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Ruling

Subject: Income Tax - Capital Gains Tax - cost base and reduced cost base

Question 1

Is the cost base and reduced cost base for the property (the Apartment) owned by the entity the amount of $Y + $S + $T.

Answer

Yes.

This ruling applies for the following periods:

Income year ended 30 June 2012.

The scheme commences on:

1 January 200X.

Relevant facts and circumstances

The entity is a private company registered in a certain year.

Upon its registration the entity entered into a partnership by providing 25% of the required capital to purchase and develop an apartment complex.

A few years later in 200X, the entity acquired the Apartment for $X. In an earlier audit, the Commissioner determined that the entity had acquired the Apartment for a market value of $Y, based on the State Revenue Office levying stamp duty on that market value.

The entity was levied $S stamp duty by the State Revenue Office and a $T Titles Registry fee by the State Land Registry as a result of acquiring the Apartment.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 100-25

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Subsection 110-25(1)

Income Tax Assessment Act 1997 Subsection 110-25(2)

Income Tax Assessment Act 1997 Subsection 110-25(3)

Income Tax Assessment Act 1997 Subsection 110-25(6)

Income Tax Assessment Act 1997 Subsection 110-35(4)

Income Tax Assessment Act 1997 Subsection 110-55(2)

Income Tax Assessment Act 1997 Paragraph 112-20(1)(c)

Income Tax Assessment Act 1997 Subsection 112-20(2)

Income Tax Assessment Act 1997 Section 977-5

Income Tax Assessment Act 1997 Section 977-50

Income Tax Assessment Act 1997 Paragraph 977-55(a)

Reasons for decision

Summary

The cost base and reduced cost base for the Apartment owned by the entity is the amount of $Y + $S + $T.

Detailed reasoning

Cost base

In accordance with subsection 110-25(1) the cost base of a CGT asset, which for the purposes of the CGT asset definition in section 100-25 will include real property such as the Apartment, will consist of five elements.

The first element is defined by subsection 110-25(2) to include the money paid in respect of acquiring the CGT asset. Based on the relevant facts, the first element of the Apartment's cost base at this stage will be the $X paid in early 200X.

The market value substitution rule in paragraph 112-20(1)(c) however modifies the first element by substituting the money paid with the asset's market value. Based on the relevant facts, the first element of the Apartment's cost base is now $Y as opposed to $X, based on the deemed market value of $Y. Please note that subsection 112-20(2) does not apply:

· as the Commissioner determined in an earlier audit that the Apartment is a revenue asset in accordance with section 977-50

· as per paragraph 977-55(a), the disposal of a revenue asset is a realisation event, and

· as per section 977-5, a realisation event for a CGT asset is a CGT event (i.e. in this instance CGT event A1 as per section 104-10).

The second element is defined by subsection 110-25(3) to be the incidental costs incurred in acquiring the CGT asset. Stamp duty is defined by subsection 110-35(4) to be an incidental cost. Therefore based on the relevant facts, the second element of the Apartment's cost base is $S.

The fifth element is defined by subsection 110-25(6) to be the capital expenditure incurred to establish the title of the acquired CGT asset. The $T Titles Registry fee levied by the State Land Registry would be such capital expenditure. Therefore based on the relevant facts, the fifth element of the Apartment's cost base is $T.

The addition of the first, second and fifth elements results in the Apartment having a cost base of $Y + $S + $T.

Reduced cost base

Subsection 110-55(2) states that with the exception of the third element, all of the elements of the reduced cost base of a CGT asset are the same as those for the cost base. As the Apartment has no third element, its reduced cost base is also $Y + $S + $T.