Edited version of private advice

Authorisation Number: 1051577960863

Date of advice: 18 September 2019

Ruling

Subject: CGT and substantially renovated holiday home

Question 1:

Are you entitled to include 'holding costs' in cost base of the property for the period post 1985 but pre 1991 to current?

Answer

No.

Question 2:

Are you entitled to include 50% of the Holding Costs incurred after 1991 in cost base of the property?

Answer

Yes

Question 3:

Are you entitled to include 100% of holding costs incurred after substantial renovations in the cost base of the property?

Answer

No

Question 4

Are you entitled to include the full amount of the cost of the improvements made to the dwelling in the fourth element of the cost base of the dwelling?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 2019

Year ending 30 June 2020

Year ending 30 June 2021

Year ending 30 June 2022

The scheme commences on:

1 July 2018

Relevant facts and circumstances

You and your spouse purchased a property to be used as a holiday home post CGT as joint tenants after 1985 but before 1991.

It has never been rented out or used to produce assessable income. It has been used for private purposes only.

No ownerships such as rates, taxes, repairs and insurance have ever been claimed as a tax deduction in either income tax return.

Your spouse died after 1991 and you inherited their share of the property.

In 2017 construction begins on substantial renovations to the holiday home. There is considerable change to the property, including the house being raised, change in floorplan including the creation of new rooms, alterations to existing rooms, new kitchen and bathrooms. These renovations were more than cosmetic changes.

You spent about $500,000 to renovate the property.

Renovations were completed in 2018.

You have sought a ruling on CGT cost base Element 3 in particular, over the timeline the property has been held.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 110-25(4)

Income Tax Assessment Act 1997 Division 128-1

Income Tax Assessment Act 1997 section 128-50

Income Tax Assessment Act 1997 section 108-55

Income Tax Assessment Act 1997 section 109-5

Reasons for decision

You and your spouse acquired a holiday home as joint tenants, which are regarded as a CGT asset.

For CGT purposes, individuals who own a CGT asset as joint tenants are treated as if they each own a separate CGT asset constituted by an equal interest in the asset, and as if each of them hold that interest. Where an asset is held jointly with another person, an individual's joint interest in the asset passes to the surviving owner of the asset upon their death. That is, the asset does not form part of the deceased taxpayer's estate.

Division 128 of the Income Tax Assessment Act 1997 (ITAA 1997) outlines the CGT rules that apply when a taxpayer dies. The general rule is that a capital gain or loss from a CGT event relating to a CGT asset that the taxpayer owned just before death is disregarded (section 128-10 of ITAA 1997).

With your spouse's death, their interest in the dwelling automatically transfers to you as the surviving joint tenant. The transfer triggers CGT event A1 which relates to the disposal of a CGT asset (section 104-10 of ITAA 1997). Any capital gain or loss on transfer of the interest in the dwelling as a consequence of death is disregarded (section 128-10 of ITAA 1997).

However, special rules under section 128-50 ITAA 1997 apply if a CGT asset is owned by joint tenants and one of them dies. Under these rules you have been taken to have acquired your spouse's interest in the dwelling at the date of their death (s 128-50(2) of ITAA 1997). Further, the cost base and reduced cost base of the deceased taxpayer's interest in the asset is divided equally between the surviving tenants.

Specifically, where the asset is a post-CGT asset (i.e. acquired after 20 September 1985), the general rule is that the first element of cost base (and reduced cost base) of the interest to each survivor is worked out by using the cost base of the deceased's interest (at the date of their death divided by the number of survivors).

The general rules about cost base of a CGT asset consist of 5 elements as set out under section 110-25 of ITAA 1997. Legislation was changed after 21 August 1991 that allowed any third element costs that had not been claimed as s deduction to be included in the asset's cost base. Before that you are not entitled to claim those holding costs.

You can claim 50% of holding costs in the cost base of the share inherited from your spouse in 1997 upon their death due to the holding costs law changes made in 1991.

You are considered to have not acquired a new asset for CGT purposes. The capital expenditure incurred on the improvements made to the property can be included in the 4th element of the cost base for each of the two ownership interests in the property.

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