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Edited version of private ruling

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Ruling

Subject: Capital gains tax

Question 1:

Will the money you paid to the purchasers of your property as an 'incentive to purchase' form part of the cost base of the property?

Answer:

No.

Question 2:

Will the capital proceeds you received for the sale of your property be reduced by the amount of money you paid to the purchasers of your property as an 'incentive to purchase'?

Answer:

Yes.

This ruling applies for the following period:

Year ending 30 June 2010

The scheme commences on:

1 June 2009

Relevant facts and circumstances

You sold your rental property.

You had a contract of sale for an agreed amount.

A few days before settlement, the purchasers contacted you to inform you that they would not be paying the agreed amount due to their loan being approved for a lesser amount than what they had originally thought.

You could not wait for another contract to be drawn up so as an incentive for the purchasers to proceed with the purchase of your rental property, you paid them the shortfall, being the difference between the contracted price and the amount they could afford to pay, to bring their total funds up to the contracted amount.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 110-25,

Income Tax Assessment Act 1997 section 116-20 and

Income Tax Assessment Act 1997 section 116-50.

Reasons for decision

Question 1

Detailed reasoning

The Cost base

The cost base of a capital gains tax (CGT) asset is generally the cost of the asset when you bought it.

The cost base of a CGT asset consists of five elements.

The first element of the cost base, being the acquisition costs, is the total of the money paid, or required to be paid, and the market value of the property given, in respect of the acquisition. 

The second element of the cost base are the incidental costs that the taxpayer incurs in acquiring the asset of which relate to a CGT event that happens in relation to the asset. Incidental costs can include stamp duty; remuneration for the services of an accountant, agent, valuer, auctioneer; and the costs of advertising to find a buyer. 

The third element is the cost of ownership of an asset.   A cost of ownership of an asset is any expenditure in connection with the continuing ownership of the asset. These costs include interest on money borrowed to acquire an asset, costs of maintaining, repairing and insuring an asset, rates and land tax, interest on money borrowed to refinance the money borrowed to acquire an asset, and interest on any money borrowed to finance capital expenditure incurred to increase an assets value.    

The fourth element is capital expenditure incurred to increase the value of the CGT asset. This must be reflected in the enhanced value of the asset at the time of the CGT event.

The fifth element is capital expenditure that you incurred to establish, preserve or defend your title to the asset, or a right over the asset. 

In your situation, you paid an amount to the purchasers of your rental property as an 'incentive' to continue with the purchase, i.e. to ensure that they had the correct amount of funds required at settlement. This amount does not fall into any of the elements that make up a CGT asset's cost base. Therefore, when calculating a capital gain or capital loss on the sale of the property, the amount you paid the purchasers will not form part of the cost base of your CGT asset.

Question 2

Detailed reasoning

Generally the capital proceeds from a CGT event are the total of the money and the market value (worked out as at the time of the event) of any other property you have received or are entitled to receive in respect of the CGT event happening.

However, there are some modifications to the general rule that may be relevant to the disposal of a CGT asset.

The capital proceeds from a CGT event are reduced by;

In your case, you received the contracted amount from the purchasers at settlement for the sale of your rental property. This amount is your capital proceeds. However, as you paid the purchasers an amount of money prior to settlement to ensure that they had the funds they required to meet the contracted sale price, your capital proceeds for the sale of your property should be reduced by the amount you paid to the purchasers.

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