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Capital Gains Tax – Wasting Assets

In this blog piece, StudyOnline.ie taxation lecturer for ACCA and CPA, Teresa Hegarty, discusses the issue of Wasting Assets for Capital Gains Tax purposes.

 

What is a Wasting Asset?

A wasting asset (or wasting chattel) is an asset which has a predictable life not exceeding 50 years, for example – Livestock, Bloodstock, Private Motor Car, Yachts, Aeroplanes and Caravans.

(note that Freehold land is not a wasting asset whatever its nature)

Exemption from CGT

A gain arising on the disposal of tangible movable property, which is a wasting asset, does not give rise to a charge to tax (exempt from GCT) as the assets waste away over their lifetime and generally the residual value is negligible so that gains will not normally arise on their ultimate disposal.

Items of Plant and Machinery are always to be regarded as having a predictable life of less than 50 years and are always a wasting asset for Capital Gains Tax purposes.

Wasting Assets used in a business

The exemption however is not given where the assets are business assets used in a trade or profession and which qualify for Capital Allowances.  The reason for this is that Capital Allowances up to the full cost of those assets are given for Income Tax purposes, being the wear and tear of the asset over its tax life. Even if capital allowances are not claimed the exemption will still not be given if the allowances could have been claimed.

Loss made on the Disposal of a Wasting Asset used in a Trade

No loss claim for CGT purposes is available in respect of assets qualifying for capital allowances as it will have been effectively relieved for Income Tax or Corporation Tax purposes.

Example

 

Business Equipment Cost 10,000
TWDV at date of sale   2,000
Sales Proceeds   4,500
CGT Computation
Sales Proceeds    4,500
Less cost– 10,000
Chargeable loss–   5,500
Loss allowed for CGT purposes      Nil

 

The loss of €5,500 has already been fully relieved for Income Tax purposes as follows:

 

Original Cost    10,000
Less TWDV at date of sale–     2,000
Capital Allowances granted during

period of ownership

      8,000   A
Sales Proceeds      4,500
Less TWDV at date of sale–     2,000
Balancing charge (BC) on disposal      2,500   B
Overall Capital Allowances granted

including the BC           A-B

     5,500Equivalent to the loss calculated using

CGT above. No further relief allowed under

CGT rules

 

Profit made on the Disposal of a Wasting Asset used in a Trade

 

If a wasting asset is sold and the asset has qualified without restriction for capital allowances (i.e. asset was not used for % privately) then any gain arising, after indexation relief, is fully chargeable to CGT

Example

Business Equipment Cost1,000Assume indexation factor is 1.8
TWDV at date of saleNil 
Sales Proceeds4,500 
CGT Computation
Sales Proceeds     4,500 
Cost     1,000 * 1.8–   1,800 
Chargeable Gain     2,700

 

Note that the capital allowances granted during the period of ownership will be recaptured on sale by means of a balancing charge in the income tax system.

1 Comment

  1. Teresa Hegarty

    See my blog piece attached discussing Wasting Assets for CGT purposes
    Kind Regards
    Teresa

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