Edited version of private ruling

Authorisation Number: 1011560920920

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Inclusion of rental property expenses in cost base

Are you entitled to include costs of owning a rental property acquired prior to 20 August 1991 in the cost base if you did not claim an immediate deduction due to your income being below the tax threshold in the years the expenses were incurred?

No.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commenced on:

1 July 2009

Relevant facts and circumstances

You acquired a rental investment property which settled after 20 August 1991.

The contract for acquisition was signed prior to 20 August 1991.

It was used as a rental property until it was sold in the 2009-10 income year.

You held equal ownership shares in the property.

You have been Centrelink age pensioners and eligible for the Senior Australians tax offset for over 10 years.

For several years, your taxable incomes have been below the threshold required to submit a tax return.

Records have been kept of the expenses and inclusion of these expenses in the cost base would reduce your total discounted capital gain.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 109-5

Income Tax Assessment Act 1997 Section 110-25

Income Tax Assessment Act 1997 Subsection 110-25(4)

Income Tax Assessment Act 1997 Section 110-45(1B)

Reasons for decision

Please note that all references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.

Capital gains tax - acquisition and disposal

Section 102-20 advises that capital gains tax (CGT) is incurred when a CGT event takes place and you make either a capital gain or a capital loss. A capital gain is included in your annual income tax return. It is not a separate tax, merely a component of your income tax. Your net capital gain is added to your annual income and you are taxed at your marginal tax rate.

The most common CGT event is CGT event A1. Section 104-10 explains that this event occurs whenever there is a change of ownership for a CGT asset, for example, when you dispose of an asset to someone else whether by sale or by gift. The time of the event is when you enter into a contract for the disposal or, if there is no contract, when the change of ownership occurs.

Similarly, in the case of acquisition of a CGT asset, section 109-5 advises that you are taken to have acquired the asset when you enter into a contract with someone who disposes of the asset to you, or if there is no contract, when that someone stops being the asset's owner.

Cost base

Section 110-25 advises that the cost base of a CGT asset is made up five elements which are:

1. The money paid, or required to be paid, in respect of acquiring the CGT asset and/or the market value of any other property given, or required to be given, in respect of acquiring the CGT asset.

2. Incidental costs of acquiring the asset, or costs in relation to the CGT event. These costs include stamp duty, legal fees, agent's commission and fees paid for professional services. Note that you cannot include these costs if you have or can deduct them.

3. Non-capital costs incurred in connection with ownership, for example, interest, rates, land tax, repairs and insurance premium. Note that you cannot include these costs if you have or can deduct them.

4. Capital expenditure incurred to increase the value of the asset, if the expenditure is reflected in the state or nature of the asset at the time of the CGT event, for example, extensive renovations undertaken to the CGT asset.

5. Capital expenditure incurred to preserve or defend the title or rights to the asset.

For element 3 above, subsection 110-25(4) states that the third element consists of the costs of owning the asset you incurred but only if you acquired the asset after 20 August 1991.

In addition, section 110-45(1B) explains that expenditure does not form part of the second or third element of the cost base to the extent that you have deducted or can deduct it.

Application to your circumstances

You acquired a rental property in equal shares by a contract signed prior to 20 August 1991. The property was earning assessable income from acquisition until disposal. You have not lodged income tax returns since you both became aged pensioners who are eligible for the Senior Australians tax offset, because your income has fallen below the threshold required to submit an income tax return. While you have not claimed deductions for the expenditure incurred in relation to your rental property since that time you can claim those expenses by lodging the relevant income tax returns.

As you signed the contract to purchase the property before 20 August 1991, you are not entitled to include those costs in the cost base that would fall within the third element even if they were not deducted or deductible.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).