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Ruling

Subject: Holding Costs, Cost Base and Capital Gains Tax

Questions and answers:

Question:

Can holding costs be included in the cost base of a property if they have not been claimed as a tax deduction during the holding period of the property?

Answer:

No

Question:

Can an estimated repair and maintenance cost of $5 per week during the entire holding period be included in the cost base without evidence?

Answer:

No

This ruling applies for the following periods:

Year ending 30 June 2012

The scheme commences on:

01 July 2011

Relevant facts and circumstances

You purchased a 25% interest in a property prior to 1991 as an investment property.

The property never realised any income as your parents lived in it until their deaths, after which the property was sold in a recent year.

No expenses (interest on mortgage, council rates, water rates etc) have ever been claimed for in relation to this property by you.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 108-17

Income Tax Assessment Act 1997 Section 108-30

Income Tax Assessment Act 1997 Section 110-25

Income Tax Assessment Act 1997 Section 110-25(4)

Income Tax Assessment Act 1997 Section 110-25(7)

Income Tax Assessment Act 1997 Section 110-30

Income Tax Assessment Act 1997 Section 110-35

Income Tax Assessment Act 1997 Section 118-192

Reasons for decision

Capital Gains

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you make a capital gain or loss as a result of a CGT event happening to a CGT asset. CGT assets include real estate acquired on or after 20 September 1985.

You make a capital gain if your capital proceeds from the sale of your CGT asset are greater than your cost base for the purchase of that asset, for example, if you received more for an asset than you paid for it.  

You make a capital loss if your reduced cost base for the purchase of that asset is greater than your capital proceeds resultant from the sale of that asset.

Cost base

The cost base of a CGT asset is generally the cost of the asset when you bought it. However, it also includes certain other costs associated with acquiring, holding and disposing of the asset.

In order to work out how much your capital gain or capital loss is, you must first establish the cost base or reduced cost base of your ownership interest in the property.

Section 110-25 of the ITAA 1997 states that the cost base of a CGT asset is made up of five elements.

The first element of your cost base includes money or property given for the asset.

The second element includes incidental costs of acquiring the asset, or costs in relation to the CGT event. Examples are agent's commission, advertising to find a seller or buyer, fees paid to an accountant.

You do not include costs if you:

· · have claimed a tax deduction for them in any year, or

· · omitted to claim a deduction but can still claim it because the period for amending the relevant income tax assessment has not expired.

The third element of your cost base includes non-capital costs of your ownership of the CGT asset, which include:

· · interest on money borrowed to acquire the asset; and costs of repairing, maintaining, or insuring it, and

· · interest on money you borrowed to refinance the money you borrowed to acquire the property; and

· · interest on the money you borrowed to finance the capital expenditure you incurred to increase the assets value.

You do not include such costs if you acquired the asset before 21 August 1991. Nor do you include them if you:

· · have claimed a tax deduction for them in any year, or

· · omitted to claim a deduction but can still claim it because the period for amending the relevant income tax assessment has not expired.

The fourth element is capital expenditure that you incurred to increase the assets value.

The fifth element is capital expenditure you incurred to establish, preserve or defend your title to the asset, or a right over the asset.

You acquired your interest in the property before 21 August 1991; therefore you are not entitled to include holding costs in you cost base. Nor can you claim an estimated weekly maintenance cost - you must have actually incurred a cost and be able to evidence the expense to include the amount in your cost base.