-gains-tax/cgt-assets-and-exemptions/ [Accessed 20 09 2018]. Krause, M. V., 2018. Effects of a capital gains tax on asset pricing. Business research, 11(1), pp. 115-148. Sadiq, K. et al., 2018. Capital Gains Tax. In: K. Sadiq, ed. Principles of Taxation Law. Sydney: Thomson Reuters, pp. 1-913. Taylor, A., 2018. The long-term returns from collectibles. [Online] Available at: https://www.economist.com/finance-and-economics/2018/02/22/the-longterm-returns-from-collectibles [Accessed 20 09 2018]....