ATO Interpretative Decision

ATO ID 2001/375

Income Tax

Cost Base: Recoupment of expenses
FOI status: may be released

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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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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

Do interest payments in respect of a CGT asset made by an employer as part of an employee's salary sacrifice arrangement form part of the asset's cost base?

Decision

No. Interest payments made by an employer as part of salary sacrifice arrangement constitute a recoupment of these amounts within the meaning of section 20-25 of the Income Tax Assessment Act 1997 (ITAA 1997). Subsection 110-45(3) of the ITAA 1997 provides that expenditure that has been recouped does not form part of the cost base of a CGT asset.

Facts

The taxpayer purchased a property in July 2000 and borrowed to finance the purchase. The taxpayer's parents live in the property rent-free. The taxpayer is considering asking their employer to make the loan repayments as part of a salary sacrifice arrangement. The taxpayer will continue to be liable for the interest payments on the loan.

Reasons for Decision

As provided by paragraph 110-25(4)(a) of the ITAA 1997 interest incurred on the money borrowed to acquire an asset can form part of the cost base of the asset. For assets acquired after 7.30pm on 13 May 1997, subsection 110-45(3) of the ITAA 1997 provides that, except so far as the amount is included in assessable income, expenditure does not form part of the cost base to the extent that it is recouped.

The term 'recoupment' is defined in section 20-25 of the ITAA 1997. Subsection 20-25(2) of the ITAA 1997 provides that where another entity pays an amount for you in respect of a loss or outgoing that you incur you are taken to receive the amount as recoupment of the loss or outgoing.

As the interest incurred by the taxpayer is to be paid by their employer, the taxpayer is taken to have recouped these amounts. Therefore the interest paid by the taxpayer's employer will not form part of the CGT asset's cost base.

Date of decision: 5 March 2001

Year of income: Year ended 30 June 2001

Legislative References:
Income Tax Assessment Act 1997
   section 20-25
   subsection 20-25(2)
   paragraph 110-25(4)(a)
   subsection 110-45(3)

Keywords
capital gains tax
capital gains
expense payment fringe benefits
interest expenses
non deductible expenses
recoupment
rental property
rental property loan interest expenses
salary sacrifice

Siebel/TDMS Reference Number: 1-7V3IBCW

Business Line: Private Groups and High Wealth Individuals

Date of publication: 29 September 2001
Date reviewed: 5 November 2018

ISSN: 1445-2782

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