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Ruling

Subject: capital gains tax and the sale of property

Questions and Answers

1. Are the expenses that you have incurred for interest, insurance, rates, tools bought and hired when building the house, termite and pest spraying, fence repairs, slashing and planting trees and shrubs able to be included in the cost base of the property?

No.

2. Are the capital expenses that you have incurred in building the kit home and the dams able to be included in the cost base of the property?

Yes.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

Some time after 20 September 1985, but prior to 20 August 1991, you and your spouse purchased a block of land with a shed (herein referred to as the property).

You and your spouse had intended to use the property as a weekender until you eventually retired to live there.

It was never your main residence and was never used to produce income.

It wasn't a farm but simply a lifestyle property where you and your spouse spent some weekends and holidays.

Your circumstances changed and you sold the property during 2011.

During your ownership period you and your spouse had two dams dug out on the property.

During your ownership period you and your spouse purchased a kit home and owner built a small house. Unfortunately due to circumstances that arose you and your spouse were forced to double purchase the products required to complete the job.

You and your spouse have incurred expenses for interest, insurance, rates, tools bought and hired when building the house, termite and pest spraying, fence repairs, slashing and planting trees and shrubs.

In the course of your ownership period you and your spouse have lost receipts and some have completely faded.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1,

Income Tax Assessment Act 1997 Section 102-5,

Income Tax Assessment Act 1997 Section 102-20,

Income Tax Assessment Act 1997 Section 104-10,

Income Tax Assessment Act 1997 Section 110-25,

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

Income Tax Assessment Act 1997 Subsection 110-25(5),

Income Tax Assessment Act 1997 Section 110-36,

Income Tax Assessment Act 1997 Section 110-55,

Income Tax Assessment Act 1997 Section 115-5,

Income Tax Assessment Act 1997 Section 115-10,

Income Tax Assessment Act 1997 Section 115-15,

Income Tax Assessment Act 1997 Section 115-20,

Income Tax Assessment Act 1997 Section 115-25,

Income Tax Assessment Act 1997 Section 115-100 and

Income Tax Assessment Act 1997 Section 116-20.

Reasons for decision

Capital gains tax (CGT) is the tax you pay on certain gains you make. It is not a separate tax and any capital gain that you make is included in your assessable income and taxed at your marginal tax rates.

You make a capital gain or capital loss, if and only if, a CGT event happens to a CGT asset that you own. The most common event, CGT event A1, happens if you dispose of an asset. CGT event A1 happened when you sold your property.

You make a capital gain if your capital proceeds are more than the assets cost base. You make a capital loss if your capital proceeds are less than the assets reduced cost base.

Capital proceeds is the term used to describe the amount of money that you receive, or are entitled to receive when a CGT event happens.

The cost base of a CGT asset consists of five elements. You need to add together all of these elements to calculate the cost base. Briefly there are:

1. Money paid or required to be paid for the asset such as the money that you paid to acquire the property.

2. Incidental costs of acquiring the asset, or costs in relation to the CGT event, for example, stamp duty, legal fees, agent's commission etc.

3. You can include non capital costs of ownership only in the cost base of assets acquired after 20 August 1991, such as land taxes, insurance premiums, rates etc. These costs cannot be indexed or used to calculate a capital loss.

4. Capital expenditure you incur to increase the value of the asset such as construction of a shed.

5. Capital expenditure you incur to preserve or defend your title or right to the asset.

In your situation the costs that you have incurred for interest, insurance, rates, tools bought and hired when building the house, termite and pest spraying, fence repairs, slashing and planting trees and shrubs are all third element costs and as you acquired the property prior to 20 August 1991, you are not able to include them in the cost base of property.

Furthermore, as the property was not used to produce assessable income, you are unable to claim deductions for these expenses.

Costs that you have incurred in building the kit home and the dams are fourth element costs and can be included in the cost base of the property.

Where you have lost receipts for expenses that you are able to include in the cost base, you will need to attempt to reconstruct your records by approaching the relevant organisations that issued the receipts and asking them to reissue them.

As you are an individual, and the CGT event happened after 21 September 1999 and you owned the property for at least 12 months prior to the CGT event happening, you are able to use the CGT 50% discount when calculating your net capital gain.

Alternatively, as you acquired the property prior to 21 September 1999 and owned it for at least 12 months you are able to choose the indexation method to calculate your net capital gain. However, you can only choose one of these methods to calculate your net capital gain and cannot apply both.

For more information please refer to the Guide to capital gains tax 2011 - NAT 4151 which is available on our website www.ato.gov.au.