Capital gains tax: cost base of CGT asset owned by a company - requirement to index cost base

Is a company required, by section 110-25 of the Income Tax Assessment Act 1997 (ITAA 1997), to work out the cost base of a CGT asset it acquired before 21 September 1999 and which it owned for at least 12 months by indexing the relevant elements of the cost base?

Yes. As the taxpayer is a company, it must index expenditure incurred before 21 September 1999 in calculating the cost base of the CGT asset under section 110-25 of the ITAA 1997.

The taxpayer is a company (but not a listed investment company (LIC)) and purchased land prior to 21 September 1999.

The company sold the land in the 2004 income year and made a capital gain.

The directors of the company are considering retiring and wish to wind up the company.

The directors do not wish to use the indexation method to calculate the company's capital gain on the disposal of the land so they may maximise the amount which can be paid out of the company and treated as exempt under the retirement exemption in Subdivision 152-D of the ITAA 1997.

CGT event A1 happens if a taxpayer disposes of a CGT asset (subsection 104-10(1) of the ITAA 1997). The taxpayer makes a capital gain if the capital proceeds from the disposal are more than the asset's cost base (subsection 104-10(4) of the ITAA 1997).

The rules about the cost base of a CGT asset are set out in Division 110 of the ITAA 1997. The cost base of a CGT asset is made up of five elements.

The cost base of an asset acquired at or before 11.45am on 21 September 1999 also includes indexation of the elements of the cost base (except the third element) if the requirements of Division 114 of the ITAA 1997 are met (subsection 110-25(7) of the ITAA 1997).

However, some entities, namely, individuals, complying superannuation entities, trusts and LICs can choose whether the cost base includes indexation (subsection 110-25(8) of the ITAA 1997). A company (other than a LIC) however, cannot choose whether the cost base includes indexation, as it is not an entity mentioned in the table in subsection 110-25(8) of the ITAA 1997.

Accordingly, the cost base of an asset acquired by a company (other than a LIC) at or before 11.45am on 21 September 1999 includes indexation of the elements of the cost base (except the third element) if the requirements of Division 114 are met.

Subsection 114-10(1) of the ITAA 1997 provides that you only index expenditure in the cost base of a CGT asset if you acquired the asset before 21 September 1999 and at least 12 months before the time of the CGT event. Indexation is only relevant if the cost base of a CGT asset is relevant to a CGT event (subsection 114-5(1) of the ITAA 1997).

In this case, the company owned the CGT asset for more than 12 months. Indexation is relevant in this case as CGT event A1 happened and subsection 104-10(4) of the ITAA 1997 provides that the cost base is relevant in determining your capital gain from this event.

Accordingly, as all the requirements in Division 114 of the ITAA 1997 are satisfied, in this case the company must include indexation in the cost base of their land when calculating their capital gain from CGT event A1. Note 1: Indexation cannot be included in the reduced cost base of a CGT asset.