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Edited version of your written advice
Authorisation Number: 1051466223260
Date of advice: 7 January 2019
Ruling
Subject: CGT - elements of the cost base
Question
Will the portion of the calculated economic loss for which you were not compensated form part of the cost base of the property?
Answer
No.
This ruling applies for the following periods:
Year ending 30 June 2018
The scheme commences on:
1 July 2017
Relevant facts and circumstances
You purchased a property.
The property was not used to produce assessable income.
The property was not your main residence.
In 20XX the property was severally damaged.
You received an amount of compensation.
You only received compensation for part of the damage caused.
The property was sold.
No other insurance proceeds were received.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 110-25
Reasons for decision
For most capital gains tax (CGT) events, your capital gain is the difference between your capital proceeds and the cost base of your CGT asset. Under section 110-25 of the Income tax Assessment Act 1997 (ITAA 1997) the cost base of a CGT asset is largely what you paid for it, together with some other costs associated with acquiring, holding and disposing of it.
Cost base
The cost base of a CGT asset is made up of five elements. You need to add together all these elements to work out your cost base for each CGT asset.
First element of the cost base
This element includes money paid, or required to be paid, for the asset and the market value of property given, or required to be given, to acquire the asset.
Second element of the cost base
There are ten incidental costs you may have incurred in acquiring the asset or in relation to the CGT event that happens to it, including its disposal. They are:
● remuneration for the services of a surveyor, valuer, auctioneer, accountant, broker, agent, consultant or legal adviser (you can include the cost of advice on the operation of the tax law as an incidental cost only if the advice was provided by a recognised tax adviser and you incurred the cost after 30 June 1989)
● costs of transfer
● stamp duty or other similar duty
● costs of advertising or marketing to find a seller or buyer
● costs relating to the making of any valuation or apportionment to determine your capital gain or capital loss
● search fees relating to an asset, such as fees to check land titles and similar fees
● the cost of a conveyancing kit
● borrowing expenses, such as loan application fees and mortgage discharge fees
● expenditure, also known as termination or exit or similar fees, that is incurred as a direct result of your ownership of a CGT asset ending
● expenditure that
● is incurred by the head company of a consolidated group to an entity that is not a member of the group, and
● reasonably relates to a CGT asset held by the head company
● is incurred because of a transaction that is between members of the group.
You do not include these costs if you:
● have claimed a tax deduction for them in any year, or
● did not claim a deduction but can still claim it because the period for amending the relevant income tax assessment has not ended.
Third element of the cost base
The costs of owning an asset include rates, land taxes, repairs, maintenance and insurance premiums. Non-deductible interest on borrowings to finance a loan used to acquire a CGT asset and on loans used to finance capital expenditure you incur to increase an asset’s value are also third element costs.
You do not include such costs if you acquired the asset before 21 August 1991.
Also, you do not include them if you:
● have claimed a tax deduction for them in any income year, or
● did not claim a deduction but can still claim it because the period for amending the relevant income tax assessment has not ended.
Fourth element of the cost base
The fourth element is capital costs you incurred for the purpose, or the expected effect, of increasing or preserving the asset’s value, for example, costs incurred in applying (successfully or unsuccessfully) for zoning changes. It also includes capital costs you incurred that relate to installing or moving an asset.
Fifth element of the cost base
This element includes capital expenditure you spend to preserve or defend your ownership of, or rights to, the asset.
In your case, you wish to include the remaining amount you weren’t compensated for into the cost base of the property. This amount was not an expense you incurred and is not covered by any of the elements of the cost base mentioned above. This means that you cannot include this amount in the calculations for the cost base of the property. Any reduction in the value of the property would have been reflected in the proceeds received for the ultimate disposal assuming that the market value was received.
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