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Edited version of your written advice
Authorisation Number: 1012725062295
Ruling
Subject: Capital gains tax
Questions and answers
1. Are there any capital gains tax (CGT) implications resulting from the amount you received in relation to dealings with your CGT asset?
No.
2. Is there any change to the cost base of your CGT asset because of the amount you received?
No.
This ruling applies for the following period:
Income year ending 30 June 2015.
The scheme commenced on:
1 July 2014.
Relevant facts and circumstances
You are the owner of a CGT asset.
As a result of dealings with your CGT asset, you received compensation equal to the expenses you incurred.
Relevant legislative provisions:
Income Tax Assessment Act 1997 Section 104-10.
Income Tax Assessment Act 1997 Section 110-25.
Income Tax Assessment Act 1997 Section 110-40.
Income Tax Assessment Act 1997 Section 110-43.
Income Tax Assessment Act 1997 Section 110-45.
Income Tax Assessment Act 1997 Section 110-50.
Reasons for decision
Section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) states that CGT event A1 happens if you dispose of a CGT asset and that you dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner.
In your circumstances, the Commissioner considers that at all times you retained beneficial ownership of the land.
Therefore, in your case, it is considered that a change of ownership of the land did not occur, in terms of paragraph 104-10(2)(a) of the ITAA 1997. Therefore, no CGT event A1 occurred under section 104-10 of the ITAA 1997. Furthermore, the circumstances of the transaction did not lead to any other CGT event occurring.
Expenses incurred in defending title to capital assets are not deductible under section 8-1 of the ITAA 1997 (Broken Hill Theatres Pty Ltd v FC of T (1952) 85 CLR 423; 9 ATD 423). These expenses may, however, be included in the cost base of a CGT asset for CGT purposes under section 110-25 of the ITAA 1997.
Subsection 110-25(6) of the ITAA 1997 states that the fifth element of the cost base is capital expenditure that you incurred to establish, preserve or defend your title to the asset, or a right over the asset.
In your case, you incurred expenses in preserving your ownership in the property. These expenses would normally fall within the scope of the fifth element of the cost base of the property.
However, expenditure does not form part of any element of the cost base of a CGT asset to the extent that a taxpayer has recouped it except where the recouped amount is included in the taxpayer's assessable income (subsections 110-40(3), 110-43(3), 110-45(3) and 110-50(3) of the ITAA 1997).
In your case, you were paid a sum of money to reimburse you for expenses incurred in preserving your ownership in the property. This payment does not fall within the definition of ordinary income and is not assessable as statutory income therefore it is not included in your assessable income.
As the payment is not assessable income, and was paid to you as a recoupment for the expenses you incurred, you therefore cannot include your expenses in the fifth element of the cost base of the property.