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Ruling
Subject: CGT and cost base
Question:
Can the amount paid to the other couple to compensate them for part of the costs they have incurred to improve the property during the ownership period be included in cost base when calculating any capital gain resulting from the sale of the property?
Answer: Yes.
This ruling applies for the following period
Year ended 30 June 2011
The scheme commenced on
1 July 2010
Relevant facts
In year X, you and your spouse, together with another couple, purchased a block of land with the intention of subdividing into two blocks; giving each couple one block each on which each hoped to build a private residence.
Due to council restrictions and 'internal turmoil' the intended use of the land could not be fulfilled and it was subsequently sold in Year Y.
The proceeds of the sale of the land were split equally between the four purchasers.
During the ownership, the other couple carried out some capital improvements to the property, such as building a shed, have electricity connected and planting trees.
You and your spouse paid an amount to the other couple to compensate them for part of the costs they had incurred to improve the property during the ownership period.
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 110-30.
Income Tax Assessment Act 1997 - Section 110-35.
Income Tax Assessment Act 1997 - Section 115-10.
Income Tax Assessment Act 1997 - Section 115-15.
Income Tax Assessment Act 1997 - Section 115-20.
Reasons for decision
The cost base of a capital gains tax (CGT) asset consists of five elements:
· The first element, being the acquisition costs, is the total of the money paid, or required to be paid, in respect of the acquisition.
· The second element is the incidental costs that the taxpayer incurs in acquiring the asset of which relate to a CGT event that happens in relation to the asset.
· The third element is costs of ownership, including both capital and non-capital costs.
· The fourth element is capital costs associated with increasing or preserving the value of your asset, or installing or moving the asset.
· The fifth element is capital expenditure incurred by a taxpayer in establishing, preserving or defending their title to an asset, or right over an asset.
In your case, you and your spouse incurred an amount to compensate the other owners of the property for part of the costs they had incurred to improve the value of the property during the ownership period. Your portion of this amount is included in the fourth element of the cost base when calculating any capital gain from the sale of the property.