Edited version of private advice

Authorisation Number: 1051549012829

Date of advice: 30 July 2017

Ruling

Subject: Capital Gains Tax - sale of property

Question

For the purposes of the record keeping requirements in Division 121 of the Income Tax Assessment Act 1997 (ITAA 1997), are you able to estimate the figures associated with establishing the cost base of your property by means other than directly referencing actual expenses or having the costs estimated by an appropriately qualified person?

No

This ruling applies for the following period

Year ending 30 June 2019

The scheme commenced on

1 July 2018

Relevant facts

To fund a nursing home deposit you have sold an investment property.

The property was purchased by you and your late spouse over 15 years ago. The property underwent significant renovations after your purchase.

The property was sold last year.

You have no documentation available to determine the cost of the renovations, and due to your health, you are unable to recall the cost.

The Public Trustee in your state has been appointed to manage your financial affairs due to your age and health.

The Public Trustee has been unable to source any documentation to support any renovation costs incurred.

A relative estimated an amount that you and your husband spent on renovating the property.

The property was not your main residence.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 121-20(5)

Income Tax Assessment Act 1997 Subsection 121-25(2)

Reasons for decision

Summary

To calculate the cost base of your CGT asset appropriate records are required to be kept. An attempt must be made to obtain the relevant documents. If you are unable to ascertain the actual construction expenditure an estimate provided by an appropriately qualified person is acceptable. You cannot include any expenditure in your cost base that has previously been deducted from your assessable income.

Detailed reasoning

Division 121 of the Income Tax Assessment Act 1997 (ITAA 1997) addresses record keeping requirements under the CGT provisions.

It requires that you must keep records of every act, transaction, event or circumstance that may be relevant to working out whether you have made a capital gain or capital loss from a CGT event, regardless of whether the event has already happened or may happen into the future.

Subsection 121-25(2) of the ITAA 1997 requires that CGT records must be retained by a taxpayer for five years after it becomes certain that no CGT event could happen to the asset for which the records would be relevant to working out the capital gain or capital loss from that CGT event.

Section 121-20(5) of the ITAA 1997 states if the necessary records of an act, transaction, event or circumstance do not already exist, you must reconstruct them or have someone else reconstruct them.

If records are lost or have not been maintained for the purpose of calculating your CGT cost base you should first make an attempt to obtain the relevant documentation by approaching the relevant parties and obtaining copies. These may be obtained from builders, contractors, accountants, insurance bodies, solicitors, real estate agents, or government authorities.

Paragraph 16 of Taxation Ruling TR 97/25 Income tax: property development: deduction for capital expenditure on construction of income producing capital works, including buildings and structural improvements provides that where it is not possible to ascertain the actual construction expenditure incurred on capital works, we accept an estimate provided by an appropriately qualified person. Paragraphs 23 to 31 provide further guidance on use of estimate when actual construction expenditure is not available:

23. Subsection 262A(4AJA) of the 1936 Act operates upon a disposal, by way of transfer, of capital works begun after 26 February 1992 and in respect of which deductions have been allowed or are allowable under Divisions 10C or 10D of the 1936 Act or Division 43 of the new Act. Broadly stated, it requires the transferor to provide the transferee with information that enables the latter to determine any entitlement under Division 43.

24. It is not always possible for the purchaser of a building to establish the actual cost of the building, particularly in circumstances where the builder or previous owner becomes bankrupt or is not able, for other reasons, to provide the information. In those circumstances, we accept a building cost estimate by an appropriately qualified person.

25. We consider that an appropriately qualified person has expertise in the calculation of building construction costs and is likely to be accepted by a court or tribunal as an expert witness on the issue of calculating the cost of construction of the particular building. That expertise may have been acquired through a course of study or through relevant experience in providing building cost estimates over a significant period of time.

26. The attainment of relevant professional qualifications or recognition by an appropriate professional association or organisation is indicative of expertise in this field.

27. Unless they are otherwise qualified, valuers, real estate agents, accountants and solicitors generally have neither the relevant qualifications nor experience to make such an estimate.

28. Appropriately qualified people might include:

·        a quantity surveyor, who has expertise in the relevant type of construction;

·        a clerk of works, such as a project organiser for major building projects;

·        a supervising architect who approves payments at each stage in major projects and who may approve individual payments to subcontractors in smaller projects; or

·        a builder who is experienced in estimating construction costs of similar building projects.

29. The question of whether a person has the required expertise is an issue of fact in each case.

30. We do not accept the use of published building cost guides to estimate the actual cost of construction, unless they are used merely as a guide by an appropriately qualified person. Building cost guides typically provide a cost per square metre of a range of building projects, based on industry averages. They are not sufficiently specific to the particular building being valued.

31. Building cost guides also include a reasonable profit margin for the builder. However, the builder's profit margin does not form part of the construction expenditure unless the original construction was commissioned from a builder whose charges for the work included such a profit. Where the original construction was carried out directly by the then owner, or by that owner using trade subcontractors and perhaps an architect, no such builder's profit was incurred as part of the capital expenditure on construction.

Subsection 110-45(2) further provides that if a deduction has been claimed under Division 43 of the ITAA 1997 for any capital works undertaken on the property you are unable to include the costs already claimed in the cost base for working out your capital gain. Therefore it is important to determine if any of the capital works have previously been claimed as a deduction against the rental income of the property before determining the cost base.

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