Edited version of your private ruling

Authorisation Number: 1012452033079

Ruling

Subject: Capital Gains Tax - Cost Base

Question 1

Are you able to include the cost of constructing a new dwelling in the cost base when calculating CGT?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 2013

Year ending 30 June 2014

The scheme commences on:

1 July 2012

Relevant facts and circumstances

You are going to transfer your share of a property to your relative.

A dwelling on the property was demolished and a new one built.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 110-25

Income Tax Assessment Act 1997 section 116-30

Reasons for decision

You make a capital gain or loss as a result of a capital gains tax (CGT) event happening to a CGT asset. CGT assets include real estate acquired on or after 20 September 1985. CGT events are those transactions that occur to a CGT asset that result in you either making a capital gain or capital loss.

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

Capital gains tax is not a separate tax, it forms part of your assessable income and is taxed at your marginal tax rate.

The construction of the new dwelling is considered an improvement to the land and it is not treated as a separate asset, you will be taken to have acquired the new dwelling on the date you acquired the land.

The following are the five elements of the cost base:

1. Money you paid for original dwelling and land.

2. Incidental costs of acquiring dwelling and land, they are:

· Fees paid to a surveyor, valuer, auctioneer, accountant, broker, agent, consultant or legal adviser (you can only include the cost of advice concerning the operation of the tax law as an incidental cost if the advice was provided by a recognised tax adviser)

· costs of transfer

· stamp duty or other similar duty

· costs of advertising or marketing (but not entertainment) to find a buyer

· costs relating to the making of any valuation or apportionment to determine your capital gain or capital loss

· search fees (such as fees to check land titles and similar fees

· the cost of a conveyancing kit (or a similar cost), and

· borrowing expenses (such as loan application fees and mortgage discharge fees).

Note: 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.

3.Costs of owning the asset including:

· rates, land taxes, repairs and insurance premiums

· non-deductible interest on borrowings to finance a loan used to acquire a CGT asset and on loans used to finance capital expenditure you incur to increase an assets value.

Note: 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.

4.Capital costs to increase or preserve the value of your asset or install or move it, such as:

· costs of applying for zoning changes

· costs of demolition and

· construction costs.

5.Capital costs of preserving or defending your ownership of or rights to your asset. 

· The capital cost of building the new dwelling is included in the fourth element of the cost base.

General advice

Demolition of dwelling

Capital gains event C1 happens if a capital gains asset you own is lost or destroyed. Taxation Determination TD 1999/79 confirms that CGT event C1 can happen on the voluntary destruction of an asset where for example, a taxpayer might demolish a building in the course of redeveloping a property.

Subsection 104-20(3) of the ITAA 1997 provides that you make a capital gain from CGT event C1 if the capital proceeds from the loss or destruction are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base.

The transfer of a property to another person results in CGT event A1 occurring.

Capital proceeds, is the consideration a taxpayer receives upon the disposal of their interest in a Property. There are modifications to this general rule where a taxpayer does not receive any consideration. Under this modification, the taxpayer is taken to have disposed of their interest in the Property at market value on the date of disposal (section 116-30 of the ITAA 1997).

Capital proceeds is the term used to describe the amount of money or the value of any property a taxpayer received or is entitled to receive as a result of a CGT event happening to a CGT asset that a taxpayer owns.