Edited version of your private ruling

Authorisation Number: 1012581456899

Ruling

Subject: Capital gains tax - cost base

Question

For the purposes of the record keeping requirements in Division 121 of the Income Tax Assessment Act 1997 (ITAA 1997), are you able to reconstruct the figures associated with establishing the cost base of the property by obtaining estimates from an appropriately qualified person?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2013

Year ending 30 June 2014

The scheme commenced on:

1 July 2012

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

X acquired a property. The existing building on the property was demolished and a new building was constructed.

Receivers were appointed in relation to certain property of X, including the property.

The property was sold.

The receivers have sought to obtain the books and records in relation to the property from the relevant parties. Some of these parties have been unable or unwilling to provide these records. The information provided to the receivers is insufficient to determine the construction and other acquisition costs relating to the building on the property.

The receivers engaged a quantity surveyor to determine the construction costs for the building on the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 121

Income Tax Assessment Act 1997 Subsection 121-20(5)

Reasons for decision

Division 121 of the ITAA 1997 addresses record keeping requirements under the capital gains tax (CGT) provisions.

It requires that you must keep records of every act, transaction, event or circumstance that may be relevant to working out whether you have made a capital gain or capital loss from a CGT event.

If records are lost or have not been maintained for the purpose of calculating your CGT cost base you should first make an attempt to obtain the relevant documentation by approaching the relevant parties and obtaining copies. These may be obtained from builders, contractors, accountants, insurance bodies, solicitors, real estate agents, government authorities etc. 

In the event that the necessary documentation cannot be obtained, subsection 121-20(5) of the ITAA 1997 provides that if the necessary records of an act, transaction, event or circumstance do not already exist, you must reconstruct them or have someone else reconstruct them. 

Taxation Ruling TR 97/25 addresses the use of an estimate when actual construction expenditure is not available. It allows that in those circumstances, we would accept a building cost estimate by an appropriately qualified person. In these cases a valuation estimate by an appropriately qualified person would be accepted. An appropriately qualified person would have expertise in calculating these capital costs and would be likely to be accepted by a court or tribunal as an expert in the relevant field.

The question of whether a person has the required expertise is an issue of fact in each case. TR 97/25 provides guidance on who we consider to be an appropriately qualified person as follows: 

25. We consider that an appropriately qualified person has expertise in the calculation of building construction costs and is likely to be accepted by a court or tribunal as an expert witness on the issue of calculating the cost of construction of the particular building. That expertise may have been acquired through a course of study or through relevant experience in providing building cost estimates over a significant period of time.

26. The attainment of relevant professional qualifications or recognition by an appropriate professional association or organisation is indicative of expertise in this field.

27. Unless they are otherwise qualified, valuers, real estate agents, accountants and solicitors generally have neither the relevant qualifications nor experience to make such an estimate.

28. Appropriately qualified people might include:

· a quantity surveyor, who has expertise in the relevant type of construction;

· a clerk of works, such as a project organiser for major building projects;

· a supervising architect who approves payments at each stage in major projects and who may approve individual payments to subcontractors in smaller projects; or

· a builder who is experienced in estimating construction costs of similar building projects.

29. The question of whether a person has the required expertise is an issue of fact in each case.

In this case, costs were incurred in constructing a building on the property. This is a capital cost that would be expected to increase the value of the asset and could be included (subject to record keeping requirements) in the fourth element of the cost base. The receivers have been unable to obtain receipts and invoices relating to these costs from the relevant parties. We consider that sufficient efforts have been made to reconstruct the records.

Accordingly, for the purposes of reconstructing the CGT cost base of the property we will accept estimates from an appropriately qualified person as per the directive provided in TR 97/25. Any reconstructed cost amount estimated by an appropriately qualified person can be included in the cost base of the CGT asset pursuant to section 110-25 of the ITAA 1997.