Edited version of private advice

Authorisation Number: 1052096743750

Date of advice: 20 March 2023

Ruling

Subject: CGT - adverse possession

Question 1

For the purposes of Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997), did you acquire the property when you obtained possessory title to the property by adverse possession, being the date XX years and X days after taking possession?

Answer

Yes. You acquired the property when you obtained possessory title to the property by adverse possession on XX X 20XX.

Question 2

If the answer to Question 1 is no, for the purposes of Parts 3-1 and 3-3 of the ITAA 1997, did you acquire the property when the NSW Guardian & Trustee provided consent to the application on XX X 20XX?

Answer

N/A

Question 3

If the answers to Question 2 and 3 are no, did you acquire the property when you acquired the legal title on XX X 20XX.

Answer

N/A

Question 4

Is the first element of your cost base and reduced cost base of the property the market value of the property on the date of acquisition as the market value substitution rule applies?

Answer

Yes. The first element of your cost base and reduced cost base of the property is the market value on the date of acquisition.

Question 5

Does your cost base and reduced cost base of the property include the stamp duty and legal fees incurred in obtaining legal title under adverse possession?

Answer

Yes. The legal fees and stamp duty incurred in relation to the application for possessory are included in the cost base of the property.

This ruling applies for the following periods:

Period ended 30 June 20XX

Period ending 30 June 20XX

The scheme commenced on:

XX X 20XX

Relevant facts and circumstances

The previous registered proprietor of the property was Person A.

In or about XX XX 19XX, you took up occupation of the property by changing the locks, maintaining the property, making improvements and paying all council rates and utility charges.

Person A died on X XX 19XX leaving his whole estate to his parent who had predeceased him.

The State Trustee & Guardian subsequently applied for and was granted Letters of Administration.

In accordance with the law, you became entitled to claim possessory title on X XX 20XX, which was XX years and X days after the you took possession and occupation of the Property.

Although you became entitled to claim possessory title at that time, claimed an interest in the property and consent to the application for possessory title was required by it. Consent was obtained in writing on XX XX 20XX.

As a result of the consent from the State Trustee & Guardian, you made a Possessory Application (by adverse possession) to the Registrar General under Sections XXX & XXX of the relevantAct on X XX 20XX.

You became the registered proprietor of the property on XX X 20XX.

You incurred legal fees and stamp duty in becoming the registered proprietor of the Property.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 109

Income Tax Assessment Act 1997 section 109-5

Income Tax Assessment Act 1997 section 110-25

Income Tax Assessment Act 1997 section 110-35

Income Tax Assessment Act 1997 section 112-20

Reasons for decision

Acquisition of the property

ATO Interpretative Decision ATO ID 2004/731 Income Tax Capital gains tax: acquisition of asset: adverse possession considers when a person has acquired a property under adverse possession.

Division 109 of the ITAA 1997 sets out when you are taken to have acquired an asset for CGT purposes. In general, you acquire a CGT asset when you become its owner: subsection 109-5(1) of the ITAA 1997.

In this case you did not become the registered proprietor of the land until XX X 20XX. However, the law recognises that in special circumstances title to property can be acquired based on a claim of adverse possession.

In order for title to property to be acquired by adverse possession, the person claiming title must establish that the time limit on the right of the registered proprietor to recover possession of the land has expired and that they satisfy the common law requirements of adverse possession.

In this case the property was located in the state. In the state, the relevant limitation period for bringing actions to recover land is XX years and X days from the date on which the right of action accrued. Once the limitation period has expired, the title of the person entitled to bring an action to recover the land is extinguished.

At common law, to extinguish the registered proprietor's title, the possession must be open, not secret; peaceful, not by force; and adverse, not by the consent of the true owner: Mulcahy v. Curramore Pty Ltd [1974] 2 NSWLR 464 at 475.

In or about XX X 19XX, you took up occupation of the property by changing the locks, maintaining the property, making improvements and paying all council rates and utility charges.

Taking XX X 19XX as a starting point means the relevant limitation period under the relevant state legislation expired on X XX 20XX.

The date of acquisition is therefore treated as XX X 20XX even though in order for the title to be transferred and the application for possessory title required the consent of the State Trustee & Guardian to obtain the

successful claim which did not occur until XX X 20XX.

This applies even though you did not become the registered proprietor of the property until the later date of XX X 20XX.

Market substitution Rule

In accordance with section 110-25 of ITAA 1997, the cost base of an asset for CGT purposes generally comprises of the following five elements:

•         First element: the cost of acquiring the asset

•         Second element: incidental costs

•         Third element: costs of owning the asset

•         Fourth element: capital expenditure increasing or preserving the value of the asset or of installing or moving the asset

•         Fifth element: capital expenditure to establish, preserve or defend title.

The first element of the cost base is generally the price paid to acquire the property pursuant to subsection 110-25(2) of the ITAA 1997. However, in this instance no expenditure was incurred to acquire the property.

Paragraph 112-20(1)(a) of the ITAA 1997 states that where the taxpayer did not incur expenditure to acquire the relevant asset, the first element of the cost base will be the market value of the asset at the time of acquisition on XX X 20XX.

The first element of the cost base of the property in this case will therefore be the market value of the property as at the date of acquisition on XX X 20XX.

Cost Base

In accordance with s 110-25 of ITAA 1997, the cost base of an asset for CGT purposes generally comprises of the following five elements:

•         First element: the cost of acquiring the asset

•         Second element: incidental costs

•         Third element: costs of owning the asset

•         Fourth element: capital expenditure increasing or preserving the value of the asset or of installing or moving the asset

•         Fifth element: capital expenditure to establish, preserve or defend title.

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

These fifth element costs to be included as part of the cost base would include the legal fees and stamp duty incurred in relation to the application for possessory title and the ultimate registration on XX X 20XX.