Edited version of your private ruling

Authorisation Number: 1012557092918

Ruling

Subject: CGT - acquisition/disposal/subdivision

Question

Will the capital gain on the sale of investment properties be assessable to the taxpayer?

Answer

Yes.

Question

Is the interest and additional expenses for the investment properties deductible after the mortgagee took possession of the property?

Answer

No.

Question

If not, can the interest and additional expenses form part of the cost base of the properties for CGT purposes?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commenced on

1 July 2009

Relevant facts and circumstances

You owned multiple rental properties.

In Month 20XX you were declared bankrupt.

In Month 20XX a mortgagee took possession of your rental properties.

The mortgagee asked the tenants to vacate the properties.

No rental income was earned after this date.

In the 2011 financial year your rental properties were sold by the mortgagee.

You incurred expenditure for your properties after they were taken by the mortgagee but before they were sold.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Income Tax Assessment Act 1997 Section 106-30.

Income Tax Assessment Act 1997, Section 110-25.

Reasons for decision

Question 1

Section 106-30 of the Income Tax Assessment Act 1997 (ITAA 1997) advises that the vesting of assets in a trustee under bankruptcy law is ignored for CGT purposes. The effect of this is that the asset is still considered to be owned by the insolvent person, even though the asset is vested in the trustee.

The acts of the trustee in relation to the vested asset are taken to be the bankrupt's acts under subsection 106-30(2) of the ITAA 1997.

When the bankruptcy trustee sold the property CGT event A1 happened (section 104-10 of the ITAA 1997).

Consequently, no disposal takes place on the vesting of the asset the trustee, but a disposal of the asset by the trustee is considered to be a disposal by the insolvent person.

The liability for CGT on the capital gain on disposal of the property is borne by the insolvent person in the year of income in which the disposal occurred.

Therefore, any capital gain on the sale of your properties is assessable to you and will need to be included in your income tax return for the 2011 financial year.

Question 2

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature.

In your case, as the properties were no longer producing assessable income when the expenses were incurred, the expenditure will not be an allowable deduction under section 8-1 of the ITAA 1997.

Question 3

As per section 110-25 of the ITAA 1997 the cost base of a CGT asset is made up of five elements:

· Money or property given for the asset

· Incidental costs of acquiring the CGT asset or that relate to the CGT event

· Costs of owning the asset

· Capital costs to increase or preserve the value of your asset or to install or move it

· Capital costs of preserving or defending your ownership of or rights to your asset

In your circumstances, the costs that you have incurred, including rates, interest, bank charges and water rates are all costs of owning the asset. As these costs are non-deductible you are able to include them as part of your cost base for the appropriate asset.

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).