Edited version of your written advice

Authorisation Number: 1012817463375

Ruling

Subject: Capital gains tax

Questions and answers:

Are you entitled to include $X in the cost base when calculating a capital gain?

No.

Are you entitled to include the amount of $Y representing the increase in borrowing on your investment property in the cost base when calculating the capital gain?

No.

This ruling applies for the following periods:

Year ending 30 June 2012

The scheme commenced on:

1 July 2011

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.

You purchased an investment property a number of years ago.

The investment property was in your sole name.

You and your former spouse entered into a financial agreement.

The financial agreement provided that the marital home be divided between you and your spouse, with your spouse receiving $Z of the sale proceeds.

The agreement states that each party shall be solely entitled to the exclusion of the other party to all other property and chattels of whatsoever nature and kind in his or her possession as at the date of this financial agreement and for this purpose real estate is deemed to be in the possession of the persons whose name is registered on the certificate of title.

You refinanced the loan on the investment property and at the same time you used the equity in the investment property to increase the borrowing on the investment loan by $Y, with the amount being used to repay part of the home loan for your family home.

You were not required to pay your former spouse $X representing part of the market value of the investment property under the financial agreement.

You sold the investment property and made a capital gain.

Relevant legislative provisions:

Income Tax Assessment ACT 1997 Section 102-20

Income tax Assessment ACT 1997 Section 110-25

Reasons for decision

A capital gain or capital loss is made as a result of a capital gains tax (CGT) event happening to a CGT asset (section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997)). The most common CGT event is CGT event A1 the disposal of a CGT asset.

The cost base of a CGT asset is generally the cost of the asset when a taxpayer 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 a taxpayer's capital gain or capital loss is, a taxpayer must first establish the cost base or reduced cost base of a taxpayer's ownership interest in the property.

Section 110-25 of the ITAA 1997 states that the cost base of a CGT asset is made up of five elements.

1. Money you paid for the asset.

2. Incidental costs of acquiring the property, they are:

• Fees paid to a surveyor, value, 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 convincing 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. 

In your case you were not required to pay your former spouse the sum of $X representing part of the market value of the investment property under the financial agreement entered into by you and your former spouse.

The $Y you borrowed is just the refinancing of earlier borrowings which were used to finance the purchase of the property, however borrowings to finance the purchase of the property are not part of the cost base of the property.

Neither of the amounts can be included in the cost base when calculating the capital gain made on the investment property.