Edited version of your private ruling

Authorisation Number: 1012076282047

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Ruling

Subject: CGT

1. Does TD 98/24 apply to the determination of you CGT liability in the 2011 income year in respect of the sale of your rental property?

Yes

2. Is the method used by your tax agent in determining your cost base correct?

No.

3. Is the ATO able to calculate the CGT liability that will arise from the sale of your unit?

No.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commences 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 and your partner purchased a unit in 2003.

You paid $xyz for the unit.

Your unit was a part of a newly constructed block, it had not been occupied before you purchased it and you have not made any modifications to it since.

When you purchased the unit you were provided with a Quantity Surveyor's schedule which allowed you to claim limited depreciation for the first five years after purchase. Your accountant at the time claimed this in your returns.

The unit was rented out continuously until it was sold.

The unit was sold on 2011 for an amount greater than what you paid for it.

Your current tax agent is applying TR 98/24 in the calculation of your cost base and has reduced the cost base of the unit by an amount based on the depreciation schedule.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 110-45(4)

Income Tax Assessment Act 1997 Section 43-10

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.

Detailed reasoning

TR 98/24

Taxation Ruling TR 98/24 outlines the CGT consequences of a CGT event happening to post- CGT real property if the real property is sold with depreciable assets.

If the sale of a rental property includes depreciating assets, a balancing adjustment event will happen to those assets. To calculate the balancing adjustment amount a comparison is made between the assets termination value (such as the proceeds from the sale of the asset) and its adjustable value at the time of the balancing adjustment event. If the termination value (i.e. proceeds received) is greater than the adjustable value, the excess will be included in assessable income. On the other hand, if the termination value is less than the adjustable value, a deduction can be claimed for the difference.

Capital proceeds should be apportioned between the property and the depreciating assets to determine the separate tax consequences for each of them.

Application to you

When you purchased the unit a quantity surveyor supplied you with a depreciation schedule, you have been claiming deductions using this schedule. Therefore TR 98/24 is applicable to your circumstances.

The sale of your unit triggered balancing adjustment events and you need to apportion the proceeds of sale between the property and the depreciating assets that you have been claiming deductions for. Any excess is to be added to your assessable income and any shortfall can be claimed as a deduction.

Reduced Cost Base and Division 43 deductions

Section 110-45(4) of the Income Tax Assessment Act 1997 (ITAA 1997) states that the cost base is reduced to the extent that you have deducted or can deduct for an income year capital expenditure incurred by another entity in respect of the CGT asset.

Division 43

Under Division 43 of the ITAA 1997 you can deduct certain capital expenditure on buildings used to produce assessable income.

Specifically, Section 43-10 of the ITAA 1997 operates to allow a deduction for an amount of capital works used in a deductible way during the income year. (I.e. construction costs for a building that is used to produce income).

The rate of deduction is either 2.5% or 4% of the construction expenditure depending on when construction started and how the capital works are used.

Where ownership of the building changes either fully or partly, the residual entitlement passes to the new owner, provided of course that the building continues to be used for eligible income-producing purposes. During periods when the building is not used for income-producing purposes, the associated write-off is forgone as a deduction. 

The amount of the deduction you can claim depends on the type of construction and the date construction started.

Deductions for earlier years

As stated above, where ownership changes, the right to claim any un-deducted construction expenditure for capital works passes to the new owner. Where you are entitled to a capital works deduction in past years you will need to amend your previous assessments.

Taxation Determination TD 2005/47 confirms that you are only required to amend those assessments where any amendment would still be in time, meaning previous income years where the amendment period has expired can be disregarded.

Your CGT Liability

The amount of CGT liability which arises from the sale of your unit is calculated using the method followed by your accountant, with the additional aspect of the cost base being reduced further by the capital works deductions under Division 43 of the ITAA 1997 claimed in your amended returns.

What you need to do

You will need to amend previous returns where the amendment period has not expired to include any capital works deductions that you may be entitled to. You then need to reduce the cost base of your unit by all the amounts deducted.