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Edited version of your written advice
Authorisation Number: 1013056925977
Date of advice: 21 July 2016
Ruling
Subject: Capital gains tax
Question 1
Will you be liable for capital gains tax (CGT) on the sale of an asset purchased for investment purposes?
Answer
Yes.
Question 2
Will you be able to access the CGT discount if you hold the asset for more than one year?
Answer
Yes.
Question 3
Will you be entitled to deductions for bank interest and bank fees incurred in borrowing money to purchase the asset?
Answer
No.
Question 4
Will you be entitled to deductions for other costs incurred in holding the asset, such as valuation fees, insurance?
Answer
No.
Question 5
Will you be entitled to include bank interest, bank fees, valuation fees, and insurance in the cost base of the asset?
Answer
Yes.
This ruling applies for the following periods:
Year ended 30 June 2016
Year ending 30 June 2017
The scheme commences on:
12 June 2016
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 and your spouse are looking at investing in an asset.
It will be held for investment purposes and capital growth.
It will be purchased at market value.
It will be independently valued by a valuer, and insured for insurance purposes.
It will contain lot numbers as provided by the seller.
It will be purchased in your name, or your spouse's name.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
Income Tax Assessment Act 1997 Section 102-20
Income Tax Assessment Act 1997 Section 108-5
Income Tax Assessment Act 1997 Section 108-20
Income Tax Assessment Act 1997 Section 110-25
Income Tax Assessment Act 1997 Section 115-25
Reasons for decision
Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you can make a capital gain or loss if and only if a CGT event occurs. The most common CGT event, CGT event A1, occurs when you dispose of a CGT asset to someone else, for example, if you sell a property.
A CGT asset is defined in section 108-5 of the ITAA 1997 as any kind of property, or a legal or equitable right that is not property.
A personal use asset is defined in subsection 108-20 of the ITAA 1997 and includes a capital gains tax (CGT) asset (excluding a collectable) that is used or kept mainly for your personal use and enjoyment.
Examples of personal use assets include clothing, cameras, televisions and furniture.
In your case, you have stated that you are purchasing the assets for investment purposes and capital growth. They are not being kept for your personal use and enjoyment, therefore they are considered a CGT asset and subject to the CGT provisions.
CGT discount
For a capital gain to be a discount capital gain, it must have resulted from a CGT even happening to a CGT asset acquired by the entity at least 12 months before the CGT event, section 115-25 of the ITAA 1997.
In your case, as the assets are classified as CGT assets, you will be entitled to the 50% discount on your capital gain, as long as you hold the assets for longer than 365 days, or 366 in a leap year.
Interest
Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature.
In your case, the assets are being held for capital growth, you are not earning income from holding them. Therefore, you will not be entitled to any deductions for costs you incur in relation to the assets.
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, section 110-25 of the ITAA 1997. It consists of five elements.
The first element is the acquisition cost of the CGT asset.
The second element is the incidental costs of owning the asset. These costs include; stamp duty, advertising costs, valuation costs, conveyancing costs, and borrowing expenses, such as loan application fees or mortgage discharge fees.
In your case, you will include valuation and bank fees in the second element of the cost base.
The third element is the capital and non-capital cost of owning the CGT asset. These costs include; interest on money you borrowed to acquire the asset, costs of maintaining, repairing or insuring it, and council rates.
In your case, you will include the interest on your loan, insurance and bank vault fees in the third element of the cost base.