Edited version of private advice

Authorisation Number: 1052253377454

Date of advice: 23 May 2024

Ruling

Subject: Capital proceeds and cost base

Question 1

Are the capital proceeds from the sale of the property equal to the market value on the date you ceased renting the property and moved in as your main residence?

Answer

No.

Question 2

Does the second element of the cost base include solicitor's and sales commission fees relating to the sale of the property?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You purchased a property and rented it out soon after initial renovations were done.

Tenants renting the property vacated the property and a market appraisal was done around this time.

After the market appraisal was done, major renovations were made to the property. You then moved into the property as your main residence.

The property was sold. You incurred solicitor fees and sales commissions fees from the sale of the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 110-25

Income Tax Assessment Act 1997 subsection 110-25(3)

Income Tax Assessment Act 1997 section 110-35

Income Tax Assessment Act 1997 section 116-20

Reasons for decision

Question 1

Are the capital proceeds from the sale of the property equal to the market value on the date you ceased renting the property and moved in as your main residence?

Summary

No.

Detailed reasoning

Section 116-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the capital proceeds from a capital gains tax (CGT) event include the money you have received in respect of the event happens.

Section 104-10 of the ITAA 1997 provides that a CGT event A1 happens if you dispose of a CGT asset. You dispose of a CGT asset if a change of ownership occurs from you to another entity where the time of the CGT event is when the disposal contract is entered into.

If you use your home to produce income, you are generally taken to have acquired it at the time you first used it for this purpose. This means when you sell your home, you work out the capital gain or loss using its market value at the time you first used it to produce income. It is called the 'home first used to produce income rule'.

However, if you use your home to produce income from the time you acquire it, this rule does not apply.

Here, you acquired the property and rented it out, and then after some time you moved back into it as your main residence. You cannot use the market value at the time you moved into the property because you first rented out the property and then later on started living in it as your main residence. The capital proceeds are equal to the market value on the date the CGT event A1 occurred, not the date you ceased renting the property.

Question 2

Does the second element of the cost base include solicitor's and sales commission fees relating to the sale of the property?

Summary

Yes.

Detailed reasoning

CGT is the tax you pay on certain gains you make. Section 110-25 of the ITAA 1997 provides that the cost base of a CGT asset consists of five elements:

1. acquisition costs

2. incidental costs relating to the acquisition and subsequent disposal of the asset

3. non-capital costs of ownership which are not deductible

4. capital expenditure to increase the value of the asset, and

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

The second element of the cost base is the incidental costs that the taxpayer incurs in acquiring and disposing the asset of which relate to a CGT event that happens in relation to the asset (subsection 110-25(3) of the ITAA 1997). Incidental costs include solicitor's fees and sales commission fees that are incurred in the sale of the property.