Edited version of your written advice

Authorisation Number: 1051474060440

Date of advice: 22 January 2019

Ruling

Subject: Capital gains tax – cost base

Question 1

Does the cost base of the land include costs for land rates, water rates, rural land authority, interest on loan, borrowing costs, cattle yard, fencing, chemical spray, pasture improvement and motor vehicle fuel in accordance with section 110-25 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Does the cost base of the land include the cost of the tractor and other motor vehicle expenses in accordance with section 110-25 of the ITAA 1997?

Answer

No

This ruling applies for the following period:

For the year ended 30 June 2018

The scheme commences on:

1 July 2017

Relevant facts and circumstances

You owned land.

On objection to a decision made by the ATO you were not accepted to be carrying on a business as primary producers.

You purchased another property. Both properties were operated as a hobby farm.

You purchased the second property for recreation, running a few head of cattle for interest/hobby and some produce conservation of fodder (hay) for the cattle. The property consisted of a hayshed, double garage and a pumphouse for bore. At the time the property was purchased it was run down and required work to be done.

The boundary fence was replaced with new materials as the existing fence was non repairable.

On every trip to the property it involved maintenance and repairs for such things as electrical fencing damage, fences down because of fallen trees, necessary inspection of boundary and internal fencing and spraying noxious weeds.

Pasture improvement was to control noxious weeds which involved spraying with herbicides once or twice a year. New pasture species of rye grass and clover were planted.

The property was purchased with cattle yards. You purchased new steel tubular cattle yard panels, cattle yard gates in a metal frame, cattle yard bows, cattle yard sliding gates and a new cattle crush. This involved the construction of new yards.

You purchased a tractor which was sold with the property as part of the inclusions in the sale contract.

You incurred motor vehicle fuel costs in travelling to undertake repair and maintenance and improvement activities at the property. You have also incurred other expenses including registration, insurance, repairs and maintenance related to the motor vehicle whilst conducting repair and maintenance and improvement activities at the property.

The second property was sold in the financial year ended 30 June 2018.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 110-A

Income Tax Assessment Act 1997 section 110-25

Reasons for decision

Subdivision 110-A of the ITAA 1997 details the general rules of the cost base of a CGT asset. The cost base consists of five elements.

First Element: Acquisition costs

Under subsection 110-25(2) of the ITAA 1997, this element is the total of any money you paid or are required to pay in respect of acquiring the asset and the market value of any property that you gave or are required to give in respect of acquiring it. The money does not have to be paid or property given to the entity from which the asset was acquired. However, the money or property still needs to have been paid or given in respect of the acquisition of the asset. (Taxation Determination TD 2003/1).

Application to your circumstances

You advise that the property was purchased for a purchase price. This would be included in the first element.

Second Element: Incidental costs

Under subsection 110-25(3) of the ITAA 1997, incidental costs cover both incidental costs incurred to acquire the CGT asset and those that relate to the CGT event (e.g. disposal of the asset).

Incidental costs may include transfer costs, stamp duty, advertising or costs associated with the services of a valuer, accountant or legal adviser, or borrowing expenses such as loan application and mortgage discharge fees (section 110-35 of the ITAA 1997).

Application to your circumstances

Borrowing costs are included under the second element.

Third Element: Costs of ownership

Under subsection 110-25(4) of the ITAA 1997, costs of ownership of a CGT asset include, but are not limited to;

● interest on money borrowed to acquire the asset or to refinance such a borrowing,

● interest on money borrowed to finance capital improvements to the asset,

● repairs and maintenance,

● insurance premiums, and rates and land tax.

Application to your circumstances

Interest

Interest expenses can be claimed under the third element.

Holding costs - Insurance premiums, rates and land tax

You are able to include the lands rates, water rates and rural land - Livestock Health and Pest Authority costs under this element.

Repair and maintenance costs (Fence and cattle yards)

‘Repairs and maintenance’ are third element costs. Repairs generally involve a replacement or renewal of a worn out or broken part, for example, replacing some guttering damaged in a storm or part of a fence that was damaged by a falling tree branch. Expenses that are capital, or of a capital nature, are not repairs and are not included as third element costs, such as;

● replacement of an entire structure or unit of property (such as a complete fence or building, a stove, kitchen cupboards or refrigerator)

● improvements, renovations, extensions and alterations, and

● initial repairs, for example, in remedying defects, damage or deterioration that existed at the date you acquired the property.

You have incurred both repair (third element) and ‘improvement’ (fourth element) costs for the boundary fencing and cattle yard. The costs should be apportioned appropriately.

Land maintenance costs

You have incurred costs for spray chemicals for weed control along with the injection of new pasture species as general pasture improvements which are considered to the third element costs.

Motor vehicle fuel expenses

In relation to your travel costs, the third element of the cost base will be limited to the cost of travel to carry out repairs and maintenance on the property, as those travel costs are a cost of owning the asset.

Any renovation or restoration of the property which went beyond repairs and maintenance would be considered to be a capital improvement. As such, the cost of any travel in relation to the renovation or the restoration of the property which goes beyond repairs and maintenance is not a cost of owning the asset under the third element.

As such appropriately apportioned costs for fuel can be considered as a third element travel expense costs.

Fourth Element: Capital expenditure to increase value

Subsection 110-25(5) of the ITAA 1997 provides that the fourth element of a CGT asset’s cost base is capital expenditure incurred:

(a) the purpose or the expected effect of which is to increase or preserve the asset’s value; or

(b) that relates to installing or moving the asset.

The expenditure can include giving property.

Application to your circumstances

Expenditure for the replacement of the boundary fence and the cattle yard should be appropriately claimed under this element.

Fifth Element: Capital expenditure to establish or defend title to or a right over an asset

Subsection 110-25(6) of the ITAA 1997 provides that capital expenditure you incurred to establish, preserve or defend your title to the asset or a right over the asset will form the fifth element of the cost base.

You have not claimed any fifth element costs.

Costs which are not included in the five elements of the cost base:

Other motor vehicle expenses and tractor

In accordance with common law principles, anything which is affixed to land (including buildings) will generally form part of the land. It can also form part of the cost base of the land for CGT purposes. However, where property constitutes a separate CGT asset, it cannot from part of the cost base of land.

Subsection 108-5(1) of the ITAA 1997, provides that a CGT asset ‘…includes any kind of property’. Accordingly, the tractor is also ‘property’, and is therefore also a CGT asset in its own right.

Taxation Determination 98/24 (TD 98/24) provides that chattels (e.g., items of furniture) that are sold with the property are separate CGT assets in their own right and are not part of the real property. This is the case whether the chattels were acquired with the property or afterwards.

A depreciating asset is not outlay expenditure, or a presently existing liability to outlay expenditure. It is not a cost ‘incurred’. It is a notional amount provided for in Australian taxation legislation to take into account the reduction in the value of an asset during its use, either wholly or partly, in the production of assessable income.

There is no provision in the capital gains tax legislation which includes the decline in value of a CGT asset in the cost base of another CGT asset. Nor does it include other motor vehicle expenses incurred when conducting repair and maintenance or improvement activities on the property.

Application to your circumstances

The tractor cannot be incorporated into the land. It remains a separate personal use asset and does not form part of the cost base of the land.

Costs for the other motor vehicle expenses and the decline in value of the motor vehicle does not constitute ‘costs of ownership’ for the purposes of section 110-25(4) of the ITAA 1997 and cannot be included in the cost base.