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HowtoMaximiseCGTCostBases
byGordonThring,Coopers&Lybrand
ReleasedMarch1998
1.0Overview
The"costbase"ofanassetformsafundamentalstepindeterminingwhetherataxpayerhasderivedacapital
gainorincurredacapitallossfollowingthedisposalofanasset.Initssimplestformataxablegainiscalculated
asthedifferencebetweentheamountyoureceiveupondisposal("disposalconsideration")andthecosttoyouof
theasset("costbase"),indexedforinflation.Similarlyacapitallossiscalculatedasthedifferencebetweenthe
amountyoupaid("costbase")andtheamountyoureceiveupondisposal("disposalconsideration").
Indeterminingtheamountofacapitalgainorcapitalloss,section160ZoftheIncomeTaxAssessmentAct
1936("the1936Act")requiresthetaxpayertocomparetheconsiderationreceivedonthedisposalofanasset
withtheasset'scostbase.Generally,acapitalgainwillarisewherethedisposalconsiderationexceedsthe"cost
base"(or"indexedcostbase"wheretheassetwasheldforgreaterthan12months).Alternatively,acapitalloss
willarisewherethe"reducedcostbase"exceedsthedisposalconsideration.
1.1Costbase:components
ForCGTpurposesanasset'scostgenerallycomprisesofexpenditureincurredatthetimeofacquisition,
throughouttheperiodofownershipandatthetimeofdisposal.
Section160ZH(1)ofthe1936Actdefinestheterm"costbase"asthesumofthefollowingcomponents:
(a)theamountofanyconsiderationinrespectoftheacquisitionoftheasset
(b)theamountoftheincidentalcoststothetaxpayeroftheacquisitionoftheasset
(ba)theamountofthenoncapitalcoststothetaxpayeroftheofownershipoftheasset(except
wheretheassetisapersonaluseassetofthetaxpayer)
(c)theamountofanyexpenditureofacapitalnatureincurredbythetaxpayertotheextentto
whichitwasincurredforthepurposeofenhancingthevalueoftheassetandisreflectedinthestate
ornatureoftheassetatthetimeofdisposaloftheasset
(d)theamountofanyexpenditureofacapitalnatureincurredbythetaxpayertotheextentto
whichitwasincurredinestablishing,preservingordefendingthetaxpayer'stitleto,orarightover,
theassetand
(e)theamountoftheincidentalcoststothetaxpayerofthedisposaloftheasset.
Notethatsection160ZHdoesnotrequiretherelevantexpendituretobecapitalexpenditure(thoughoftenitwill
be).
Eachoftheabovecomponentsareconsideredbelow.
(i)Acquisitionconsideration
Commonly,theprincipalcomponentofanasset'scostbaseis"theconsiderationinrespectoftheacquisitionof
anasset",ietheacquisitionconsideration.Section160ZH(4)oftheActdefinesthiscomponentascomprisingof:
anyamountoramountsofmonieswhichthetaxpayerhaspaidorisrequiredtopayinrespectofthe
acquisitionoftheassetand/or
themarketvalueofanypropertywhichthetaxpayerhasgivenorisrequiredtogiveinrespectofthe
acquisitionoftheasset.
Itshouldfirstbenotedthat"consideration"forCGTpurposesisnotthecontractlaw"consideration".Itisa
narrowerconceptof"money"or"property".Inthisrespect"acontractualpromise",whichiscontractlaw
considerationisunlikelytobe"property",andhenceconsiderationforsection160ZHpurposesseeTaxation
RulingTR95/3,para104to108.Byvirtueofsection160ZK(4),whereataxpayerisrequiredtopaymoneyorgive
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property,itincludesarequirementtopaymoneyorgivepropertyimmediatelyoratafuturedateandinthecase
ofmoney,eitherinalumpsumorbyinstalments.Accordingly,theacquisitionconsiderationwillincludeall
amountspayableinrespectoftheacquisitionoftheasset,withoutanydiscountforthetimevalueofmoney.This
matterisconsideredinfurtherdetailundertheheadingTimingofacquisition.
Anissuealsoarisesinrelationtotherequirementthatthetaxpayerhasgivenorisrequiredtogiveproperty.For
instanceistheissueofsharesbythepurchasercompanytothevendorinexchangeforassetsthe"giving"of
property,eventhoughtheshareswereneverownedbythepurchaser?Similarlyistheforgivenessofadebtowed
bythevendortothepurchasera"giving"ofpropertywhenthepropertyisbeingextinguished?Doesitmatterifa
debtisfirstcreatedandthensatisfiedbytheshareissueordebtforgiveness?
Whereataxpayeracquiresanassetwhichissubjecttoasecurity(egamortgage),section160S(2)oftheAct
requiresthatthefullamountoftheliabilityassumedformpartoftheconsiderationfortheacquisitionoftheasset
bythatperson.Forexample,whereapersonacquiresanassetfor$100,000,andalsoassumesaliabilityof
$50,000(egamortgage),thetotalacquisitionconsiderationwouldbe$150,000.
WhereanassetisconstructedorcreatedbythetaxpayertheCommissioner,inTaxationDeterminationTD60,is
oftheopinionthatnoamountcanbeimputedforthevalueoftheowner'slabour.
Acquisitionconsiderationdeemedmarketvalue
Incertaininstancestheacquisitionconsiderationwillbedeemed,undersection160ZH(9),toequalthemarket
valueofthatasset,beingwhere:
(a)Thereisnoconsideration
Section160ZH(9)(a)statesthatindeterminingthecostbaseofanasset,ataxpayerwillbedeemedtohavepaid
orgivenconsiderationequaltothemarketvalueoftheassetifthetaxpayeracquirestheassetfromanother
personanddoesnotpayorgiveanyconsiderationinrespectoftheacquisition.
Thereissomedoubtastowhetheracovenantorundertakingprovidedbythepersoninrespectoftheacquisition
ofanassetwouldamounttoconsideration.WeunderstandhoweverthattheATOareoftheopinionthattheterm
"consideration",inthecontextofsection160ZH(9)(a),shouldbelimitedto"moneyandotherproperty",andas
suchwouldnotextendtoincludeacovenantorundertaking.
(b)Theconsiderationcannotbevalued
Indeterminingthecostbaseofanasset,undersection160ZH(9)(b)ataxpayerwillbedeemedtohavepaidor
givenconsiderationequaltothemarketvalueoftheasset,ifthewholeorpartoftheconsideration"cannotbe
valued".However,itisfeltthatitwillonlybeinextremelyrarecasesthatacourtwouldholdthatpropertycannot
bevalued.Situationswherevaluationisnotpossiblemayincludepromisesoffutureservicesorrecognitionofpast
services(assumingtheseareproperty).
(c)Theconsiderationisexcessiveorinadequateandthepartiesarenotactingatarmslength
Section160ZH(9)(c)statesthatataxpayerwillbedeemedtohavepaidorgivenconsiderationequaltothemarket
valueoftheassetif:
theconsiderationpaidorgiveninrespectoftheacquisitionisgreateror(ifitisadisposalbyanother
person)lessthanthemarketvalueoftheassetatthetimeofacquisition.
thetaxpayerandthevendorwerenotdealingwitheachotheratarm'slengthinconnectionwiththe
acquisition.
Thepivotalquestiontobeconsideredindeterminingwhethermarketvaluewillbedeemedundersection160ZH(9)
(c)iswhetherthepartieswereactingwitheachotheratarm'slengthinconnectionwiththeacquisition.
InGranbyvFCTATC4240,LeeJoftheFederalCourtstated(atp4243)that"theoperationofsec160ZH(9)(c)
doesnotdependontheconsiderationpaidorgivenbeinggreater,orless,thanmarketvaluealone.Itisnecessary
toshowthatthetransactionunderwhichtheconsiderationispaidorgivenwasnotconductedbypartiesdealing
witheachotheratarm'slength''.
Itisimportanttorememberthattherearetworequirementsinsection160ZH(9)(c)nonmarketvalue
considerationgivenandnonarmslengthdealinginrelationtotheassetdisposal.Inpracticesomepeople
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assumethatanacquisitionataclearlynonmarketvalueautomaticallytriggerssection160ZH(9)(c)(andthe
disposalconsiderationequivalentsection160ZD2(c)).Thisisnotthecase.Adonationofpropertytoacharityisa
simpleexample.Clearlythepropertywasdisposedofatlessthanmarketvalue.Despitethisitisfeltthatthe
parties(thecharityandthedonor)wouldnormallybeconsideredtobedealingatarmslengthinrelationtothe
disposal(iethedonation).
Theotherpointtorecogniseisthatsection160ZH(9)(c)requiresthatthereisnonarmslengthdealinginrelation
totheacquisitionoftheasset.Hence,adealinvolvingseveraltransactionsmay,fromaoverallperspectivebeat
armslengthwiththetotalconsiderationbetweenthepartiesequaltomarketvalue,howeversection160ZH(9)may
stillapplyifonepartofthedealinvolvesanacquisitionofanassetforconsiderationwhichisnotequaltomarket
value.Thismayarisewhereanotherpartoftheoveralldealisalsonotatmarketvalue,thus"balancing"thetotal
considerationatmarketvalue(ie.a"collateraltransaction").
BarnsdallvFCT88ATC4565confirmsthepropositionthatnonarm'slengthpartiesmayneverthelessbedealing
witheachotheratarm'slengthinconnectionwithanacquisition.Althoughtheonuswouldbeonthepurchaserto
establishthatthedealingswereatarm'slength,particularlyifitwerenotatmarketvalue.Correspondingly,the
factthattheparties'normalrelationshipisatarm'slengthdoesnotmeanthattheyweredealingwithotherat
arm'slengthinconnectionwithaparticularacquisition.
TheCommissioner,inTaxationDeterminationTD12,considersthatwherealeasedassetispurchasedbythe
lesseeatitsresidualvalue,thelessorandlesseewillgenerallybedealingwitheachotheratarm'slengthin
connectionwiththeacquisition.ThiswastheviewtakenbytheFederalCourtinGranby'scase.
(ii)Incidentalcostsofacquisitionanddisposal
Incidentalcostsincurredbythetaxpayerinconnectionwiththeacquisitionand/ordisposaloftheassetare
includedintheasset'scostbase.Theterm"incidentalcosts"isexhaustively(andrestrictively)definedbytheAct
asbeing:
(a)fees,commissionorremunerationfortheprofessionalservicesofasurveyor,valuer,
auctioneer,accountant,broker,agent,consultantorlegaladviser
(b)costsoftransfer,includingstampdutyorothersimilarduty
(c)costsofadvertisingtofindasellerorbuyeror
(d)costsinrelationtothemakingofanyvaluationorapportionmentforCGTpurposes
However,"incidentalcosts"donotincludeamountswhichhavebeenallowedorareallowableasadeductionto
thetaxpayer.
TheCommissioner,inTaxationDeterminationTD23,statesthatexpenditureincurredsubsequenttothedisposal
ofanassetmayqualifyas"incidentalcosts"ofthedisposalandbeincludedinthecostbaseoftheasset.
Expenditureincurredinrelationtotaxationadviceprovidedbyaprofessionaltaxadviserinrelationtothe
acquisitionordisposalofanassetisan"incidentalcosts",howeveronlytotheextentthatitwasincurredafter1
July1989.
(iii)Noncapitalcostsofownership
Anasset'scostbase(excludingpersonaluseassets)includescertaincostsofownership,providedtheyarenot
capitalinnature.These"noncapitalcostsofownership"aredefinedasbeing:
interestincurredonaloantakenouttofinancetheacquisitionoftheasset
expenditureonrepairsto,ormaintenanceof,theasset
premiumstoinsuretheassetand
ratesorlandtax(whereapplicable).
Notwithstandingthefactthatinterestincurredonaloantakenouttofinancetheacquisitionofanassetiseligible,
theCommissionerinTaxationDetermination93/1excludesanyrelatedborrowingcosts.
The"noncapitalcostsofownership"donotincludeamountswhichhavebeenallowedorareallowableasa
deductiontothetaxpayer.Generally,wheretheassetisusedforincomeproducingactivities,expendituresuch
asinterest,insurancepremiums,repairsandratesarelikelytobedeductible,andassuchwillnotbeincludedin
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thecostbase.
Notethatalthough"noncapitalcostsofownership"areincludedintheindexedcostbase,theyarenot
themselvesindexed.Further,thesecostsarenotincludedinthereducedcostbaseandassucharenottaken
intoaccountincalculatingacapitalloss.
ThedifficultywiththisprovisionhasbeenhighlightedbythedecisioninSteelevFCofT97ATC4239("Steele's
case").Incertainsituationsinterestandothercostsofownershipsuchasrepairs,ratesandtaxesmaynotbe
deductiblebecause(amongstotherfactors)theyareofacapitalnature(asinSteele'scaseWharfPropertiesLtd
vCommrofIR(HongKong)97ATC4225).Suchexpensesarethereforenotonlynondeductible,butalso
becausetheyarecapitalstrictlyspeaking,cannotbetakenintoaccountindeterminingthecostbaseundersec
160ZH(6A).
(iv)EnhancementExpenditure
Expenditureofacapitalnaturewhichisincurredbythetaxpayerforthepurposeofenhancingthevalueofthe
assetandisreflectedinthestateornatureoftheassetatthetimeofdisposaloftheassetisalsoincludedinthe
costbaseofanasset.
Inrelationtothefirstcondition,thereisconsiderableuncertaintyastohowthereferenceto"purpose"shouldbe
interpreted.Thepreferableviewwouldbethatitistheresultdesiredtobeachievedwhichshouldbeconsidered.
Thatis,iftheresulttobeachievedbytheexpenditureisanenhancementinvaluethenitformspartofthecost
baseoftheassetirrespectiveofthemotivesforincurringtheexpenditure.Althoughinmanyinstancesitwillbe
clearwhethertherequisitepurposeexists,thiswillnotalwaysbethecase.
Inrelationtothesecondcondition,theexpendituremustbereflectedinthestateornatureoftheasset,andnotin
itsvalue.Therefore,expenditureincurredonanimprovementwhich,notwithstandingthetaxpayer'sintentions,has
infactresultedinadeclineintheasset'svalue,mayneverthelessbeincludedinthecostbasewherethat
improvementisreflectedinthestateornatureoftheasset.
Ontheotherhand,whereexpenditureisnolongerreflectedinthestateornatureoftheasset,thatexpenditure
wouldnotbeincludedintheasset'scostbase.Forinstanceaexpenditureincurredinrepairingabuildingwould
notqualifyforinclusionintheasset'scostbasewheresubsequentrepairshaveerasedthephysicaleffectsofthe
earlierexpenditure.
Oneareainwhichthereisuncertaintyastowhethertheyamounttoenhancementexpenditureisdemolition
expenditure.Forinstanceexpenditureincurredindemolishingabuildingtoallowfortheconstructionofanew
buildingmaynotsatisfytherequisitepurposeasitmaynotbeclearwhetherthepurposeofthedemolitionwasto
enhancethevalueoftheasset(ratheritwastoenabletheconstructionofanewbuilding).Further,followingthe
constructionofthenewbuildingaquestionariseswhetherthedemolitioncostsrepresentanenhancement
reflectedinthenatureoftheassetondisposal.However,wherelandissimplyclearedofanexistingbuildingand
issoldintheclearedstate,itmaybepossibletoarguethatthepurposeofthedemolitioncostswastoenhance
thevalueofthelandandthatthedemolitioncostsdorepresentanenhancementinthestateoftheland.
(v)Expenditurerelatingtoestablishing,preservingordefendingtitle
Expenditureofacapitalnatureincurredbythetaxpayertotheextenttowhichitwasincurredinestablishing,
preservingordefendingthetaxpayer'stitleto,orarightover,theassetwillbeincludedinthecostbaseofthe
asset.
Typically,expenditurewhichwouldqualifywithinthisheadingwouldbelegalcostsincurredin"establishing,
preservingordefending"thetaxpayer'stitle.Forinstance,inBrok enHillTheatresPtyLimitedvFCT(1952)85
CLR423legalcostsincurredbyamotionpictureoperatorinopposingapotentialcompetitor'sapplicationfora
licencewereconsideredtobeofacapitalnatureandmayhavefallenwithinthiscategory.
1.2Typesofcostbase
Incalculatingacapitalgainorloss,theCGTprovisionsrefertothreetypesofcostbase,being:
ordinarycostbasewhichisgenerallyusedtocalculateacapitalgainwherethetaxpayerdisposesofthe
assetwithin12monthsofacquisition
indexedcostbasewhichisgenerallyusedtocalculateacapitalgainwherethetaxpayerdisposesofthe
asset12monthsormoreafterthedateofacquisitionand
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reducedcostbasewhichisusedtocalculateacapitalloss.
Incalculatingtheindexedcostbaseofanasset,eachoftheelementsdiscussedabove(otherthannoncapital
costsofownership)maybeindexedbytheindexationfactor.Theindexationfactorisdeterminedinaccordance
withthefollowingformula(roundedtothreedecimalplaces):
CPIIndexnumberforthequarterofyear
inwhichassetdisposedof
CPIIndexnumberforthequarterofyear
inwhichliabilitytopayconsiderationarise
orexpenditureincurred
Thereducedcostbaseisbasicallythecostbaseoftheasset,withthefollowingadjustments:
noncapitalcostsofownershiparenottobeincluded
thecostbaseisreducedby:
amountsthathavebeenallowedorareallowable(orwouldbeallowablebutforapportionmentunder
section61),asadeductiontothetaxpayerinrespectofanyyearofincomeand
amountsthatareincludedinthetaxpayer'sassessableincomeondisposal(egdepreciationbalancing
charge).
1.3Recordkeepingrequirements
Section160ZZUofthe1936Actrequiresapersonwhohas,atanytimeafter19September1985,ownedan
assettokeepsuchrecordsasarenecessarytoenablethereadyascertainmentof:
thedateonwhichtheassetwasacquired
anyamountthatwould,onthedisposaloftheasset,formpartofthecostbaseoftheassetand
wheretheassethasbeendisposedof,thedateofthedisposalandtheconsiderationinrespectofthe
disposal.
Generally,suchrecordsmustberetainedforaperiodoffiveyearsafterthedateofdisposal.Thepenaltyforfailure
tocomplywiththissectionis$3,000.
Therecordkeepingrequirementscontainedinsection160ZZUwillnotapplytocertain"exceptedassets"being
assetstowhichtheCGTprovisions"didnot"or"wouldnotapply".However,therecordkeepingrequirementsare
termedinsuchawaythattheymayapplytoassetswhichatpresentareexemptfromCGT.Forinstancea
companyholdingpreCGTassetsmayhavethoseassetsdeemedtobepostCGTassetsbytheoperationof
section160ZZS.Insuchacasetherecordkeepingrequirementswouldapplytothatasset,possibly
retrospectively.
Giventhatataxpayerhastheonustoprovethatanassessmentisexcessive,pursuanttosection14ZZKof
theTaxationAdministrationAct,therecordkeepingrequirementsinsection160ZZUwouldseemlargelyirrelevant
andinmanycasesinadequate.Forinstance,ataxpayermayberequiredtosubstantiatethecostbaseofan
assetmorethanfiveyearsafterthedatetheassetwasdisposedof.Forexample,adisposalmayresultina
capitallosswhichiscarriedforwardandoffsetagainstcapitalgainsderivedmanyyearsaftertheoriginaldisposal.
TaxationLawsAmendmentBill(No7)1997
TaxationLawsAmendmentBill(No7)1997,whichwasintroducedtoParliamentinDecember1997,contains
amendmentstoCGTrecordkeepingrequirements.TheBillwillallowtaxpayerstouseanassetregisterinsteadof
sourcedocumentsforCGTrecordkeepingpurposes.Theamendmentswillapplytoallassets,whetheracquired
beforeorafterthecommencementofthenewrules.Themeasurewillonlyapplytoentriesmadeinassetregister
thathasbeen"certified"onorafter1January1998.
1.4Costbase:whyismaximisingitimportant?
Theasset'scostbaseformsapivotalconsiderationindeterminingwhetherataxpayerhasderivedacapitalgain
orincurredacapitallossonthedisposalofanasset.Section160Zofthe1936Actrequiresthatataxpayer,in
calculatingacapitalgainorlossondisposal,comparetheconsiderationreceivedwiththeasset'scostbase.
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Obviouslybymaximisingthecostbaseofanassetthetaxpayershouldbeabletoeffectivelyminimiseany
potentialcapitalgainondisposal,oralternativelymaximisetheavailabilityofcapitallosses.
Thefollowingstrategiescouldbeadoptedbyataxpayerinordertomaximisethecostbase:
thetaxpayerneedstoensurethatallamountsallowedundersection160ZHareincludedinthecostbase.
Inthisregardthetaxpayershouldmaintainsufficientrecordsoftheacquisitionconsiderationandallowable
expenditure
thetaxpayershouldbeawareoftheimpactofsituationswhichmayerodethecostbase,suchasthe
transferofcapitallossesbetweengroupcompanies
transactionsneedtobestructuredeffectively,withparticularregardhadtothefundingmix(debtvequity)
andthechoiceofinvestmentvehicle
amountspayable.
Thesestrategiesareconsideredthroughoutthepaperandinparticularundertheheading"TaxPlanning".
2.0ImplicationofSteele'scase
ThedecisionoftheFullFederalCourt,inSteelevFCT96ATC4131("Steele'scase"),raisesseriousdoubtsover
thedeductibilityofholdingandinterestcostsincurredpriortoapropertybecomingincomeproducing.
Steele'scase(andothersimilarcasessuchasTemelliandWharfProperties)haveimplicationsfordetermining
thecostbaseofanasset.PriortoSteele'scaseitwasgenerallyacceptedthatinterestexpenditurewouldbe
noncapitalandthereforewould,ifdenieddeductibility,fallwithinthe"noncapitalcostofownership"categoryand
beincludedinanasset'scostbase.Steele'scase,however,suggeststhatinterestmayincertaincircumstances
becapitalinnatureandtherefore,notonlydeniedadeductionbutalsoexcludedfromtheasset'scostbase.
Steele'scaseinvolvedataxpayerwhoon18December1980acquiredatractofrurallandusingborrowedfunds
withthestatedintentionofdevelopingamotelandtownhousecomplex.Variousworkswereundertakenbythe
taxpayerinpursuanceofthedevelopmentprojectincludingobtainingplumbingandengineeringreportsand
negotiatingwitharchitectsandaconstructioncompany.Inearly1982thetaxpayersoldahalfinterestintheland
totheconstructioncompany,enteringintoajointventureagreementwiththeconstructioncompanyinrelationto
thedevelopmentofthemotelandtownhousecomplex.
Thejointventurearrangementsdidnotrunsmoothly,anddespitethetaxpayer'soriginalintentionandtheworks
undertaken,thelandwasfinallysoldwithoutanydevelopmentproceeding.Duringthesevenyearsofownership
thetaxpayerusedthelandforagistmentproducingminorincome.Thetaxpayerclaimedadeductionforinterest
incurredonthefundsborrowedtoacquiretheland.
ThemajorityoftheFullFederalcourtinSteele'scasedeniedthetaxpayeradeductionforinterestonthebasis
thattheinterestwasincurredoncapitalaccount.TheirHonoursconcludedthatthecharacteroftheadvantage
soughtbythetaxpayerinmakingpaymentsofinterestwasthecreationofacapitalasset,andnotwithstanding
thefactthattheinterestwasarecurrentexpense,itwasofacapitalnature.TheirHonourssaid:
"WhenDixonJ,intheoftencitedpassageinTheTexasCompanyatATD356CLR468469,
spok eofthewaytheAustraliansystemtreatsinterestonmoneyborrowedtosecurecapital,hewas
speak inginthecontextofcurrentincomegainingactivities.Heregardedinterestpaymentsaspart
of"therecurrentexpenditurewhichmustbeincurredtoobtaintheuseofthemoney",andaslik e
otherregularoutgoingsofthebusinessincurredtoobtaintheuseofcapitalassets,suchasrentor
hire.Ifthematterbelook edatinthiscontext,andinthisway,asBowenCJandBurchettJpointed
outinthepassagecitedfromAustralianNationalHotels,interestpaymentsmaybeseentosecure
noenduringadvantage.Lik erent,theysecuremerelytheuseofthecapitalitself,orofpremises
representingit,fromdaytoday.Butinterestpaidinrelationtotheacquisitionorcreationofa
capitalasset,whichislatertobeutilisedinincomegainingactivities,isinanentirelydifferent
position.Itispaidsothat,whenthetimecomes,anenduringasset(inthiscase,amotelcomplex)
willbeavailableforuseintheintendedactivity.Thefactthat,whilethecapitalassetisbeing
created,thepaymentsofinterestarerecurrentisnotenoughtochangethisconclusion.Those
paymentsarenotpartoftherecurrentoperationsofanyexistingbusinessactivity."
Ifataxpayeristobedeniedaninterestdeductioninrespectofinterestonborrowingsusedtoacquirean
investmentitmightbeexpectedthattheinterestwouldformpartofthecostbaseforcapitalgainstaxpurposes.
However,inlightofthedecisioninSteele'scasethedisallowedinterestisunlikelytoformpartoftheassetcost
base.
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Byreferencetosection160ZH(1),theinterestexpensedoesnotappeartofallintoanyofthedefinedcategories
formingpartofthecostbase.Typicallynondeductibleinterestexpenditurewouldbeincludedinanasset'scost
baseundersection160ZH(2)(ba).Thissectionwasintroducedin1991tospecificallyincludewithinanasset's
costbasenondeductibleinterestonaloantakenouttofinancetheacquisitionofanasset.However,interest
whichisofacapitalnaturewillnotbewithinsection160ZH(2)(ba)andthereforewillnotbeeligibleforinclusionin
thecostbase.Thisisbecausesection160ZH(2)(ba)referstononcapitalcosts.Thereforetheonlypossibility
wouldbesection160ZH(1)(c)whichreferstoexpenditureofacapitalnature,butrequiresitspurposetoenhance
thevalueoftheasset.Inthecaseofinterestexpense,itprobablydoesnotenhancethevalueoftheunderlying
land.
ThescopeofthedoubtsraisedbySteele'scasearenotclear.ApplyingthereasoningcontainedinSteele'scaseit
ispossiblethatadeductionforinterestcouldbedeniedevenwherethetaxpayercarriesonacontinuingbusiness
iftheassetisnotcurrentlyemployedinanincomeproducingactivity.Anexamplewouldbecostsincurredin
relationtotheextensionorconstructionofbuildingsforuseaspartofmanufacturingorwarehousingoperations.
TheCommissionerofTaxationreleasedaDraftTaxationRulingTR97/D18inOctober1997whichseeksto
addresstheissuesarisingoutofSteele'scase.Atthisstagehowever,theCommissioner'sviewsareonly
preliminaryasthetaxpayerinSteele'scasehassoughtspecialleavetoappealtotheHighCourt.
TheCommissionerstatesthatshouldinterest,incurredinthecircumstancesinSteele'scase,beultimately
consideredcapitalinnature(contrarytotheviewexpressedintheruling),suchinterestwouldnotformpartofthe
costbaseundersection160ZH.TheCommissionerhoweveracknowledgesthatsection160ZH(1)(ba)restsonthe
assumptionthatinterestisinherentlyanoncapitalexpense.
However,theCommissionertakestheviewthatinterestcannotbeatthesametimealossoroutgoingincurredin
gainingassessableincomeandcapitalinnature.Therefore,whereinterestexpenditurehassatisfiedthepositive
limbsofthedeductibilitytest,itwillnotbedeniedadeductiononthebasisthatitisanaffairofcapital.
Therefore,inlightoftheCommissioner'sviewthatinterestexpenditurewillrarelybecapital,theCommissioner
hasadoptedaconcessionalapproachtodeterminingwhetherinterestexpenditureshouldformpartofanasset's
costbase.ThisisreflectedbythefollowingextractfromTR97/D18:
"Inthemeantime,nondeductibleinterestthatwouldotherwisehavebeenincludedinthecostbase
ofanassetbecauseoftheoperationofparagraph160ZH(1)(ba)andsubsection160ZH(6A)may
continuetobesoincludeduntilitisfinallydecidedwhethersuchinterestiscapitalinnature."
ThispositionmaychangeoncetheissuesinSteele'scasehavebeenfinalised(iespecialleavetoappealtothe
HighCourtisrefusedortheHighCourthearstheappeal).ShouldtheFederalCourtdecisionstandorbeaffirmed
bytheHighCourt,thennotonlywouldtheinterestexpenditurebenondeductible,butmayalsobeineligiblefor
inclusioninthecostbaseoftheasset.
3.0Indexation:Timingofacquisition/expenditure
Whereanassethasbeenheldforaperiodofmorethan12months,leavingasidethecircumstanceswherea
capitallossisincurred,itisnecessarytoindexthecostbaseforthepurposesofcalculatingacapitalgain.The
indexedcostbaseofanassetisgenerallycalculatedbymultiplyingthevariouscomponentsofthecostbaseby
theindexationfactor.Theindexationfactorisdeterminedinaccordancewiththefollowingformula(roundedto
threedecimalplaces):
CPIIndexnumberforthequarterofyearinwhichassetdisposedof
CPIIndexnumberforthequarterofyearinwhichliabilitytopayconsiderationariseorexpenditureincurred
Notethatthenoncapitalcostsofownership,whilstincludedinthecostbase,arenotindexed.
Anumberofstrategiescanbeadoptedtoensurethatthebenefitsofindexationaremaximised,thusensuringthat
acapitalgainarisingondisposalofanassetisminimised.Broadly,thesestrategiesinclude:
wherepossibleassetsshouldbeheldformorethan12months,thusallowingthetaxpayertotakeinto
accountindexationincalculatingacapitalgain
thedisposalofanassetshould,wherepossible,bedelayedfromonequartertothenext,whichinaperiod
ofinflation,willresultinagreaterindexedcostbase
acquiringanasset,orincurringexpenditureeligible(whichiseligibleforinclusioninthecostbase),should
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bebroughtforwardtoanearlierquarterthusresultinginindexationapplyingfromanearliertime.
Section160ZJofthe1936Actprovidesthatindexationbeginsinthequarterofyearinwhichthe"liabilitytopayor
givetheconsiderationarose"or"thecostsorexpenditurewereincurred".
Indeterminingwhencostsorexpenditureis"incurred"thebodyofcaselawrelevanttosection51(1)maybe
referredto.Foranamounttohavebeenincurred,itisnotnecessaryforanactualdisbursementtohavebeen
made.If,intherelevantyear,thetaxpayerisdefinitivelycommitted,orhascompletelysubjecteditselfinalegal
sense,totheexpenditure,itwillbeincurred(JamesFlood(1953)88CLR492).Lessclearisdeterminingwhenthe
"liabilitytopayconsiderationarose".
Generallywheretheconsiderationispaidbyinstalmenttheliabilitywilltypicallyariseatthetimeoftheinitial
contract.Thisisfurthersupportedbysection160K(4),whichhastheeffectthatwhereapersonisrequiredtopay
moneyorgiveproperty,itincludesapersonbeingrequiredtopaymoneyorgivepropertyimmediatelyorata
futuredateand,inthecaseofmoney,eitherinalumpsumorbyinstalments.Accordingly,ifanassetisacquired
bywayofinstalments,theassetwillhaveacostbaseoftheaggregateoftheamountoftheinstalmentswithout
anydiscountforthetimevalueofmoney.Indexationwillapplytothewholeofthepurchasepricefromthedateof
thecontract,notwithstandingthatsome,orindeedall,ofthepurchasepriceremainsunpaid.
Whereataxpayerisdeemedtohavepaidorgivenmarketvalueconsiderationundersection160ZH(9),the
considerationistreatedbysection160K(6)ashavingbeenpaidorgivenatthetimewhentheassetwasacquired
andindexationoftheconsiderationisdeterminedaccordingly.
TheCommissionerhasissuedanumberofrulingsregardingwhenindexationshouldbegin,includingthe
following:
whereanassetisacquiredforalumpsumplusanobligationtopayacontingentandunascertainable
amounttheCommissionerconsidersthat,althoughthecostbaseincludesanylaterpaymentmadeifand
whenthecontingentobligationbecomesanactualobligation,indexationofthelaterpaymentonly
commencesinthequarterinwhichsuchpaymentismade(TaxationRulingTR93/15)
wheretheliabilitytopaytheconsiderationforanassetthatissubjecttovendorfinancearisesatthetime
oftheacquisitionoftheasset,theindexationfactoristobecalculatedforthewholeoftheconsideration
fromthattimeeventhough,underthefinancearrangements,partoftheconsiderationisnotactuallypaid
untilsometimeinthefuture(TaxationRulingIT2362)
whereataxpayerentersintoasetfeeconstructioncontractwhichprovidesforpaymentbyinstalments
correspondingtothevalueofworkdonebythebuilderasperanarchitect'scertificate,eachprogress
paymentisindexedfromthequarterinwhichthearchitect'scertificateinrelationtothatpaymentissues
(TaxationDeterminationTD19)
inan"offtheplan"purchase,boththeamountofthedepositandthebalanceofthepurchaseconsideration
areindexedfromthetimetheliabilitytopaytherespectiveamountsisincurred.Examplesof"offtheplan"
purchasesarewheretheownerofthelandhasnotcompletedallcapitalworksrequiredbeforebuildingcan
commencesuchasfinalisationofboundaries,roadsandtelephoneandelectricityconnections,orwhere
anapartmentblockisinthecourseofconstruction(TaxationDeterminationTD18).
Specificrulesgoverntheindexationofconsiderationwherethetaxpayeracquiredanasset,after15August1989,
asaresultofthedoingbyapersonofanactthatdidnotconstitutea"disposal"oftheasset.Forinstance,the
rulesmayapplywheresharesareacquiredbyissueorallotmentorunitsinaunittrustareacquiredbyissueby
thetrustee.TheFullFederalCourtinAllinaPtyLtdvFCT91ATC4195heldthattheissueofrightsovershares
didnotamounttoa"disposal"ofanasset.
Theserulesapplyasfollows:
whereconsiderationhasbeenpaidorgiven,indexationbeginsfromthedatethattheliabilitytopayorgive
theconsiderationarose
whereconsiderationispaidorgivenatalaterdate,thatconsiderationisindexedfromthetimetherelevant
considerationwaspaidorgiven
whereconsiderationisnotinfactpaidorgiven,thatconsiderationisnotindexed.
Forexample,acompanyissues10,000$2.00shareson31December1996,ofwhich50centspershareis
payableonissue.Afurthercallof$1.00pershareispayableforeachshareon31December1997.Indexation
wouldapplyasfollows:
50centsindexationwouldbeginfromtheDecember1996quarter
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$1.00indexationwouldbeginfromtheDecember1997quarter
theremaining50centsisnotindexed.
Theserulesapplynotonlytodeferredconsiderationpayablebythepersonwhofirstacquiredtheassetbutalso
toanysubsequentpersonwhoacquirestheassetwhereliabilityfordeferredconsiderationpayabletotheperson
whodidtheactthatresultedintheacquisitionoftheassetbythefirstpersonisassumedbythatsubsequent
person.
4.0Erosion(Reduction)oftheCostBaseofCGTAssets
The1936Actcontainsprovisionswhichoperatestoerode(reduce)thecostbaseofCGTassetsincertain
circumstances.Theseinclude:
(a)thetransferofcapitallossesbetweengroupcompanies
(b)thetransferofaCGTassetbetweengroupcompanies
(c)asharevalueshiftingarrangement
(d)theforgivenessofacommercialdebt
(e)thedisposalofaCGTassetforlessthanitscostbase
(f)thereductionorreturnofcapitalofsharesinacompanyorunitsorinterestsinatrustand
(g)recoupedexpenditure.
Eachofthesewillbedealtwithinturnbelow:
(a)ByCapitalLossTransfers
Incertainspecifiedinstances,acompany,whichincursacapitallossandwhichisalsopartofagroupof
companies,maytransferacapitallosstoanothergroupcompany.Whenthisoccurs,thatiswhereagroup
company(beingthelosscompany)transfersacapitallosstoanothergroupcompany(beingthegaincompany),
thenthecostbaseofcertainCGTassetsmaybereduced.
TheseCGTassetsaresharesheldbyanyparentcompanyanddebtheldbyanycreditorrelatedcompany.This
obviouslyincludessharesheldbytheparentcompanyanddebtheldbythecreditorcompanydirectlyintheloss
company.However,indirectinterestsmayalsobeaffected.Forexample,sharesanddebtinvestmentsnotmade
directlyintothelosscompanybutmadeviaanothergroupcompanyandtheninvestedintothelosscompanymay
beaffected.TheCGTprovisionsprovidethattheparentcompanymustbeagroupcompanyinrelationtotheloss
companyandmustholdpostCGTsharesinanothergroupcompany.Thecreditorcompanyisalsorequiredtobe
agroupcompanyandhavemadeapostCGTloantoanothergroupcompany.Accordingly,allintragroup
shareholdingsandloanscouldpotentiallybeaffectedandtheircostbaseadjustedbycapitallosstransfers.
TheCGTprovisionsoperatetoadjustthecostbaseoftheseCGTassets"bysuchamountasisappropriate"
havingregardtosubventionpaymentsmadeandtothedirectandindirectinterestsoftheparentcompanyand
creditorcompanyinthelosscompany.Thisprovisionisgenerallyunderstoodtomeanthatthecostbaseofthese
CGTassetsarereducedtotheextentofthecapitallosstransferredoutaftertakingintoaccountanysubvention
payments,whicharepaymentsmadeforthetransferofthecapitalloss.Forexample,wherethesubvention
paymentsequalthefullaftertaxvalueofthecapitallossestransferredthennocostbaseadjustmentsshouldbe
required.
Anappropriatebasisforallocatingthecostbasereductionadjustmentmaybesomethingotherthanaprorata
basisacrosstheentireintragroupshareanddebtinvestmentinthelosscompany.Thecorporategroupmaybe
abletoallocatethereductionadjustmententirelytothecostbaseoftheshares.Thiscouldbejustifiedonthe
basisthattheintragroupdebtdoesnotrepresentancapitalinvestmentinthecompanybutisonlyashortterm
debtoratradedebtetc.
ThereisalimitastotheamountbywhichthecostbaseoftheseCGTassetcanbereducedthatis,itcanonly
bereducedto$Nil.ThisisasaresultoftheCGTprovisionsoperatingtolimittheamountofcapitallossesthat
canbetransferredouttothesumoftheunindexedcostbaseofallsharesandanydebtheldbyagroupcompany
inthelosscompany.Forexample,wheretheparentholdingcompanyholdsallthesharesanddebtina
subsidiarycompanywithacostbaseof$100,anycapitallossesofthesubsidiarycanonlybetransferredtothe
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extentof$100.
Bywayofanaside,inordertoutiliseanycapitallossthatexceedsthislimititwouldbenecessarytorecapitalise
thetransferorcompanybywayofacapitalordebtinjection.However,thispotentiallyleavesasignificant
unrealisedCGTexposureinthehandsoftheparentandcreditorcompanies.Ifthesesharesordebtinterests
wereeversoldorredeemedasignificantcapitalgainmayarise.
Interestingly,anupwardadjustment"bysuchamountasisappropriate"isrequiredtothecostbaseofcertain
CGTassets,beingthesharesheldbyanyparentcompanyanddebtheldbyanycreditorcompanyhavingregard
theirdirectandindirectinterestsinthegaincompany.Thiscompensatoryadjustmentservestoupliftthecost
baseofthesharesandanydebtheldinthegaincompany,thusoperatingtomaximiseitscostbaseandavoid
doubletaxationarisingupondisposalofthesharesasaresultoftheacquisitionoftheassetincreasingthe
underlyingvalueofthegaincompany.Further,thecostbaseincreasemaynotberestrictedtotheamountofthe
costbasedecrease.Rather,thecostbaseincreaseisnottoexceedtheincreaseinmarketvalueofthesharesor
debtthatresultsfromthecapitallossbeingtakentohavebeenincurredbythegaincompany.Accordingly,allof
theindirectinterestsoftheparentandcreditorcompaniesinthegaincompanymaybeadjustedupwardstaking
intoaccounttheimpactofthelosstransfer.
However,therestrictionintheamountofcapitallossthatcanbetransferredoutdoesnotapplywhereitisbeing
transferredoutofaparentcompanydowntoitssubsidiarycompany,thatistheparentcompany,istheloss
company.
Bywayofexample,supposethatparentcompanyholds100%ofthesharesinlosscompanywithhasacost
baseof$100.Theparentalsoholds100%ofthesharesingaincompanywithacostbaseof$100.Assumethat
thereisnodebt.Inthe1997year,thelosscompanyincurredacapitallossof$20,whilethegaincompany
incurredacapitalgainof$20.Thelosscompanytransfersthecapitallosstothegaincompanytooffsetthe
capitalgain.Thelosscompanyisrestrictedtothetransferof$100asthisisthecostbaseofthesharesheldin
it.Thelosscompanyisthereforenotrestrictedintransferringthe$20capitallosstothegaincompany.Thecost
baseofthesharesheldbytheparentcompanyinthelosscompanyisreducedbytheamountofthetransfer,that
isthenewcostbaseis$80.Thecostbaseofthesharesheldbytheparentcompanyinthegaincompanyis
increasedbytheamountofthetransfer,thatisthenewcostbaseis$120.However,whereparentcompanywas
thelosscompanytherewouldbenorestrictionontheamountofcapitallossesthatcouldbetransferredtoit
subsidiarygaincompanyandfurthertherewouldbenoadjustmentstothecostbasesoftheinvestmentsineither
theparentorgaincompanies.
(b)BywayofTransfersofAssetsbetweenGroupCompanies
Anotherinstancewhereathecostbaseofaninvestment(sharesordebt)inacompanymaybeaffectediswhere
thereisatransferofanassettoanothercompany.PursuanttoDivision19AoftheCGTprovisions,anadjustment
tothecostbaseofthesharesinthetransferorcompanyisonlyrequiredwhere:
(a)thecompanytransfersapreCGTassetforconsiderationlessthanthemarketvalueofthat
assetor
(b)thecompanytransfersapostCGTassetforconsiderationlessthanbothitsmarketvalueand
itsindexedcostbase.
Bothcompaniesmustalsoshare100%commonownership,whichincludesbeinggroupcompaniesandalso
includesbeingwhollyownedbythesamenaturalperson.
Theadjustmentisintendedtopreventanassetstrip,thatistopreventcompanygroupsfromclaimingcapital
losseswherenorealeconomiclosshasoccurred.
Bywayofexample,HoldingPtyLtdholds100%ofthesharesinXPtyLtdandYPtyLtdbothwithcostbasesof
$100.XandYeachhaveanassetwhichcost$100andhasacurrentmarketvalueof$100.Xtransfersitsasset
toYfornoconsideration.Asthereisnoconsideration,Xwouldbedeemedtohavegivenconsiderationequalto
marketvalue,ie$100.Xthereforehasnocapitalgainorloss.Ifnocostbaseadjustmentwasrequired,thenwhen
HoldingPtyLtdsubsequentlydisposedofXitrealisesacapitallossof$100onthedisposaloftheshares(iethe
$100costbaseless$Nilconsiderationbasedonmarketvalue).AnunrealisedcapitalgainisalsosittinginYof
theequivalentamount.Accordingly,HoldingPtyLtdwouldbeabletorealiseacapitallossnowanddeferthe
realisationofacapitalgainuntilsometimeinthefuture.However,theCGTprovisionswouldoperatetoadjustthe
costbaseofthesharesinXinthisinstancedownto$nil.AsaresultHoldingPtyLtdisnotbeabletorealiseany
capitallossonthetransferoftheassetfromXtoY.
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(c)BywayofaShareValueShiftingArrangement
ThecostbaseofsharesmaybeadjustedwhereDivision19BoftheCGTprovisionappliesasaresultofentering
intoasharevalueshiftingarrangement.Thismayoccurwherethevalueoftheoriginalsharehasbeen"shifted"to
someothershares.Asaresulttheprovisionsmayoperatetodeemthecostbaseofthesharestobereduced.
Division19Bonlyoperateswhereallofthefollowingconditionsaresatisfied:
(a)valueisshiftedawayfromshares(Ashiftinvalueofotherassets,egdebt,isnotaffected.)
(b)thesharesarepostCGTshares
(c)theshareswereheldbyacontroller(orassociate)ofthecompany
(d)thereareshareswhichsimultaneouslyincreaseinvalue
(e)thesharestowhichthevalueisshiftedarealsosharesofthatcompany
(f)theincreasedvaluesharesarealsoheldbythecontroller(orassociates)and
(g)thereisamaterialdecreaseinthevalueshiftedoutoftheoriginalshares.
Wheretheseconditionsaremetthenthecostbaseoftheoriginalshareisreducedtoreflecttheshift.However,
wheretheincreasedvalueshareisapostCGTshare,thereisalsoacompensatingincreaseinthecostbaseof
theincreasedvalueshare,soastoavoiddoubletaxation.Wheretheincreaseanddecreasevaluesharesareheld
bydifferentpartiestheremayalsobeadeemeddisposalandcapitalgain.
(d)BywayofaForgivenessofaCommercialDebt
WhereacommercialdebtforgivenessisdeemedtooccurbyvirtueoftheDebtForgivenessprovisions,thenthere
maybeaforgivenamountwhichmayreducethecostbasesofCGTassetsheldbythedebtorcompany.Thiswill
occurwhereaforgivenamountisrequiredtobeoffsetandthereareinsufficientpriorrevenuelosses,priorcapital
losses,andundeductedcapitalexpenditures(forexampledepreciablecostbasesofassets)tofullyoffsetthe
forgivenamount.Inthiscasetheremainderoftheforgivenamountwillbeappliedagainstanycostbases(being
theindexedcostbase,reducedcostbaseorcostbaseasisappropriate)ofCGTassetsheldbythedebtor
company.
However,wherethecommercialdebtisanintragroupdebtbetweenacreditorcompanyanddebtorcompany
undercommonownership,thenthesecompaniesmayenterintoanagreementsothatthecreditorforgoesits
entitlementtoclaimacapitallosstotheextentoftheprovisionalnetforgivenamount.
(e)WheretheAssetisDisposedOfforLessthatitsCostBase
Subsection160ZH(3)oftheCGTprovisionsalsooperatestoreducethecostbaseofaCGTassetwhereitis
disposedofforlessthanitscostbaseforthepurposeofcalculatingifanypotentialcapitallossarises.Theeffect
ofthisprovisionistoreducethecapitallossrealisedupondisposalofaCGTasset.
ThecostbaseoftheCGTassetisreducedbytheamountofanyexpendituretotheextentitwasallowedoris
allowableasdeduction.Forexample,deductionsfordepreciationwillreducethecostbasetotheextentofthe
allowabledeductions.However,certainexpenditurewhichisclawedbackintoassessableincomeasaresultof
thedisposalwillbeincludedinthereducedcostbase.Forexample,depreciationbalancingchargeswillbe
includedinthereducedcostbaseoftheCGTasset.
Further,wherethereisadisposalofaCGTassetbeingashare,arebateabledividendadjustmentmaybemade
toreducethecostbaseforthepurposesofdeterminingthereducedcostbase.Arebateabledividendadjustment
ariseswhere:
(a)underanarrangement,thecompanymakesadistributiontoashareholder
(b)wholeorpartofthedistributioncouldreasonablybetakentobeattributabletopreacquisition
profits,ieprofitsderivedbythecompanybeforetheshareholderacquireditsshare.
(c)theshareholderisentitledtoadividendrebatepursuanttosections46or46Ainrespectof
thedividendcomponentofthedistribution.
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(d)theshareholderisacontroller(orassociate)ofthecompanyatanytimeduringtheperiodin
whichthearrangementismadeorcarriedout.
(f)Bywayofreductionsorreturnofcapital
InthecaseofpostCGTshares,wherethereisareductionofcapitalthecostbaseofthesharesiseffectively
reduced.Thatis,whereacompanydistributesanamountthatisneitheradividendnorfortheshares'disposal,
thentheCGTprovisionsoperatetodeemadisposalandreacquisitionofthesharesatthereducedcostbase.
TheCGTprovisionsalsooperatesimilarlytoreducethecostbaseofanreturnofcapitalonaunitinaunittrustor
aninterestinatrust.
(g)Recoupedexpenditure
Indeterminingthecostbase,indexedcostbaseorreducedcostbaseofanassetsection160ZH(11)provides
that"accountshallnotbetaken"ofconsiderationinrespectofwhichthetaxpayeristoberecouped.No
"account"presumablymeansitistobeignoredcompletely(ie.deemednevertohavebeenpaid).
"Recouped"normallymeansthatyouarereimbursedoutsidetheoriginaltransaction.However,theATOtakethe
viewthatsection160ZH(11)coverstherefundofapurchasepriceofanassetunderthetermsofthesalecontract.
Howeveritmaynotcoverthesuingfordamagesbywayofrefundofthepurchasepriceduetotheassetnot
performingtoexpectations.
5.0AnyTLIPChangesinrelationtoCostBase
TheTaxLawImprovementProject("TLIP")isagovernmentinitiativetorewriteandreplacethe1936Actover
severalyears.Theaimoftheprojectistorestructure,renumberandrewritetheincometaxlawsothatitcanbe
moreeasilyunderstoodbythosewhoneedtoreadit.Theprojectdoesnotaimtoreformthetaxsystemorreview
taxpolicy(butinevitablydisputeshavearisenastowhethertherewrittenlawhasmerelyrestatedtheoldlaw,or
hasinadvertentlychangedit).
TherewrittenCGTprovisionswerereleasedduring1997inExposureDrafts10and11.TheBillintroducingthese
changesiscurrentlybeforetheParliamentandhasnotyetbeenpassed.SomeofthebroadchangestotheCGT
provisionsinclude:
(a)Sections160ZH(1)and(4),whichrelatetomonetaryandpropertyconsiderationforacquisition
costshavebeenconsolidatedintoasinglesection.Thisshouldbeastructuralchangeratherthana
substantivechange.
(b)ThenewCGTprovisionsusetheterm"CGTevent".Thisisusedtocoverdisposalsofassets.
Thisisrelevanttothecostbaseforpurposesofdeterminingincidentalcosts.Incidentalcostswill
beincludedinthecostbaseofanassettotheextenttheyrelatetothe"CGTevent".
(c)Noncapitalcostsofownershipthatcanbeincludedinthecostbasehavebeenbroadenedto
includeinterestonmoneyborrowedtorefinancetheoriginalacquisitionborrowingsandintereston
moneyborrowedtofinancecapitalexpenditureincurredtoincreasetheasset'svalue.
(d)TheCGTprovisionsrelatingtothedeterminationofcostbasearetobetabulatedsothat
taxpayerscanreadilyidentifywhichmodificationsapply.
SomeofthemoresubstantivechangestobeintroducedbyExposureDrafts10and11whichimpactuponthe
calculationofcostbaseinclude:
(a)Therequirementsonbeneficiariestomakecostbaseadjustmentstotrustinterestseachtime
theyreceivenonassessablepaymentswillbeeasedtorequireonlyasingleannualreduction.
Further,thelawwillexpresslystatethatpaymentsinkindaretobetreatedinthesamewayas
moneypayments,whichisinaccordancewithcurrentadministrativearrangements.Underthe
existinglaw,whenatrusteepaysanamounttoabeneficiary,thecostbaseofthetrustinterestis
reducedbytheamountofthepayment.Althoughtheexpression"paysanamount"clearlycovers
moneypayments,thepositionislessclearifitisapaymentinkind.
(b)Thelawwillexpresslystatethatpaymentsinkindbyacompanytoashareholderaretreated
inthesamewayasmoneypayments.Undertheexistinglaw,whereacompanypaysanamountto
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ashareholder,thecostbaseofsharesisreduced.
(c)AbuildingorcapitalimprovementwillbetreatedasaseparateCGTassetonlyifitisofakind
subjecttoabalancingadjustmentonitsdisposal,lossordestruction.Thiswillsimplifycalculation
andrecordkeepingrequirements.
Atpresent,improvementsonland,suchasbuildingsorcapitalimprovements,thatqualifyforan
incometaxdeductionaretreatedasseparateassets.ThismeansthattheCGTprovisionscause
taxpayerstoapportionsaleproceedsbetweenlandandindividualimprovementswhereasthisisnot
requiredforotherpurposes.
(d)Tradingstockwhichisinheritedbyadeceased'sestateorbeneficiaryatwillhaveacostbase
equaltoitsmarketvalue.Atpresent,anestateorbeneficiaryacquirestradingstockthatwas
acquiredbythedeceasedonorafter20</`>September1985atthedeceased'scostbase(reduced
orindexed,ifrelevant),eventhoughthedeceased'sfinaltaxationreturnaccountsforitatmarket
valueandthatamountistreatedasincome.
(e)Thecostbaseofanassettransferredfromoneentitytoanother,whichissubjecttorollover
relief,willbeentitledtoindexationwherethecombinedperiodofownershipbyboththetransferor
andtransfereeisatleast12months.Correspondingly,ifrolloverreliefappliestoanentitythat
replacesaCGTassetwithanotherasset,the12monthperiodwillbeginfromwhentheoriginal
asset(ratherthanthereplacementasset)wasacquired.
Atpresent,thetransfereemustowntheassetforatleast12monthstogetindexationirrespective
ofhowlongthetransferorownedit.Forareplacementassetrollover,the12monthperiodbeginsat
acquisitionofthereplacementasset(ratherthantheoriginalasset).
6.0AnyOtherRecentChanges1997FederalBudgetchangestocostbase
TheFederalGovernmentannouncedchangestothecostbaseprovisionsintheMay1997budget.Thechanges
areaimedatadjustingthecostbaseofanassetwheredeductionswereallowedorareallowableandtheexisting
costbasereductionrulesdidnotapply.
Asdiscussedabovethecostbaseofanassetisdefinedinsec160ZH(1)asthesumoftheconsiderationin
respectofacquisition,noncapitalcostsofownership,capitalexpendituretoenhancevalueordefendtheasset
andincidentalcostsofacquisitionanddisposal.Incidentalcostsandnoncapitalcosts,totheextentthatan
amounthasbeen(oris)allowableasadeductiontothetaxpayer,areexcludedfromthecostbase.Theexisting
lawdoesnothoweverpreventanamountofconsiderationinrespectoftheacquisitionofanassetorexpenditure
inrespectoftheassetfrombeingincludedinthecostbasewherethatamountisalsoallowableasadeduction.
Thecurrentpositioninrelationtocostbaseandindexedcostbaseistobecontrastedwiththatofthereduced
costbase,whichiscalculatedbyreducingthecostbasebyamountswhichwereallowedasdeductionstothe
taxpayer.Theproposedchangeswillrequirethatasimilarreductionbemadetothecalculationofthecostbase
(andindexedcostbase)forthepurposeofcalculatingacapitalgain.Inotherwords,includedinthecostbaseis
expenditureonlytotheextentthatdeductionsarenotallowableinrespectofthatexpenditure.
OneareawherethischangemaybeofparticularrelevanceisinrelationtotheDivision10Dbuildingallowance
whichpreviouslydidnotimpactonthecostbaseofproperty.Forinstance,abuildingisacquiredon1July1999
forconsiderationof$1million.Thebuildingwriteoffiscalculatedat2.5%peryear(ie$25,000peryear).
Assumingthebuildingissoldon30June2001,andthattheindexedcostbaseatthisdateisequalto$1.1
million.TheamendmentsintroducedbytheBillwillreducetheindexedcostbaseby$50,000to$1.05million,
beingthebuildingallowancedeductionsclaimedoverthe2years.
ThesechangeswereintroducedintoParliamentinTaxationLawsAmendmentBill(No6)1997.Asaconcessional
measurethesechangeswillnotapplytoassetsacquiredbefore7.30pmon13May1997.Further,asa
transitionalmeasurewheretheunderlyingassetislandorbuildingacquiredbefore7.30pmon13May1997then
thesemeasureswillnotapplytoexpenditureincurredbefore1July1999eventhoughthisexpendituremay
constitutethedeemedacquisitionofaseparateasset.
ThecostbasechangescontainedinTaxationLawsAmendmentBill(No6)1997donotimpactuponsection
160ZMofthe1936Act,whichoperatestoreducethecostbaseofataxpayer'sinterestinatrustuponreceiptofa
nonassessabledistribution.
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7.0TaxPlanning
AsdiscussedabovethetaxplanningfocusshouldbeonthemaximisationofthecostbaseforCGTpurposes.
Often,thecostbaseofanassetcanbemaximisedbysimplyensuringthatalltheamountsofexpenditure
coveredinsection160ZHthatcanbeincludedinthecostbaseareidentifiedandincludedinrespectofthe
acquisitionofanasset.Forexample,allincidentalcoststotheacquisitionshouldbeidentified.
FurtherkeepinganCGTassetregisterforeachassetwillassistindeterminingtherelevantcostbasebylisting
thecostsofacquisition,thedateofacquisition,aswellascapitalexpenditureincurredwhileholdingtheasset
whichenhancedthevalueoftheassetorpreservedthetaxpayersrightovertheassetetc.Thisshouldensurethat
norelevantexpenditure,forexample,expenditureoncapitalworksandlegalcostsindefendingtitletotheasset
arenotoverlooked.
Inrespectsofthedisposalofaparcelofshares,TD33(capitalassets)andTR95/D12(revenueassets)accept
theuseofa"nomination"or"specificID"methodincalculatingtherealisedgainorlossondisposalfortax
purposes.Accordingly,whereaparcelofsharesexist,oneshouldensurethatsystemsareadequatetocalculate
theresultinggainorlossonabasisotherthanFIFO.Thiswouldallowthetaxpayerachoiceincalculatingthe
costbase.
Whereacompositeassetpurchaseismade,itmaybedesirabletoallocatetheconsiderationpaidinorderto
maximisethecostbaseofoneofthoseassetsratherthantheother.Ifthisisthecase,thenspecifyingthevalue
inthepurchasecontractorobtaininganindependentvaluationmayberequired.
Effectivestructuringoftransactionsisaneffectivemeansofensuringthatanasset'scostbaseismaximisedand
anypotentialCGTliabilityisminimised.Thefollowingmattersshouldbeconsidered:
Thechoiceoffundingofanacquisition,bywayofeitherdebtorequityinastructuresuchasacompanyor
fixedtrust,mayimpactuponthecostbaseandultimatelytheamountofanytaxablegainrealisedon
disposaloftheinvestment.
Generally,fromaCGTperspective,equity,asopposedtodebt(particularlyinterestfreedebt),isthepreferred
meansoffundinganacquisition.Essentially,makingaloantoacompanyortrustwastesanyindexationshelter
whichwouldhavebeenavailablehadtheinvestmentbeenmadebywayofequityinthestructure.Againinthe
valueofashareinacompanyorunitinaunittrust,ifassessableunderPtIIIA,willobtainthebenefitofany
indexationoftheassetcostbase.
Alternativelywheredebtisbeingusedforfundingitshouldgointothestructureatthehighestpossiblelevel,
preferablydirecttotheultimateinvestor.Ifdebtfundingisputinatlowerlevelstherewillbeanerosionofcost
baseandhenceindexationattheinvestorlevel.
Thechoiceofinvestmentvehiclemayalsoimpactuponthecostbaseandanyultimatecapitalgainon
disposal.Generallycompaniesarenotpreferredforpropertyinvestments.
Further,usingadiscretionarytrustratherthanaunittrustcouldavoidaCGTliabilitybeingcrystallisedwhere
thereisareturnofcapitalonthetrust.TheCGTprovisionsoperatetoreducethecostbaseofaninterestina
trustandoncethecostbaseisreducedto$Nil,anassessablecapitalgainmayarise.However,undera
discretionarytrustabeneficiaryisnotlegallyregardedashavinganinterestinthetrustandthisproblemis
overcome.
"amountspayable"
Alternativestoanoutrightdisposalcouldbeconsideredwhere,forexample,anassethasaminimalcostbase,
egminingrightsorresearchanddevelopmentresults.Itmaybepossibletocreatealeaseorlicenceoverthe
originalassetratherthandisposeoftheoriginalassetsandcrystalliseasignificantcapitalgain.
ThetaxpayershouldalsobeawareoftheexistenceofspecificCGTprovisionswhich,whentriggered,willdeem
thatanassetwasacquiredfornoconsideration.Broadlytheseprovisionsmaybetriggeredeitherwhereaperson
createsanintangibleasset,whichimmediatelyvestsinanotherpersonandwhereapersonwhoownsanasset
receivesconsiderationforatransactioninrelationtothatassetandfurthernoneoftheotherCGTprovisionsapply
tothetransaction.
Ontheotherhand,theCGTprovisionsmayoperatetodeemamarketvaluecostbaseevenwhereno
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considerationorinadequateconsiderationispaid.Thedeemingrulesapplywhere:
(a)noconsiderationispaidinrespectofanacquisitionthatalsoconstitutedadisposalbythe
disposer
(b)thewholeorpartoftheconsiderationcannotbevaluedand
(c)wherethepartieswerenotdealingwitheachotheratarmslengthandtheconsiderationpaid
inrespectofanacquisitionthatalsoconstitutedadisposalbythedisposerisinadequate.
Lastly,asdiscussedearlierthetimingoftheacquisitionanddisposalofanassetscanensurethatthebenefits
fromindexationapplyingtothecostbasearemaximised.Thiswillbeespeciallyrelevantinperiodswhereinflation
ishigh.Forexample,byacquiringtheassetinanearlierquarter,holdingtheassetforatleast12monthsand
disposingoftheassetinalaterquarter.
STUDYPOINTS

1. Ifyoudonotpayanythingforanasset,doyoumissoutonacostbase?Ifnot,howisitdetermined?
2. Tomaximisethecostbaseofanasset,itisimportanttoincludeallincidentalcostsofacquisitionand
disposal.Whatarethey?
3. Inwhatsituationscaninterestcostsbeincludedinanasset'scostbase?
4. Whatcircumstancesmaypotentiallyerodeanasset'scostbase?
5. Instructuringtransactions,howdoesthefundingmixaffectanasset'scostbase?
6. Inperiodsofhighinflation,whatstepscanbetakentomaximisethebenefitsofindexationapplyingtoan
asset'scostbase?

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