Treatment of P&E in the CGT Calculation

Question

I need your help to check whether I have included P&E items correctly in my CGT calculation. ATO is talking about balancing act. I want to legally reduce my capital gains. Many thanks

Purchase Details:
Purchase cost of CGT asset $429,900.00
Add: Incidental costs to acquire the CGT asset $5,973.75
Less: Plant & Equipment value at purchase $9,901.00
Total purchase cost of CGT asset $419,999.00

Sale Details:
Sales price $515,000.00
Less: Incidental costs that relate to the CGT event $13,740.50
Less: Plant & Equipment value at sale $3,837.48
$17,577.98 -$17,577.98
Total net sales proceeds $497,422.02

Net capital gain is:
Net sales proceeds $497,422.02
Less: Total purchase price $419,999.00
Less: Capital allowance claimed $29,247.32 $390,751.68
Net capital gain is: $106,670.34


Answer

I attach my CGT calculator that may help.

This is all about CGT event K7 https://www.ato.gov.au/law/view/document?docid=PAC/19970038/104-235 Basically if a piece of plant and equipment qualified to be depreciated, say against rent income then the CGT provisions to not apply. You need to reduce the purchase price by the value of your P&E depreciation schedule and reduce the sale proceeds by the value of the plant and equipment, which is pretty much accepted to be the WDV in your depreciation schedule though you need to consider your particular circumstances. Usually the opening value of the P&E is removed from the purchase price. The closing value of the depreciation schedule is removed from the selling price and then CGT is calculated. In theory the gain or loss on the P&E is dealt with separately on revenue account in the rental schedule but in reality this will mean no balancing adjustment because the portion of the sale proceeds allocated to P&E is the same as the unclaimed depreciation (closing value) on them. I would be surprised to learn that the ATO has quibble over the portion of the sale proceeds relating to P&E being higher than the unclaimed depreciation as their depreciation rates are reasonably conservative.

So the “balancing act” the ATO are talking about is the idea that if you have sold the P&E for more than the unclaimed depreciation left then you should pay income tax on the difference. Because you have claimed depreciation the P&E is taken out of the CGT calculation. If the property was not used to produce income then the P&E would not have been depreciated so it does not have to be removed from the purchase and sale price.

It looks to me like you have not included incidental costs of purchase in your cost base calculation even though you mention them.

When you say capital allowance claimed I gather you are talking about Div 43 building depreciation and that you purchased the property after 13th May 1997. Properties purchased before that date do not have to write back building depreciation.

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