ATO Interpretative Decision
ATO ID 2005/347 (Withdrawn)
Income Tax
Capital gains tax: capital improvements - cost base used in determining whether improvement is a separate CGT assetFOI status: may be released
-
This ATO ID is withdrawn as a result of subsections 110-25(7) and 110-25(8) of the Income Tax Assessment Act 1997 being repealed by Act 32 of 2006 with effect from 6 April 2006 which is applicable to CGT events happening on or after 1 July 2005.This document incorporates revisions made since original publication. View its history and amending notices, if applicable.
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Is a taxpayer who made a capital improvement to land acquired before 20 September 1985 required to use the indexed cost base of the improvement when applying the tests in subsection 108-70(2) of the Income Tax Assessment Act 1997 (ITAA 1997) to determine whether the improvement is a separate CGT asset, if the improvement was undertaken before 21 September 1999?
Decision
Yes. As the requirements in Division 114 of the ITAA 1997 are met, the taxpayer is required to use the indexed cost base for the purposes of determining whether the tests in subsection 108-70(2) of the ITAA 1997 are satisfied.
Facts
A taxpayer purchased vacant land before 20 September 1985. After this date, but before 21 September 1999, the taxpayer entered into a contract to make a major improvement to the land. The improvement cost $100,000.
The taxpayer entered into a contract to sell the improved land in the 2005-06 income year for $500,000.
The indexed cost base of the improvement at the time of entering into the contract was $110,000.
The improvement threshold for the 2005-06 income year is $109,447.
Reasons for Decision
Subsection 108-70(2) of the ITAA 1997 provides that a capital improvement to a CGT asset that you acquired before 20 September 1985 (that is not related to any other capital improvement to the asset) is taken to be a separate CGT asset if its cost base (assuming it were a separate CGT asset), when a CGT event happens to it, is:
- -
- more than the improvement threshold for the income year in which the event happened, and
- -
- more than 5% of the capital proceeds from the event.
To determine whether the improvement in this case is a separate CGT asset, its cost base must be compared with the improvement threshold for the 2005-06 income year and the capital proceeds from the disposal of the improved land.
An issue arises as to whether indexation must be included in the cost base of the improvement when applying these tests.
Subsection 110-25(7) of the ITAA 1997 provides that the cost base of a CGT asset that a taxpayer acquired at or before 11.45 am on 21 September 1999 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.
Broadly, Division 114 of the ITAA 1997 requires that the asset must have been acquired at or before 11.45 am on 21 September 1999 and owned for at least 12 months before the CGT event.
Although subsection 110-25(8) of the ITAA 1997 provides that, for CGT events happening after 11.45 am on 21 September 1999, the cost base of an asset includes indexation only if an eligible entity so chooses, this is only for the purpose of working out the amount of a capital gain from the asset. The entity cannot choose to exclude indexation from the cost base of an asset when applying subsection 108-70(2) of the ITAA 1997.
As the improvement in this case was acquired before 21 September 1999 and it was owned for at least 12 months, its cost base includes indexation for the purposes of applying subsection 108-70(2) of the ITAA 1997. As this amount is more than:
- -
- the improvement threshold for the 2005-06 income year ($109,447), and
- -
- 5% of the capital proceeds from the disposal of the land ($25,000),
the improvement will be a separate CGT asset.
Having established that the improvement is a separate asset from the land, the taxpayer (if eligible) can work out their capital gain from its disposal using the CGT discount method or choose that the indexed cost base method apply.
Year of income: Year ended 30 June 2006
Legislative References:
Income Tax Assessment Act 1997
subsection 108-70(2)
subsection 110-25(7)
subsection 110-25(8)
Related Public Rulings (including Determinations)
Taxation Determination TD 2005/20
Keywords
Capital gains
Capital gains tax
CGT assets
CGT separate assets
ISSN: 1445-2782
| Date: | Version: | |
| 29 November 2005 | Original statement | |
| You are here | 15 January 2010 | Archived |