08 September 2009

Capital Gains Tax and gold

Question from a reader:

“No-one seems to be able to give a clear answer due to the sorry state of knowledge about PM’s in Australia but seeing as you work for the Mint, are an accountant, and want to make this site a source of information for Australian gold investing, are you able to make some comment about the capital gains treatment of gold bullion in Australia? Are there any precedent cases in tax law? In particular, is the conversion of unallocated to allocated considered a capital gains event? I know that you are not able to give investment advice but perhaps you could give some hypothetical situations or similar.”

Before I start, let me say that my comments below are general in nature and do not take into account the specific taxation circumstances of each reader. Readers should not rely on what I say and should seek their own independent advice on the taxation implications relevant to their own circumstances before making any investment decision.

The only publically available information on the tax treatment of precious metals in Australia I know of is that contained in the Product Disclosure Statement (PDS) for our ASX listed product, Perth Mint Gold (PMG). This product is structured as a right to receive gold, so is different to unallocated or allocated, but it does give some pointers as to the likely treatment of physical bullion.

Note that the PMG PDS advice assumes an Australian resident individual taxpayer who acquires PMGs and holds them on capital account, in other words the frequency of your trading would not constitute carrying on a business of trading or dealing in gold.

Firstly, gold is a Capital Gains Tax (CGT) asset. Some gold investors seem to think that gold is a special asset to which the normal tax rules don’t apply. Sorry, it is just like any other real asset, like property. It is taxable.

The PMG PDS advice notes that gold does not earn any income and that it is held with the intention of selling it for a capital gain. This affects the treatment of the costs incurred in acquiring and storing gold. Below is a summary of the tax issues for PMG:

* Sale of PMG on ASX [same as sale of gold]: Disposal of PMG is a taxable CGT event. 50% Discount may be available if PMG held for more than 12 months.

* Physical Settlement [same as unallocated conversion to physical]: No CGT event. Costs of acquisition and exercise of PMG become part of cost base of the gold.

* PMG Management Fee [same as storage fee]: Not deductible in the year in which it is incurred. Forms part of the cost base of the PMG. Can be utilised to reduce any capital gain on the disposal or cancellation of the PMG. Does not form part of the reduced costs base of the PMG and so cannot increase any capital loss on disposal or cancellation of a PMG. Not a cost of acquiring or exercising the PMG. Will not become part of the cost base of any physical gold a Holder acquires through exercising the PMG.

I think the sale of gold and storage fees advice for PMG would apply to physical gold. I am not so sure about the unallocated to allocated conversion because the exact advice on Physical Settlement refers to the option nature of PMG: “Under section 134-1 of the 1997 Tax Act, any gain or loss on the exercise of an option is disregarded and any payment made to acquire the option, plus any payment made to exercise the option, will become part of the cost base of the asset acquired on exercise of the option. Therefore, no CGT will arise if the Holder completes an Exercise Notice requesting physical delivery of gold bullion.”

I think it would be important in any unallocated to allocated (or unallocated collection) transaction to ensure that you are only invoiced for fabrication and storage/delivery and that it is not processed as a sale of unallocated, purchase of allocated. Common sense interpretation is that conversion of unallocated to physical is merely a change in form and as you do not give up the gold in exchange for cash, there is no CGT event. But since when does tax law make any sense? Always best to get specific advice from a tax expert.

3 comments:

Anonymous said...

Might be worth mentioning collectables worth $500 or less have no CGT. Collectables specifically include coins "that are used or kept mainly for the personal use or enjoyment of you or your associate(s)".

http://www.ato.gov.au/individuals/content.asp?doc=/content/36555.htm

Kelvin Barclay said...

Bron,

Capital Gains Tax on legal tender gold coins.

Let us say you buy an Australian legal tender 1oz gold coin for $1800 with a face value $1.

Later on you sell the coin for $2000. That gives a capital gain of $200, which is taxable.
OR
You buy an old car with your coin. The seller knows that the real value of the coin is $2000 but you can legally state, on the transfer papers, a price of $1. No capital gain.

If you then sold the car for $2000
that would be a capital gain of $1999!
OR
You could also sell the car for another $1 gold coin, no capital gain.

In the USA some of the states are bring back gold and silver coins and some bloke said that there will no problem UNTIL they enter circulation and everyone uses there face value for tax purposes and there exchange rate for commercial purposes.

Bron Suchecki said...

Kelvin,

Most income tax laws have rules covering the situation you mention, which is closely related to barter.

If the coin has a market value greater than its face value then the tax office will use the market value to determine income.