Edited version of private advice

Authorisation Number: 1052228782889

Date of advice: 8 March 2024

Ruling

Subject: CGT - adverse possession

Question

Is the acquisition date of the property you acquired deemed to be the date you became entitled to claim possessory title?

Answer

Yes.

Section 109-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the time at which you acquire a CGT asset is when you become its owner.

ATO ID 2004/731 Capital gains tax: acquisition of asset: adverse possession states:

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 your case, the relevant state or territory legislation provides that the limitation period for bringing actions to recover land is 15 years from the date on which the right of action began to accrue. Once the limitation period has expired, the title of the person entitled to bring an action to recover the land is extinguished.

Therefore, you are deemed to have acquired the property when you became entitled to claim possessory title of the land after the expiry of the 15 year period in which an action may be brought to claim ownership of the land by another entity.

Question 2

Will the market value substitution rules apply to deem the first element of the cost base to be the market value at the date of acquisition?

Answer

Yes.

Section 112-20 of the (ITAA 1997) provides the first element of the cost base and reduced cost base of a CGT asset acquired from another entity is its "market value" at the time of acquisition if the taxpayer did not incur expenditure to acquire it.

In this instance you obtained ownership of the property by adverse possession and you incurred no acquisition costs to acquire the property.

Question 3

Will maintenance costs you incurred since you became entitled to claim possessory title be included in the cost base of the property?

Answer

Yes.

Section 110-35 of the ITAA 1997 provides that the third element of the cost base is the costs of owning an asset (but only if the asset was acquired after 20 August 1991).

Costs of owning an asset consist of any expenditure incurred by a taxpayer to the extent which it is incurred in connection with the continuing ownership of the asset. These costs include costs of maintaining, repairing and insuring an asset, rates and land tax.

This ruling applies for the following period:

Period ended X June 20XX

The scheme commenced on:

X January XXXX

Relevant facts and circumstances

You are the owner of the property.

The property is vacant land.

The property was originally acquired by your relative.

Your relative never built on the property.

Your relative never married or had children.

Your relative suffered mental health issues and had little interest in managing their personal affairs.

You started caring for the property.

You paid land tax, council rates and other fees.

Your relative did not contribute to the upkeep of the property or meet any of the outgoings for the property.

You undertook all maintenance and upkeep of the property.

Your relative never prepared a will.

Your relative told you that they wished to bequeath the property to you.

Your relative passed away intestate.

No representative was appointed to manage the estate's affairs.

Your relative's only asset was the property.

You were never contacted by the extended family in relation to your relative or the property.

You continued to maintain the property and paid for slashing and mowing of the property.

You considered erecting a dwelling on the property, but no plans were drafted.

You had solicitors lodge a caveat over the title of the property asserting adverse possession.

You passed the requirement for adverse possession.

You applied for adverse possession of the property.

Adverse possession was approved and the title was transferred to you.

You are considering selling the property.

Relevant legislative provisions

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