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Ruling

Subject: CGT - reduced cost base

Question

Is the interest incurred on the loan facility which relates to the refinance of the original land loan included in calculating your capital loss on sale of the land?

Answer:

No

This ruling applies for the following period

Year ended 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 own a vacant block of land.

You funded the purchase of the land with a joint borrowing.

You own your home.

You have a joint borrowing which is referable to your home.

You refinanced both your land loan and home loan into a single new joint line of credit borrowing with another lender.

You incur interest on the new line of credit.

You have subsequently sold the land, thereby making a capital loss on the sale.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 100-35

Income Tax Assessment Act 1997 Section 100-40

Income Tax Assessment Act 1997 Section 110-55

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

A capital gain is made when you receive capital amounts from a capital gains tax (CGT) event which exceed the total costs associated with that event. A capital loss is made where those total costs exceed the capital amounts you received: section 100-35 of the Income Tax Assessment Act 1997 (ITAA 1997).

Generally, the total costs associated with the CGT event are worked out with reference to the cost base (capital gain) and the reduced cost base (capital loss): section 100-40 of the ITAA 1997.

When a capital gain is made, the cost base will generally include interest on money borrowed to acquire the asset - this is part of the 'third element of the cost base': 110-25(4) (a) of the ITAA 1997. However, in a loss situation the reduce cost base is used and this third element is modified such that the interest on money borrowed to acquire the asset is no longer considered: 110-55(3) of the ITAA 1997.

Further section 110-55(5) of the ITAA 1997 provides that the reduced cost base does not include an amount that you could have deducted for a CGT asset had you used it wholly for the purpose of producing assessable income.

Whether interest has been incurred in the course of gaining or producing assessable income generally depends on the purpose of the borrowing and the use to which the borrowed funds are put

Where a borrowing is used to acquire an assessable income producing asset, or relates to expenses of an assessable income producing activity, the interest on this borrowing is considered to be incurred in the course of gaining or producing assessable income: Taxation Ruling TR 95/25

In your situation, you made a capital loss on the sale of the vacant land and therefore the reduced cost base is used in calculating the extent of this loss. As the interest you incurred on the borrowing for the land would have been deductible had this land been used for income producing purposes, the interest is specifically excluded from the reduced cost base.