Edited version of private advice

Authorisation Number: 1052113461804

Date of advice: 2 May 2023

Ruling

Subject:Capital gains tax

Question

Can the taxpayer include the electricity and gas service charges in the third element of the cost base of the property under subsection 110-25(4) of the Income Tax Assessment Act 1997?

Answer

No.

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The taxpayer solely acquired a residential property (the property) in XXXX and sold it in the 20XX income year.

The taxpayer made a capital gain on the sale of the property.

The property was not the taxpayer's main residence and was not used to derive rental income. The property was used entirely for private purposes for the whole period the taxpayer owned it.

The taxpayer paid electricity service charges and gas services charges in respect of the property from acquisition to disposal.

The taxpayer has not claimed deductions for any of the service charges.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 110-25

Income Tax Assessment Act 1997 Subsection 110-25(1)

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

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997.

Subsection 110-25(1) states that the cost base of a CGT asset consists of 5 elements.

Subsection 110-25(4) states that the third element of a CGT asset, acquired after 20 August 1991, is the costs of owning the CGT asset you incurred. It also states that these costs include:

(a)  interest on money you borrowed to acquire the asset; and

(b)  costs of maintaining, repairing or insuring it; and

(c)   rates or land tax, if the asset is land; and

(d)  interest on money you borrowed to refinance the money you borrowed to acquire the asset; and

(e)  interest on money you borrowed to finance the capital expenditure you incurred to increase the asset ' s value.

However, expenditure on assets acquired after 7:30 pm on 13 May 1997 does not form part of the third element of the cost base to the extent that they have been deducted or can be deducted (subsection 110-40(2) and subsection 110-45(1B).

Electricity and gas charges are running expenses relating to the use of facilities within the home whereas mortgage interest, municipal and water rates, land taxes and house insurance premiums are occupancy expenses relating to ownership of a home.

This interpretation of subsection 110-25(4) is consistent with Chapter 12 Capital Gains Tax Cost base in the Explanatory Memorandum (EM) that accompanied Taxation Laws Amendment Act (No.3) 1991. The EM explains that the amendments enable other non-capital costs of ownership of an asset to be added to its costs base in certain circumstances. Examples of such costs include interest on money borrowed to purchase the asset, repairs and maintenance, insurance premiums and, in the case of land, rates and land taxes.

The purpose of the law was to allow non-capital costs of ownership to be added to the cost base for assets not used for income producing purposes. Vacant land and holiday homes were the main types of assets contemplated.

There is no suggestion in subsection 110-25(4) or the EM that utility connection fees, or utility service charges, are costs of ownership.

In terms of rates, it is not clear what the legislators had in mind. At most narrow, it could be interpreted as being limited to 'property rates' because it is specifically tied to land. However, they did not use the term 'council rates' or 'property rates', therefore we accept a broader definition that includes 'water rates' (but not usage).

Application to the taxpayer's circumstances

While no deduction has ever been claimed for the electricity and gas service charges, they cannot be included in the third element of the cost base of the property.

We consider that the electricity service charges and the gas service charges are expenses incurred in using or occupying the property and not costs of owning the property.

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