Before there can be a capital gain/loss, most of the CGT events require something to happen to a “CGT Asset” that was acquired on or after 20 Sep 1985. Understanding the concept of a CGT asset is therefore an important part of the CGT process.

Section 108-5(1) of the ITAA97 defines a CGT asset in general terms to mean “any kind of property, or a legal or equitable right that is not property”.

The word “property” is a broad term and can be used to describe everything that a person may have control over.  Property may be tangible or intangible. 

ITAA97 - SECT 108.5
             (1)  A CGT asset is:
                     (a)  any kind of property; or
                     (b)  a legal or equitable right that is not property.

             (2)  To avoid doubt, these are CGT assets :
                     (a)  part of, or an interest in, an asset referred to in subsection (1);
                     (b)  goodwill or an interest in it;
                     (c)  an interest in an asset of a partnership;
                     (d)  an interest in a partnership that is not covered by paragraph (c).
Note 1:       Examples of CGT assets are:
*           land and buildings;
*           shares in a company and units in a unit trust;
*           options;
*           debts owed to you;
*           a right to enforce a contractual obligation;
*           foreign currency.

For CGT purposes, each CGT asset needs to be classified into one of the following categories:
• collectables;
• personal use assets – there are four categories of personal use assets:
o a CGT asset (other than a collectable) used or kept mainly for the personal use or enjoyment of the taxpayer in question or an associate of the taxpayer
o an option or right to acquire such an asset
o a debt arising from a CGT event affecting such an asset, and
o a debt arising other than in the course of gaining or producing assessable income or from carrying on a business.  (p369 ATL)
other assets

(4) Cost Base

Generally, a capital gains is the difference between the cost base of an asset and the capital proceeds from the CGT event in relation to that asset.

Division 110 ITAA97 provides the rules for determining the “cost base” and definition

*Section 110-25(1) defines “cost base” as consisting of five elements, summarised as:

1. Cost of the asset

2. Incidental costs of acquisition and disposal.
(eg professional remuneration to brokers and agents, transfer costs, stamp duty, advertising and valuation costs: s110-35)

3. Ownership costs.
Applicable to assets acquired after 20 August 1991 (but not to personal use assets or collectables: s108-17 and s108-30), is the non-capital costs of ownership of the asset (e.g. interest on money borrowed to acquire or refinance the asset; costs of maintaining, repairing or insuring the asset; and rates or land tax) s110-25(4)

4. Improvement, moving and installation expenditure, and

5. Expenditure to establish, preserve or defend title to or rights over the asset.

The first, second, fourth and fifth elements of the cost base of a CGT asset acquired before 11:45am on 21 September 1999 may be indexed to take into account changes in the CPI. Set out in s113.1 – ITAA 97

Reduced cost base
Subdivision 110-B ITAA97

*S110-55 - General rules about reduced cost base

The reduced cost base of a CGT asset has 5 elements where 1,2, 4 and 5 are the same as for the cosy base. The third element for the reduced cost base is any amount that is assessable of a balancing adjustment for the asset or would be assessable if certain balancing adjustment relief was not available. No element in the reduced cost base is indexed.

General Modifications to Cost Base and Reduced Cost Base

The general rules for determining the cost base and the reduced cost base of a CGT asset sometimes have to be modified. Most modifications replace the first element of the cost base and reduced cost base of a CGT asset, namely, the amount paid for the CGT asset.

S112-15 General rule for replacement modifications

If a cost base modification replaces an element of the * cost base of a * CGT asset with an amount, this Part and Part 3 3 apply to you as if you had paid that amount.

Example:  An individual pays $10,000 to acquire an option. The individual dies and the option devolves to his legal personal representative, who exercises the option.

Section 134 1 applies to the legal personal representative as if the representative had paid $10,000 for the option.

The general rules for working out the cost base and reduced cost base of an asset are modified by special rules in Div 112.  These modifications relate to:

- Replacement of the actual cost with the market value
- Split, changed or merged assets
- Apportionment rules
- Assumption of liability

The most important of these is the “market value substitution rule” which provides that the first element of the cost base and reduced cost base of a CGT asset acquired from another entity is its market value at the time of acquisition if:
• the taxpayer did not incur expenditure to acquire it (eg the asset was received as a gift)
• some or all of the expenditure incurred to acquire it cannot be valued; or
• the taxpayer did not deal at arm’s length with the other entity in connection with the acquisition (s112-20).

E.g. A father gave his daughter shares as a gift. The cost base of those shares to the daughter would be the market value of the shares at the date of the gift.