Edited version of private ruling

Authorisation Number: 1011679913395

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Inclusion of expense in cost base of capital gains tax (CGT) asset

1. Are you entitled to include the cost of preparing a local council submission in the cost base of your CGT asset on the basis of the diary note you have kept?

No.

2. Are you entitled to include the cost of preparing a local council submission as estimated by a professional valuer in the cost base of your CGT asset?

Yes.

This ruling applies for the following periods:

Period ending 30 June 2010

The scheme commenced on:

1 July 2009

Relevant facts

You purchased a property jointly with your spouse after 19 September 1985.

You and your spouse jointly incurred a cost in the preparation of a development application several years ago in relation to the property.

The application was prepared and submitted to a council on your behalf by an architectural company.

You have a copy of a diary note about scheduled payments to the architectural company, on which payments were noted and the date of the payments.

You have misplaced all other financial records in relation to the development application.

You have a copy of the original report including plans prepared by the architectural company which you wish to use as supporting evidence of your claim.

You have been unsuccessful in obtaining copies of documents from the architectural company as they ceased trading several years ago.

You have been unsuccessful in obtaining copies of cheques from your bank which you used to make payment to the architectural company and have been advised that the required data is almost certainly impossible to track down.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 110-25

Income Tax Assessment Act 1997 Section 121-10

Income Tax Assessment Act 1997 Section 121-20

Reasons for decision

You make a capital gain or capital loss if a CGT event happens. For most CGT events, your capital gain is the difference between your capital proceeds and the cost base of your CGT asset.

Section 110-25 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that 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. The elements are as follows:

1. Money paid for the asset (or required to be paid) or the market value of property.  

2. Incidental costs of acquiring the asset or costs in relation to the CGT event, for example agent's commission and advertising costs.

3. Non-capital costs associated with owning the asset. This includes costs such as rates, land taxes, repairs and insurance premiums.

4. Capital costs associated with increasing the value of the asset. For example, building a carport or getting approval to build another dwelling on the property.

5. Capital expenditure incurred to preserve or defend your title or rights to the asset.

In your case, you incurred costs in preparing and making a development application to a council. This is a capital cost that would could be expected to increase the value of your asset and so could be included (subject to record keeping requirements) in the fourth element of the cost base.

CGT Record Keeping

Division 121 of the ITAA 1997 contains the record keeping provisions for capital gains and losses. In particular, subsection 121-20(1) of the ITAA 1997 provides 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. Pursuant to section 121-20(3) of the ITAA 1997 the records must show the nature of the act, transaction, event or circumstance, the day when it happened, who did the act, or who were parties to the transaction. Section 121-10 of the ITAA 1997 requires that the records must be retained for five years after the last relevant CGT event in relation to an asset.

The Commissioners interpretation of "keep" (as used in subsection 121-20(1) of the ITAA 1997) is not discussed in Division 121 of the ITAA 1997 but Taxation Ruling TR 96/7 provides some guidance in this area. TR 96/7 states that the word "keep" in relation to a record means to retain that record. Whilst this definition is given in relation to the record keeping provisions of section 262A of the Income Tax Assessment Act 1936, it is indicative of the Commissioner's view of record keeping more generally.

Taxation Ruling TR 2005/9 provides the Commissioner's view on electronic record keeping. TR 2005/9 states that we will accept electronic records of payments in certain situations. However, where paper records are stored in electronic form the electronic records must be a true and clear reproduction of the original paper records. This is again indicative of the Commissioner's view that original documentation should be kept for the purposes of record keeping.

Similarly, Taxation Ruling TR 2002/10 covers CGT asset registers. TR 2002/10 provides that where taxpayers have not created an asset register in relation to their CGT asset, they must retain the original documents for use in calculating a capital gain or capital loss. In addition, where a taxpayer has maintained a register of CGT assets and expenses, each expense added to the register must be certified by a registered tax agent as being a true and correct record of the original. Moreover, the record will not be accepted if it is in a program that can be altered. This again highlights the Commissioner's view that original documents should be kept for the purposes of record keeping.

In your case, you purchased property after 19 September 1985 and jointly incurred expenses when you had an architectural company prepare and submit plans to a council in relation to developing your property. You are unable to locate your original financial documentation in relation to this expense. You have provided us with a copy of a diary note which is an electronic list of scheduled payments which has been printed out and noted with the dates that payments were made to the architectural company.

This diary note does not comply with the requirements of electronic record keeping as it shows only the dates and amounts of payments rather than being a full reproduction of the original paper record in line with the requirements of TR2005/9. Further, as you have not kept the original record of payment or a CGT asset register as provided in TR 2002/10, you have not "kept" records of the expense for the purposes of section 121-20 of the ITAA 1997. Therefore, you are unable to include the cost of payments made to the architectural company in the cost base of your property.

Reconstruction of CGT records

If the necessary records have not been kept, subsection 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.

The Commissioner considers it reasonable that if a taxpayer does not have records a professional valuer can be used estimate costs and thus records can be reconstructed in this way.

In your case, you purchased property after 19 September 1985 and jointly incurred expenses when you had an architectural company prepare and submit plans to Council in relation to developing your property. You have been unable to locate your original financial documentation in relation to this expense. You have been unable to reconstruct the records from independent third parties, due to fact that the architectural company has ceased to trade and your bank is unable to locate documentation in relation to the cheques you sent to the architectural company. However, you have kept a copy of the original report prepared by the architectural company and the associated annexes.

You can use the documents you have kept to obtain an estimate by a professional valuer of the original cost of having these documents prepared. Any reconstructed cost amount estimated by a professional valuer under subsection 121-20(5) of the ITAA 1997 can be included in the cost base of your CGT asset pursuant to section 110-25 of the ITAA 1997.