Edited version of private ruling

Authorisation Number: 1011700002434

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Ruling

Subject: Capital Gains Tax

Question 1

Is the market value the appropriate means of determining the cost base of a property inherited by you?

Answer

Yes.

Question 2

Are expenses as detailed allowable to be included in the cost base?

Answer

Yes.

Question 3

Are council rates, land tax and water rates included in the cost base?

Answer

Yes.

This ruling applies for the following period

1 July 2009 to 30 June 2010

Relevant facts

You inherited land when your father died. The land was originally acquired by your father prior to 20 September 1985. At this time you engaged a professional valuer to determine a cost base for the property. He duly produced a valuation using the market value method and provided full documentation to support his figure.

Your father had initiated surveying and associated works on the property for proposed subdivision purposes. After his death, you continued this work.

Initially the local council indicated that the land was suitable for residential development however over time the council undertook several studies whereby landholders were to contribute by paying fees.

The result of the various studies which included environmental assessments concluded that the bulk of the property could not be developed as intended and this turned out to be detrimental to the value of your land.

You sold a small portion of land to a government department who used the land to build infrastructure.

You obtained an estimate of development expenses and you were concerned about several aspects of retaining the property for development and decided that you would try to sell.

You approached some prospective purchasers and as there was little interest in the property you reluctantly accepted an offer from a neighbouring landowner.

You have incurred a capital loss on this land which you have returned in your income tax return for year ended 30 June XXXX.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 110.

Income Tax Assessment Act 1997 Division 128

Income Tax Assessment Act 1997 Subdivision 110-25

Reasons for decision

Question 1

Division 128 of the Income Tax Assessment Act 1997 (ITAA 1997) sets out what happens when a CGT asset passes to a legal personal representative or to a beneficiary.

When you inherit a property from a deceased estate, you are taken to have acquired the asset on the day the deceased taxpayer died. If the deceased had acquired the property the property before 20 September 1985, the cost of the asset in the hands of the beneficiary is its market value at the date of the taxpayer's death.

Current tax law does not define market value in any general provision. As a result, 'market value' usually takes the ordinary meaning.

Valuers of real property adopt the definition used by the International Valuation Standards Committee;

..the estimated amount for which an asset should exchange on the date of valuation between a willing buyer and a willing seller in an arm's length transaction, after proper marketing, wherein the parties had each acted knowledgeably, prudently and without compulsion.

Market value is generally the most appropriate basis of value for a wide range of applications and should be applied in all instances where the market value of an asset can be established. Generally (with a few exceptions), the valuation process should be undertaken by a professional valuer and the valuation process should be adequately documented.

In this case you have engaged a professional valuer to value the property which you inherited from your father. Your father acquired the property prior to 20 September 1985. You have provided full documentation with the valuation report prepared by a professional valuer which details his valuation methodology and basis of his estimate. He has made enquiries of the council and the council indicated at that time the property could be categorised as residential. (The council amended this view much later after environmental assessments).

In summary, the market value method you have used is the most appropriate method of determining the cost base of your property.

Question 2

Are the following expenses parts of my cost base?

1. Charges for surveying, subdivision plans and fees payable in respect of council for environmental, bushfire and drainage studies.

2. Fees for boundary readjustments where land was sold to Dept of Land and Water Conservation.

3. Council fees for environmental studies.

4. Legal fees in respect of administration of father's will.

5. Legal fees for executing an agreement with an adjoining landowner to obtain road access for developmental purposes.

6. Valuation fees.

7. Travel & telephone expenses.

8. Additional environmental and bushfire studies incurred in development application for a single house site.

9. Consulting fees and submissions to council.

10. Fees in respect of house site development approval.

11. Expenses relating to sale of land when property was put on the open market.

Under subsection 110-25 of the ITAA 1997, the cost base of a CGT asset is made up of five elements:

1. money or property given for the asset

2. incidental costs of acquiring the CGT asset or that relate to the CGT event

3. costs of owning the asset

4. capital costs to increase or preserve the value of your asset or to install or move it

5. capital costs of preserving or defending your ownership of or rights to the asset.

In this case the following items relate to element 2 of your cost base;

2, 4, 6, 10 and 11.

Item 4 (legal expenses incurred in administration of a will) may need to be apportioned because the expense may relate to other issues apart from this property.

The following items relate to element 4 of your cost base:

1, 3, 5, 7, 8, 9 and10.

Question 3.

Are council rates, land tax and water rates allowable additions to my cost base?

Rates and land tax are allowable as a third element of your cost base.