Edited version of your private ruling

Authorisation Number: 1012590513878

Ruling

Subject: capital gains tax (CGT) - disposal - capital works

Question: Are you required to adjust the cost base for capital works deductions upon the disposal of your investment property?

Answer: Yes.

This ruling applies for the following period

Year ended 30 June 2014

The scheme commences on

1 July 2013

Relevant facts and circumstances

You owned an investment property.

You undertook capital works to the property.

You retired several years ago.

Your income for the relevant income year was from the funds you drew from your superannuation fund and other sources.

You were not required to lodge an income tax return for the relevant income year as you have calculated your taxable income to be less than $18,200.

You have calculated your total depreciation costs for your investment property to be a specified amount for the relevant income tax year.

You did not claim this deduction in your relevant income tax return for your investment property due to your low income.

Late last year you disposed of your investment property and you made a capital gain.

You have provided documentation to support your application and this documentation is to be read with and forms part of your application for the purposes of this ruling.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 110-25

Income Tax Assessment Act 1997 Division 43

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

The most common CGT event is CGT event A1, which occurs when you dispose of a CGT asset. The time of the event is when you enter into the contract for the disposal or if there is no contract, when a change of ownership occurs.

CGT event A1 occurred when you disposed of your investment property.

You make a capital gain if your capital proceeds from the sale of your CGT asset are greater than your cost base for the purchase of that asset.  You make a capital loss if your reduced cost base for the purchase of that asset is greater than your capital proceeds.

Capital proceeds 

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

Cost base

The cost base of a CGT asset is generally the cost of the asset when you bought it. However, it also includes certain other costs associated with acquiring, holding and disposing of the asset.

In order to work out how much your capital gain or capital loss is, you must first establish the cost base or reduced cost base of your ownership interest in the property.

The cost base of a CGT asset is made up of five elements.

1. money or property given for the asset

2. incidental costs of acquiring the asset or that relate to the CGT event.

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 CGT asset

You do not include such costs if you acquired the asset before 21 August 1991. Nor do you include them 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 to install or move it

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

Rental property deductions and cost base

You can claim a deduction for certain expenses you incur for the period of time your property is rented or is available for rent. However, you cannot include expenses in your cost base calculation that have previously been claimed as rental property deductions.

Capital works deduction and cost base

You can claim a deduction for capital expenditure incurred in constructing capital works including building and structural improvements where a residential property is used for income producing purposes. This deduction is referred to as a capital works deduction.

A capital works deduction is allowable on certain kinds of construction expenditure. In the case of residential rental properties, the deductions would generally be spread over a period of 25 or 40 years. Your capital works deduction cannot exceed the construction expenditure and can only be claimed for the period of time that the property is rented or is available for rent.

You must exclude from the cost base of a CGT asset (including a building, structure or other capital improvements to land that is treated as a separate asset for CGT purposes) the amount of capital works deductions you claimed or can claim in respect of (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 13 May 1997

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

Expenditure does not form part of the cost base of a CGT asset to the extent you have deducted or can deduct it for an income year. As a result, where you have incurred capital works expenditure in relation to a CGT asset, the cost base does not include the expenditure to the extent you have deducted or can deduct it.

If you claim capital work deductions, the construction expenditure on which those deductions are based cannot be taken into account in working out any other types of deductions you can claim, such as deductions for decline in value of depreciating assets.

In your case, even though you have not claimed the capital works deductions in your previous year's income tax return due to low income they are a claimable deduction.

Therefore, your cost base must be reduced by your capital works deduction amount in the current income tax year.