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Ruling

Subject: Cost base of a CGT asset

Question and answer:

Are you able to use a quantity surveyor to determine the cost base of your investment properties?

No.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commenced on:

1 July 2009

Relevant facts

You and your spouse have two investment properties.

One of the properties has been sold.

You do not have any records relating to these properties as your spouse has these.

You and your spouse have separated.

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 121-20.

Income Tax Assessment Act 1997 Section 112-20.

Reasons for decision  

You make a capital gain or capital loss if a CGT event happens to a CGT asset. The most common CGT event is a CGT event A1.

For most CGT events, your capital gain is the difference between your capital proceeds and the cost base of your CGT asset.

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 first element includes money paid for the asset (or required to be paid) or the market value of property given (or required to be given).

Record Keeping

Division 121 of the Income Tax Assessment Act 1997 (ITAA 1997) contains the record keeping provisions for capital gains and losses. Generally, you must keep records of matters that affect the capital gains or losses that you make. In particular, section 121-10 of the ITAA 1997 states that you must retain the records for five years after the last relevant CGT event, i.e. in your case the sale of the property.

Section 121-20 of the ITAA 1997 provides that you must keep records of every act, transaction, event or circumstance that can reasonably be expected to be relevant to working out whether you have made a capital gain or loss from a CGT event.

Subsection 121-20(1) of the ITAA 1997 outlines that when you dispose of a CGT asset, the records that are relevant to working out your capital gain or loss includes records of when the asset was acquired; the date the asset was disposed of; records of each element of the cost base and reduced cost base and the effect of indexation; and the amount for which the asset was sold.

For records relating to real estate, copies of the contract for the purchase of the asset and the contract for the sale of the asset would be relevant. In addition, invoices/receipts from solicitors, the real estate agent or other costs incurred in the acquisition or sale, for example the cost of registering the transfer or stamp duty payable on the contract for the purchase, would also be relevant. Invoices and receipts recording the cost of any enhancements to the property would also need to be retained, this includes construction costs of any dwellings and any capital improvements made to it.

If you have acquired assets on or after 20 September 1985 and have not kept records, you can still do something about it. Subsection 121-20(5) of the ITAA 1997 states that if the necessary records of an act, transaction, event or circumstances do not already exist, you must reconstruct them or have someone else reconstruct them.

For example, the reconstruction of records for the purchase of a property can be done by requesting the real estate agent who was involved in the purchase to provide copies of most of the records required in relation to the purchase of the land. Alternately, the relevant State Land Titles Office may be able to provide a copy of the transfer of title showing the purchase price and the relevant State Revenue Office will have a record of stamp duty paid on the purchase.

The reconstruction of records for capital improvements and renovations can be done by requesting receipts for payment from the builders who completed the work or by getting a quantity surveyor to provide a reasonable estimate of the cost of the work completed.

Taxation Ruling TR 97/25 discusses where it is not possible to establish the actual cost of capital improvements to a property.  In these cases a valuation estimate by an appropriately qualified person would be accepted.  An appropriately qualified person would have expertise in calculating these capital costs and would be likely to be accepted by a court or tribunal as an expert in the relevant field.

 An appropriately qualified person may include:

· a clerk of works, such as a project organiser for major building projects;

· a supervising architect who approves payments at each stage in major projects and who may approve individual payments to subcontractors in smaller projects; or

· a builder who is experienced in estimating construction costs of similar building projects;

· a quantity surveyor, who has expertise in the relevant type of construction.

 The question of whether a person has the required expertise is an issue of fact in each case.

 If you do not have records of transactions, or are unable to have them reconstructed, you cannot include that amount in the cost base of the property.

 You are not able to use a quantity surveyor to determine the cost base of your two investment properties. You are required to reconstruct your records and if this cannot be done then the cost base for your properties will be zero. A quantity surveyor is only permitted to be used in relation to capital improvements.