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Edited version of your written advice
Authorisation Number: 1051273025147
Date of advice: 5 October 2017
Ruling
Subject: Capital gains tax – rental property deductions
Question
Can rental expenses as deductions be included in the capital gain calculations?
Answer
Yes.
This ruling applies for the following period
Year ended 30 June 2017.
The scheme commences on
1 July 2016.
Relevant facts and circumstances
You purchased a property (the Land).
The Land is zoned farming land.
Upon purchase you used the Land as a hobby farm.
You later rented the Land to another party.
You made a loss on the rental of the Land and did not include any income or expenses in your tax returns.
You sold the Land.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 110-25
Income Tax Assessment Act 1997 subsection 110-45
Reasons for decision
Detailed reasoning
A capital gain is made on the disposal of a capital gains tax (CGT) asset when the proceeds received from the sale are more than the cost base of the asset. Accordingly, to determine the extent of any assessable gain, it is necessary to determine the cost base of the asset.
Section 110-25 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the cost base of a CGT asset has five elements. These include the initial cost of the asset, as well as certain other costs associated with acquiring, holding and disposing of the asset. The five elements 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 premiums.
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.
As you will note in element 3 above, subsection 110-25(4) states out 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.
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.
In addition Taxation Determination TD 2005/47 specifies that, where an amount that could have been deducted was not deducted, a taxpayer cannot include the amount (that could have been deducted) in the cost base of a CGT asset if the period for amending the income tax return to which the deduction relates has not expired.
In your case your previous tax agent determined not to include in your income tax returns any income or deductions relating to the lease of the Land.
You have now changed tax agents, sold the Land and want to claim the deductions in the cost base of the Land.
You are able to include in the cost base of the Land deductions not claimed in the income tax years where the period for amendment has expired.
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