Edited version of your private ruling

Authorisation Number: 1012539735976

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Ruling

Subject: Capital gains tax

Question 1

Does the cost base of your investment property include depreciated plant and equipment and any capital works deductions?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

You purchased an investment property during the 2007/08 financial year.

You have claimed a deduction for capital allowances and capital works during your period of ownership.

You sold the investment property during the 2012/13 financial year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 104.

Income Tax Assessment Act 1997 Division 110.

Income Tax Assessment Act 1997 section 17-570.

Income Tax Assessment Act 1997 section 40-25.

Income Tax Assessment Act 1997 subsection 40-25(7).

Income Tax Assessment Act 1997 section 102-20.

Income Tax Assessment Act 1997 section 104-10.

Income Tax Assessment Act 1997 subsection 104-10(1).

Income Tax Assessment Act 1997 section 108-5.

Income Tax Assessment Act 1997 subsection 110-25(2).

Reasons for decision

Summary

You are required to calculate a balancing adjustment for the depreciating assets sold with your investment property.

The cost base of the investment property must be reduced by any capital works deduction that you have claimed, or are entitled to claim.

Detailed reasoning

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you make a capital gain or capital loss only if a Capital Gains Tax (CGT) event happens. CGT events are set out in Division 104 of the ITAA 1997.

When you sold your investment property, CGT event A1 (disposal) occurred under section 104-10(1) of the ITAA 1997.

Under section 108-5 of the ITAA 1997 a CGT asset is:

(a) any kind of property; or

(b) a legal or equitable right that is not property.

You will make a capital gain if the capital proceeds from the sale are more than the cost base. You will make a capital loss if those capital proceeds are less than the reduced cost base (section 104-10 of the ITAA 1997).

Division 110 of the ITAA 1997 sets the legislative framework to determine the cost base of a CGT asset. The Division contains general rules that apply to the cost base.

As a general rule the first element of the cost base is the total of money you have paid or are required to pay plus the market value of any property given or required to be given (subsection 110-25(2) of the ITAA 1997).

You must exclude from the cost base of a CGT asset the amount of capital works deductions you claimed (or omitted to but can still claim because the period for amending the relevant income tax assessment has not expired) for the asset if you acquired the asset:

· after 7.30pm (by legal time in the ACT) on 13 May 1997, or

· before that time and the expenditure that gave rise to the capital works deductions was incurred after 30 June 1999.

Depreciating assets that are found in a building, for example carpet or a hot water system, are taken to be separate CGT assets from the building.

Under the uniform capital allowance (UCA) system, a capital gain or capital loss from the disposal of a depreciating asset will only arise to the extent that you have used the asset for non-taxable purposes, i.e. used for private purposes.

A balancing adjustment must usually be made when the taxpayer stops "holding" a depreciating asset. This may be due to the asset being sold, scrapped, destroyed, lost, given away or otherwise disposed of, starting being held as trading stock or, in the case of a right, ceasing or expiring, or the taxpayer dying.

You work out the balancing adjustment by comparing the asset's termination value and its adjustable value at the time of the balancing adjustment event. If the termination value is greater than the adjustable value, you include the excess in your assessable income.

Generally, the termination value is what you receive or are taken to receive for an asset as a result of a balancing adjustment event, such as the proceeds from selling an asset.

Plant and equipment is a CGT asset; in the circumstance where they were used exclusively for the purpose of producing income and will be sold with the investment property a capital gain does not arise. However, each item of plant and equipment sold, with the property, will require a balancing adjustment.

If, after the balancing adjustment of each item of plant and equipment sold with the property, there is any excess income this is included in your assessable income.

Therefore the plant and equipment is not included in the cost base of an investment property.

However, in working out a capital gain from a rental property, you may need to reduce the cost base of the property to the extent that it includes construction expenditure for which you claimed, or were entitled to claim, a capital works deduction.