Separate or aggregate CGT assets? The role of subdivision 108-D

 

Under common law, when an accessory is annexed to a principal asset (such as land) the accessory becomes part of that principal asset. Theoretically, without an adjustment to the tax rules, if the principal asset of land had been acquired pre-CGT (before 20 September 1985), any building on that land or any addition to that land would also be regarded as a pre-CGT asset — even though the building or addition to that land had been acquired post-CGT.

To get around this scenario, an adjustment was indeed made to the tax rules. Hence we have subdivision 108-D, which modifies the operational rules for CGT purposes and treats an asset as being a separate CGT asset from the principal asset where the asset is:

  • a building or structure on post-CGT land which would be subject to a balancing adjustment under Subdivision 40-D (depreciating assets) or sections 355-315 or 355-525 (research and development) (ss108-55(1)). Importantly, a building or structure is not a separate asset merely because it is subject to a capital works deduction under Division 43, such as a rental property (ss108-55(1))
  • a building or structure erected post-CGT on land acquired pre-CGT (ss108-55(2) {scroll down})
  • a depreciating asset that is part of the building or structure (s108-60)
  • post-CGT land acquired adjacent to pre-CGT land, even if the titles were subsequently amalgamated (s108-65), or
  • a capital improvement that is made to a pre-CGT asset where the cost base of that improvement (assuming it is a separate CGT asset) exceeds the relevant “improvement threshold” (s108-70 and s108-85 — and see below).

Broadly, a post-CGT improvement to a pre-CGT acquired asset will be taken to be a separate CGT asset if its cost base, when a CGT event happens in relation to the pre-CGT acquired asset, is:

  • more than the improvement threshold in the year the CGT event occurs ($147,582 for the 2017-18 income year and $150,386 for the 2018-19 year – see below for full list), and
  • more than 5% of the capital proceeds from the event.

For separate improvements, the threshold applies for each improvement.

Section 108-80 outlines the factors to be considered in determining whether improvements are to be aggregated or treated as separate assets. For example, improvements are likely to be aggregated where they are part of an overall project or made within a reasonable period of each other.

Where the improvements need to be aggregated, the threshold levels apply to the total of all costs.

When a CGT event happens involving a CGT asset acquired before 20 September 1985, it is critical to check whether the cost base of the asset includes any post-19 September 1985 improvements. Where a disposal of a CGT asset comprises two or more separate assets, the capital proceeds will need to be apportioned between the separate assets (s116-40).

An intangible capital improvement made to a pre-CGT asset can be a separate asset (TD 2017/1). For example, a Development Approval (DA) to land that is pre-CGT may be separate asset and may be a subject to CGT on the sale of the pre-CGT land and the DA.

Where a taxpayer has an interest in a CGT asset and acquired another interest in the same asset, the two interests remain separate CGT assets for CGT purposes (TD 2000/31).

Improvements to pre-CGT assets
These limits are used to determine whether an improvement must be treated as a separate asset (s108-70(3)(a)).

Year Limit for treatment
as a separate asset
Year Limit for treatment
as a separate asset
1985-86 $50,000 2002-03 $101,239
1986-87 $53,950 2003-04 $104,377
1987-88 $58,859 2004-05 $106,882
1988-89 $63,450 2005-06 $109,447
1989-90 $68,018 2006-07 $112,512
1990-91 $73,459 2007-08 $116,337
1991-92 $78,160 2008-09 $119,594
1992-93 $80,036 2009-10 $124,258
1993-94 $80,756 2010-11 $126,619
1994-95 $82,290 2011-12 $130,418
1995-96 $84,347 2012-13 $134,200
1996-97 $88,227 2013-14 $136,884
1997-98 $89,992 2014-15 $140,443
1998-99 $89,992 2015-16 $143,392
1999-00 $91,072 2016-17 $145,401
2000-01 $92,802 2017-18 $147,582
2001-02 $97,721 2018-19 $150,386

Note that where a pre-CGT building is relocated to post-CGT land, the exceptions to the common law principle do not apply and the result is a single post-CGT asset that comprises both the land and the building.