Edited version of your private ruling

Authorisation Number: 1011931152129

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Ruling

Subject: Capital gains tax - inclusion of costs incurred in maintaining a vacant block of land

Question 1: Can the costs you have incurred in maintaining your vacant block of land be included as a deduction in your income tax return?

Answer: No.

Question 2: Can the costs you have incurred in maintaining your vacant block of land be included in the cost base upon its disposal?

Answer: No.

Question 3: Is the capital loss made on the disposal of the vacant block land able to be offset against any future capital gain?

Answer: Yes.

Question 4: Can the capital loss reduce your taxable income:

Answer: No.

This ruling applies for the following period

30 June 2012

The scheme commenced on

1 July 2011

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

In the early 2000's you and your spouse jointly purchased a vacant block of land (the block).

It was you and your spouse's intention to building your permanent home on the block for yourselves and your child.

You and your spouse had house plans drawn up.

You and your spouse were not able to proceed as your circumstances changed.

You and your spouse purchased a dwelling in another location.

You and your spouse put the block on the property market with a local real estate agent.

To date you and your spouse have not been able to dispose of the block due to the difficult economic conditions that the property market is experiencing.

The only way that you and your spouse can dispose of the block is by taking a substantial loss.

You and your spouse have incurred the following costs since purchasing the block:

· stamp duty

· legal and conveyance fees

· additional fees, outlay and searches

· registration fees

· council rates paid from the beginning of your ownership period to the end of the last financial year

· building of retaining wall to one side of the property cutting down of large trees and removal from property to enable building of dwelling

· grass cutting costs over a specified period to comply with council requests to avoid vermin settling in grass

· cost of For Sale sign

· local newspaper - For Sale advertisement

· cost of preliminary drawings for construction of dwelling

You and your spouse have sought advice from your accountants as to whether these costs can be included as a deduction in your income tax return.

You and your spouse did not purchase the block as a business investment.

You and your spouse will make a capital loss upon disposal of the block.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 110-25

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 116-20

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Deductions

Expenses which are incurred in the gaining or producing of assessable income are an allowable deduction except where the expense in considered to be of a capital, private or domestic nature.

In your case, the block was purchased by you and your spouse for private and domestic purposes, so you cannot include any of the costs you have incurred as a deduction in your income tax return.

Capital gains tax

Capital gains tax (CGT) is the tax you pay on certain capital gains you make. You may make a capital gain or capital loss as a result of a CGT event. 

The most common CGT event happens if you dispose of an asset to someone else, for example, if you dispose of a vacant block of land. The time of the event is when you enter into the contract for the disposal or if there is no contract - when the change of ownership occurs.

CGT event A1 will occur when you and your spouse dispose of the block. 

You make a capital gain if the capital proceeds from the CGT event exceed the cost base of the CGT asset. You make a capital loss when the capital proceeds are less than the asset's reduced cost base.

Reduced cost Base

The reduced cost base is made up of five elements, they are:

1) the money or property given for the asset

2) incidental costs of acquiring the asset or in relation to the CGT event that happens to it, including its disposal, such as:

o fees paid to a surveyor, valuer, auctioneer, accountant, broker, agent, consultant or legal advisor (you can only include the cost of advice concerning the operation of the tax law as an incidental cost if the advice was provided by a recognised tax adviser)

o costs of transfer

o stamp duty or other similar duty

o costs of advertising or marketing to find a buyer

o costs relating to the making of any valuation or apportionment to determine your capital gain or capital loss

o search fees (such as fees to check land titles and similar fees)

o the costs of a conveyancing kit (or a similar cost), and

o borrowing expenses (such as, loan application fees and mortgage discharge fees).

3) balancing adjustment amount - any amount that is assessable because of a balancing adjustment for the asset or that would be assessable if certain balancing adjustment relief were not available

4) capital costs to increase or preserve the value of your asset such as:

o costs of applying for zoning changes, and

o construction costs

5) capital costs of preserving or defending your ownership of or rights to your asset.

You and your spouse can include the following costs you incurred under second and fourth elements:

· second element

o stamp duty

o legal and conveyancing fees

o additional fees, outlay and searches

o registration fees,

o cost of For Sale sign, and

o local newspaper - For Sale advertisement

· fourth element

o building of retaining wall.

The following costs you and your spouse incurred cannot be included in the reduced cost base:

o rates

o cutting down of trees and subsequent removal

o cutting of grass, and

o cost of preliminary drawings.

Capital loss

If your total capital losses for the income year are more than your total capital gains, the difference is your net capital loss. It can be carried forward to later income years to be deducted from future capital gains.

There is no time limit on how long you can carry forward a net capital loss. You apply your net capital losses in the order that you make them.

You cannot deduct capital losses or a net capital loss from your income.

Fore more information on the cost base and reduced cost base please see the enclosed information, which has been taken from the Guide to capital gains tax 2010-11 (NAT 4151-6.2011).

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