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Edited version of your written advice
Authorisation Number: 1051354650279
Date of advice: 28 March 2018
Ruling
Subject: Elements of cost base for CGT asset used to derive income and as a main residence
Question 1
Does the cost of demolishing the existing house form part of the fourth element of the cost base of the property for the purpose of calculating the net capital gain?
Answer
Yes
Question 2
Do the interest, rates and taxes incurred during the period that the property was your main residence form part of the third element of cost base of the property, where they were not deductible in the year they were incurred?
Answer
Yes
This ruling applies for the following period:
Financial year ended 30 June 2016
The scheme commences on:
1 July 2015
Relevant facts and circumstances
You acquired a property in 20XX.
You were the sole owner of the property.
You rented the property, with dwelling, for income.
You demolished the dwelling and built a new dwelling in its place. This then became your main residence.
You disposed of the property in 2016.
You lodged your 2016 tax return but did not include the demolition cost of the rental house or the interest, rates and taxes incurred while the property was your main residence.
Relevant legislative provisions
Section 110-25 of the Income Tax Assessment Act 1997
Reasons for decision
Question 1
Subsection 110-25(5) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the fourth element of the cost base of a CGT asset includes the expenditure incurred to increase or preserve the asset’s value or that relate to moving or installing the asset.
The demolition of a dwelling is deemed to be a CGT event C1 loss or destruction of a CGT asset. You do not make a capital gain or capital loss from the demolition if you do not receive any capital proceeds.
The time for determining whether demolition costs can be included in the cost base of the land is when a subsequent CGT event happens to the land. This is the case even if the demolition costs are incurred merely to facilitate the construction of another building.
If an individual can show at the time a subsequent CGT event happens to the land, that the expenditure on demolition is reflected in the state or nature of the asset then the expenditure will be included in the fourth element of the taxpayer's cost base.
Question 2
Subsection 110-25(4) of the ITAA 1997 provides that the third element of the cost base of a CGT asset are the costs of owning the CGT asset. These costs include council rates, interest on loans to acquire the asset and costs of maintaining, repairing or insuring the asset.
Ownership costs can only be included in the cost base of a CGT asset where the asset was acquired after 21 August 1991 and the costs are not deductible in the year they were incurred.