Edited version of private advice

Authorisation Number: 1052137282654

Date of advice: 7 July 2023

Ruling

Subject: Cost base - cost of owning an asset

Question

Under section 110-25 of the Income Tax Assessment Act 1997, will the costs of owning a CGT asset be included in the cost base of the asset?

Answer

Yes

This ruling applies for the following period:

Income year ending 30 June 20XX

The scheme commenced on:

DD MM 20XX

Relevant facts and circumstances

A related party of you purchased a Property in 19XX.

The related party of you rented the Property out to you for free for a specified period of time.

During the specified period of time, the related party of you did not claim deductions for cost of owning the CGT asset in their tax return.

The related party passed away on DD MM 20XX, which resulted in the transfer of ownership of the Property from the related party to you.

The Property was not used as the main residence of the related party.

Relevant legislative provisions

Section 110-25 of the Income Tax Assessment Act 1997

Section 128-15 of the Income Tax Assessment Act 1997

Reasons for decision

Section 128-15 of the Income Tax Assessment Act 1997 (ITAA 1997) sets out what happens to a CGT asset that a deceased taxpayer owned just before their death that devolves to their legal personal representative or passes to a beneficiary in their estate. The table in subsection 128-15(4) of the ITAA 1997 sets out the modifications to the cost base and reduced cost base of the CGT asset in the hands of the legal personal representative or beneficiary.

Item 1 of the table in subsection 128-15(4) of the ITAA 1997 provides that for assets acquired by deceased on or after 20 September 1985, the first element of cost base, the acquisition cost, is generally the deceased's cost base for the asset on the day they died.

Item 3 of the table in subsection 128-15(4) of the ITAA 1997 states that the first element of the cost base is the market value of the asset on the day the deceased died if the asset is a property that passed to you after 20 August 1996, and just before the deceased died it was their main residence and was not being used to produce income.

Where an expense relates to a CGT asset and can't be claimed as a deduction, it may be able to be included as part of the cost base of the CGT asset.

Subsection 110-25(3) of the ITAA 1997 provides that the cost base of a CGT asset to a taxpayer consist of five elements. These elements are:

•         acquisition costs;

•         incidental costs;

•         costs of ownership;

•         capital expenditure to increase or preserve the asset's value; and

•         capital expenditure to establish, preserve or defend title to the asset or a right over the asset.

Subsection 110-25(4) of the ITAA 1997 states that the third element of the cost base of a CGT asset is the costs of owning the CGT asset but only if the CGT asset was acquired after 20 August 1991. It also states that these costs include:

•         interest on money you borrowed to acquire the asset;

•         costs of maintaining, repairing or insuring it;

•         rates or land tax, if the asset is land;

•         interest on money you borrowed to refinance the money you borrowed to acquire the asset; and

•         interest on money you borrowed to finance the capital expenditure you incurred to increase the asset's value.

However, under subsection 110-45(1B) of the ITAA 1997, expenditure on assets acquired after 7:30pm on 13 May 1997 does not form part of the third element of the cost base to the extent that they have been deducted or can be deducted.

In addition, Taxation Determination TD 2005/47 Income tax: what do the words 'can deduct' mean in the context of those provisions in Division 110 of the Income Tax Assessment Act 1997 which reduce the cost base or reduced cost base of a CGT asset by amounts you 'have deducted or can deduct', and is there a fixed point in time when this must be determined? specifies that, where an amount that could have been deducted was not deducted, a taxpayer cannot include the amount (that could have been deducted) in the cost base of a CGT asset if the period for amending the income tax return to which the deduction relates has not expired.

Application to your circumstances

The related party of you purchased the Property in 19XX.

The related party passed away on DD MM 20XX, which resulted in the transfer of ownership of the Property from the related party to you. The Property was not used as the main residence of the related party. Item 1 of the table in subsection 128-15(4) of the ITAA 1997 would apply in your circumstances, and the first element of cost base, the acquisition cost, for the Property would be the related party's cost base for the Property on the day the related party died.

The Property was acquired after 7:30pm on 13 May 1997. Any expenditure on the Property does not form part of the third element of the cost base to the extent that they have been deducted or can be deducted.

The Property was rented out to you for a specified period of time for free. During that period, the related party of you did not claim the cost of owning the Property as deductions in their income tax return. As the Property was rented out for free, the related party could not claim deductions for these expenditures on the Property.

Subsection 110-25(3) of the ITAA 1997 provides that the cost base of a CGT asset to a taxpayer includes costs of ownership. Subsection 110-25(4) of the ITAA 1997 states that the third element of the cost base of a CGT asset is the costs of owning the CGT asset but only if the CGT asset was acquired after 20 August 1991. As the Property was acquired after 20 August 1991, cost of owing the Property can be included as part of the cost base of the Property. These expenditures form part of the Property's cost base as the expenditures were not deducted nor could be deducted.

Conclusion

The cost base of the Property, on the day the related party passed away, includes the cost of owning the Property for the period the Property was rented out to you for free. When the ownership of the Property transferred to you, the cost base of the related party of you for the Property as at the day the related party died, becomes the first element of cost base, the acquisition cost, under your ownership.