Edited version of your private ruling

Authorisation Number: 1011952359382

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Ruling

Subject: Capital gains tax - demolition and reconstruction of investment property not undertaken

Question1: Did you make a capital loss upon cancelling the contract with a builder?

Answer: No.

Question 2: Do you include the costs you incurred under the contract with a builder in the cost base of the property?

Answer: Yes.

This ruling applies for the following period

30 June 2011

The scheme commenced on

1 July 2010

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You currently own an investment property (the property), which is currently rented out.

In late 20xx, you a specified amount to a design company to give a recommendation between renovating and extending or knocking down and rebuilding the dwelling at the property to increase the rental income and property value.

In mid 20xx, you entered into a Housing Design Agreement with a builder for a contract price for a specified amount to demolish and rebuild the home.

In mid 20xx, you paid an initial deposit of a specified amount.

Three months later due to a change in your circumstances, you terminated the agreement with the builder.

The same month the builder refunded you some of your deposit.

The balance of $X was the charge for work carried out, such as drawing amendments and consultation with local authorities.

You have provided copies of the following documentation to support your application and these documents are to be read with and forms part of your application for the purpose of this ruling:

o Confirmation of booking - the design company

o Building Agreement with the builder, and

o correspondence from the builder.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 110-25

Income Tax Assessment Act 1997 Section 104-25

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Capital gains tax (CGT) CGT event C2 happens if ownership of an intangible CGT asset ends by the asset:

· being redeemed or cancelled;

· being released, discharged, or satisfied;

· expiring; or

· being abandoned, surrendered or forfeited.  

The time of the event is:

· when you enter into the contract that results in the asset ending, or

· if there is no contract - when the asset ends.

You make a capital loss if the cost base is greater than the capital proceeds received.

While you terminated the contract to demolish the dwelling and construct a dwelling at the property due to a change in your circumstances, you did not loose or forfeit your deposit and as such no capital loss was made.

Under the agreement you had with the builder they did undertake work which is documented in their correspondence dated late 20xx. The cost of the work undertaken by the builder equated to a specified sum, they have deducted this amount from your deposit and refunded you the balance.

We consider that the above costs relate to the dwelling and are included in the fourth element of the cost base of that property. These costs will be taken into account in calculating any capital gain or capital loss made when a subsequent CGT event occurs, such as the disposal of the property.

The fourth element is capital costs you incurred for the purpose or the expected effect of increasing or preserving the asset's value - for example, costs incurred in applying (successfully or unsuccessfully) for zoning changes. It also includes capital costs you incurred that relate to installing or moving an asset. However, it does not include capital expenditure incurred in relation to goodwill which may be deductible as a business-related cost.

The other four elements of the cost base are:

o first element - money or property given for the asset

o second element - incidental costs of acquiring the CGT asset or that relate to the CGT event

o third element -costs of owning the asset, and

o fifth element - capital costs of preserving or defending your ownership of or right to your asset.

For further information on the cost base please see the enclosed information booklet, this information has been taken out of the Guide to capital gains tax 2010-11 (NAT 4151-6.2011) which is available on our website - www.ato.gov.au.