• What is the cost base?

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    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

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    For most CGT events, the cost base of a CGT asset is important in working out if you have made a capital gain. For some CGT events, however, the cost base is not relevant. In these cases, the provisions dealing with the relevant CGT event explain the amounts to use to work out your capital gain.

    For example, if you enter into an agreement not to work in a particular industry for a set period of time, CGT event D1 specifies that you make a capital gain or capital loss by comparing the capital proceeds with the incidental costs.

    In calculating a capital gain, you work out the cost base of the CGT asset involved, whereas in calculating a capital loss you work out the reduced cost base.

    Elements of the cost base

    The cost base of a CGT asset is made up of five elements. You need to add together all of these elements to work out your cost base for each CGT event.

    Where relevant, the elements of the cost base are reduced by any GST included in the price.

    First element: money paid for the asset

    This element includes money paid (or required to be paid) for the asset and the market value of property given (or required to be given) to acquire the asset.

    Second element: incidental costs of the CGT event or of acquiring the CGT asset

    Examples of these incidental costs include an agent's commission, the cost of advertising to find a seller or buyer, stamp duty, and fees paid for professional services (for example, to an accountant, professional tax adviser, valuer or lawyer).

    You can include expenditure for advice concerning the operation of the tax law as an incidental cost only if it was provided by a recognised professional tax adviser and you incurred the expenditure after 30 June 1989.

    Do not include expenditure for which you have, or may have, a deduction for income tax purposes in any year.

    Third element: non-capital costs associated with owning the asset

    Examples of these non-capital costs include interest, rates, land taxes, repairs and insurance premiums. They also include non-deductible interest on borrowings to re-finance a loan used to acquire a CGT asset and on loans used to finance capital expenditure you incur to increase an asset's value.

    You can include non-capital costs of ownership only in the cost base of assets acquired on or after 21 August 1991. You cannot include these non-capital costs in the cost base of any collectables or personal use assets.

    These costs cannot be indexed or used to work out a capital loss. Do not include expenditure for which you have, or may have, a deduction for income tax purposes in any year.

    Fourth element: capital costs associated with increasing the value of your asset

    This element is relevant only if the expenditure is reflected in the state or nature of the asset at the time of the CGT event, for example, if you paid for a carport to be built on your rental investment property.

    Fifth element: capital costs to preserve or defend your title or rights to your asset

    This element includes capital expenditure you incur to preserve or defend your title or rights to the asset, for example, if you paid a call on shares.

    Assets acquired after 13 May 1997

    If you acquired a CGT asset after 13 May 1997, the cost base of the asset does not include:

    • any expenditure on the asset that has been (or can be) allowed as an income tax deduction. This applies to all elements of the cost base, or
    • heritage conservation expenditure and landcare and water facilities expenditure incurred after 12 November 1998 that give rise to a tax rebate (now called a tax offset).

    Note
    Special rules for land

    Special rules apply if you acquired land on or before 13 May 1997 but you incurred expenditure between this date and 1 July 1999 on constructing a building that is treated as a separate asset from the land for CGT purposes. If you think this may be relevant to you, contact the ATO for more information.

    Example
    Special building write-off deduction

    Zoran acquires a rental property on 1 July 1997 for $200 000. Before disposing of the property on 30 June 2001, he claims $10 000 in special building write-off deductions.

    At the time of disposal, the cost base of the property was $210 250. Zoran must reduce the cost base of the property by $10 000 to $200 250.

    In some cases, a deduction you have claimed on a CGT asset can be partly or wholly 'reversed'-that is, the value of part or all of the deduction may be declared as income in the year the CGT event happens. In this case, the capital gains cost base of the CGT asset is increased by the amount you have to include in assessable income.

    Any expenditure you recoup does not form part of the cost base of a CGT asset. In working out whether you have made a capital gain or capital loss from a CGT event in the 2000-01 income year or in a later year, do not reduce the cost base by a recouped amount included in your assessable income.

    Example
    Recouped expenditure

    John bought a building in 1999 for $200 000 and incurred $10 000 in legal costs associated with the purchase. As part of a settlement, the vendor agreed to pay $4000 of the legal costs. John did not claim as a tax deduction any part of the $6000 he paid in legal costs.

    He later sells the building. As he received reimbursement of $4000 of the legal costs, in working out his capital gain he includes only $6000 in the cost base.

    Indexation of the cost base

    If a CGT event happens in the 2000-01 income year in relation to a CGT asset you acquired before 21 September 1999, you may be able to use either the indexation method or the discount method to calculate your capital gain.

    If you use the indexation method, some of the cost base expenditure you incurred up to 21 September 1999 may be indexed to account for inflation up to the September 1999 quarter. Only expenditure incurred before 21 September 1999 may be indexed because changes to the law mean indexation is frozen at that date. Refer to chapter 2 for more information.

    If you acquired shares in the Commonwealth Bank of Australia (CBA) or Telstra 1 (the first public offer of Telstra shares), the dates from which indexation applies to each instalment paid are shown in Recent share transactions at appendix 2.

    Reduced cost base

    The reduced cost base is the amount you take into account when you are working out whether you have made a capital loss when a CGT event happens to a CGT asset. Remember that a capital loss can only be used to reduce a capital gain-it cannot be used to reduce other income.

    The reduced cost base of a CGT asset has the same five elements as the cost base, except for the third element. The third element is any amount that is assessable because of a balancing adjustment for the asset, or that would be assessable if certain balancing adjustment relief was not available. These elements are not indexed and do not include any relevant GST input tax credits. You need to add together all of these elements for a CGT asset to find out your reduced cost base for the relevant CGT event.

    The reduced cost base does not include any of those costs that have been (or can be) allowed as deductions, for example, write-off deductions for capital expenditure. It also does not include any expenditure that you have recouped, for example, a claim on an insurance policy (except for any recouped amount included in your assessable income).

    Example
    Write-off deduction

    Danuta acquired a new income-producing asset on 28 September 1994 for $100 000. She sold it for $90 000 in November 2000. During the period she owned it she was allowed write-off deductions of $7500. Her capital loss is worked out as follows.

     

    $

    Cost base

    100 000

    Less write-off deduction

       7 500

    Reduced cost base

    92 500

    Less capital proceeds

    90 000

    Capital loss

    2 500

    Last modified: 31 Aug 2010QC 16195