Edited version of private ruling

Authorisation Number: 1011795254160

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Ruling

Subject: Capital Gains Tax - Acquisition and Disposal

Question 1

Are you eligible for the 50% discount on capital gains tax for your 50% portion of the taxable gain from the sale of the property?

Answer: Yes

Question 2

Can you include legal fees for the breach of agreement by person B) to transfer 50% of her ownership interest in the block of land to your spouse?

Answer: Yes

Question 3

Are the conveyance cost, formal valuation fees, stamp duty and or land Victoria fee incurred in purchasing person B's portion of the land added to the calculation of cost base?

Answer: Yes

Question 4

Can you add bills and fees paid such as body corporate fees, rates, state revenue land tax, water and fencing since the time you purchased the land to the cost base?

Answer: Yes

This ruling applies for the following period:

Ending 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You purchased a block of vacant land in 2001 as joint owners with person B.

An agreement was made in late 2008 or early 2009 whereby person B agreed to transfer their ownership interest in the block of land to your spouse.

You and your spouse paid for conveyance and formal valuation fees to proceed with the transfer of the title.

Person B breached the original agreement and therefore you and your spouse sought legal representation in order to complete the purchase of the land.

In 2010 person B sold their portion of 50% ownership to your spouse.

You maintained your 50% ownership.

You and your spouse paid stamp duty and or land fees during the process of purchasing person B's portion of the land.

The block of land is a subdivision within a development. This is maintained by Body Corporate.

You and your spouse have paid for body corporate fees, rates, land tax and for water and fencing costs.

The block of land was never used for income producing purpose.

Within 12 months of the transfer of title from person B to your spouse, you will sell the block of land.

Relevant legislative provisions

Section 115-5 of the Income Tax Assessment Act 1997

Section 104-10 of the Income Tax Assessment Act 1997

Section 108-5 of the Income Tax Assessment Act 1997

Section 114-1 of ITAA 1997 Income Tax Assessment Act 1997

Section 115-25 (1) Income Tax Assessment Act 1997

Reasons for decision

Discount method

Under section 115-5 of the Income Tax Assessment Act 1997 (ITAA 1997), you can use the discount method to calculate your capital gain if:

· you are an individual, a trust or a complying superannuation entity

· a CGT event happens to an asset you own

· the CGT event happened after 11:45am (by legal time in the ACT) on 21 September 1999

· you acquired the asset at least 12 months before the CGT event, and

· you did not choose to use the indexation method.

CGT event A1 occurs when you dispose of your ownership interest in a CGT asset (section 104-10 of the ITAA 1997). The time of the event is when you enter into the contract for the disposal, or if there is no contract when a change of ownership occurs.

Section 108-5 of the ITAA 1997 defines a CGT asset to include any kind of property or a legal or equitable right that is not property. Land and buildings are examples of CGT assets.

Section 114-1 of ITAA 1997 provides that you can use the Indexation method to calculate your capital gain if the CGT event happened to an asset you acquired before 21 September 1999.

115-25 (1) of ITAA 1997 provides that to be able to use discount method, the capital gain must result from a CGT event happening to a CGT asset that was acquired by the entity making the capital gain at least 12 months before the CGT event.

In determining whether you acquired the CGT asset at least 12 months before the CGT event, you exclude both the day of acquisition and the day of the CGT event.

Under the discount method you reduce your capital gain by the discount percentage. For individuals, the discount percentage is 50%.

You acquired the block of land in 2001 with person B. The title change in 2010 did not change your beneficial ownership. Therefore you have beneficial ownership of the land for more than 12 month. Also all the factors in section 115-5 of ITAA 1997 have been met. Therefore you are eligible for the 50% discount on capital gains tax for your 50% portion of the taxable gain from the sale.

Cost Base

The cost base of a CGT asset is made up of 5 elements.

The five elements of a cost base are:

First element - Money or property given for the asset.

This is money paid or the market value of the property at the time of acquisition.

Second element - Incidental costs of acquiring the CGT asset or that relate to the CGT event.

Incidental costs that may be incurred are at the time of acquisition or in relation to the disposal. Some of these are:

· Remuneration for services of a surveyor, valuer, accountant, broker, consultant or legal adviser

· Cost of transfer

· Stamp duty or other similar duty

· Cost of advertising or marketing to find a seller or buyer.

· Cost relating to the making of any valuation or apportionment to determine your capital gain or loss

· Title search fee

Third element - Cost of owning the asset

The cost of owning an asset includes rates, land taxes, repairs and insurance premiums. You do not include such costs if you acquired the asset before 21 August 1991. Nor do you include them if you have claimed a tax deduction for them in any income year.

Fourth element - capital costs to increase or preserve the value of your asset or to install or move it.

This is the capital cost that you have incurred for the purpose of increasing or preserving the assets value such as installations.

Fifth element - capital costs of preserving or defending your ownership of or rights to your asset

This includes capital expenses you incur to preserve or defend your ownership of or rights to the asset.

Conveyance cost, formal valuation fees, stamp duty and or land fees are incidental costs that are incurred in the process of acquisition and therefore fall within the second element of the calculation of cost base.

Body corporate fees, rates and land tax are costs relating to owning an asset and are therefore claimable under the third element.

Legal fees paid associated with the breach of contract by person B fall under the fifth element as preserving or defending your ownership of or rights to your asset.