CGT Now Affects Most of Your Assets, Even Gifting Jewellery…

This blog was originally posted on Ban Tacs and written by Julia Hartman, founder of the Ban Tacs group and Chief Technical Tax Advisor for Empower Wealth Tax. 
This report is also referenced and expanded in our series, Talking Property Tax with Julia Hartman in Episode 4. Watch it here >>

Capital Gains Tax (CGT) applying to collectables is a serious problem probably that is affecting everyone. Here’s just one example of CGT on jewellery as it’s passed down over generations.

 Consider for a moment you purchased an engagement ring before 19^th September 1985 that cost you $700.  As it is a pre-CGT asset there is no CGT payable when you transfer it as a gift to your spouse. Assuming you propose before 19^th September 1985, it will also be a pre-CGT asset in your spouse’s hands. 

Upon your spouse’s death, the ring comes back to you.  It is now considered a post-CGT asset inherited at market value at the date of your spouse’s death.  It may now be worth $7,000.

If you decide to give the ring to your daughter it is deemed to be a gift to her, it is deemed disposal at market value. If this happens soon after your spouse’s death the market value may be the same as on death so no capital gain.  So far so good but what if your daughter gives the ring to your grandson to propose to himself, several years later when the ring is worth $10,000? Your daughter will have to pay CGT on the $3,000 deemed capital gain. 

Your grandson has a cost base of $10,000.  If prompt and successful in his proposal it probably has the same market value when the ownership transfers to his fiancé, so there is no CGT payable.

Now let’s say, forty years later your grandson finds himself in the same position as you. He is now a widower who is wanting to give this engagement ring to his daughter.  It is now worth $100,000 (quite reasonable over 40 years) just with inflation alone and not considering any increase in real purchasing power. There will be a $90,000 capital gain due to inflation.  This is the same ring, still only worth the same number of days, but now the ATO probably wants over $15,000 in tax on a notional gain plus the tax your daughter paid. 

Makes you feel like nothing is ever yours, just on lease from the ATO!

Much of this problem can be avoided, however, if the ring only changes hands on death with the will setting out who the owner should be, as there is a rollover in these circumstances.  Inheriting rather than gifting is the solution.  Failing that you need to keep records on just about everything other than your car, home (if plain vanilla circumstances) and basic furniture.   

Nevertheless, if you inherit an asset from someone that acquired it after 19^th September 1995, you need the cost base records to go with it. The rollover means you stand in their shoes.  Furthermore, you need to pass these records on to your heirs or the ATO will end up being a beneficiary of your estate. 

Even if the asset is under the threshold of $10,000 for personal use assets, for example, furniture, caravans and boats, or $500 for collectables such as jewellery and works of art.  Your heirs will need the evidence to prove this is the case.  That is the way tax law works and the onus of proof is on the taxpayer.

To help you manage these records, Bantacs has created a suite of spreadsheets. You can check them out here >>

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