Edited version of private advice

Authorisation Number: 1052280521579

Date of advice: 31 July 2024

Ruling

Subject: Capital gains tax

Question

Are you able to include the amount of expenses you incurred as a result of purchasing a property as a foreign resident in the cost base of your right to seek compensation?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 2025

The scheme commenced on:

1 July 2024

Relevant facts and circumstances

You purchased a property.

This property is used as your main residence.

You and your spouse and children live in the property.

At the time of the purchase of the property you were on a visa and had no permanent right to live in Australia.

Your spouse was a citizen of Australia at the time of the purchase of the property.

You were granted residency of Australia a few years after purchasing the property.

You and your spouse were listed as purchasers on the original contract of purchase for the property.

The formal exchange of contracts had to be done immediately as per the vendor's request.

This meant that your spouse could not obtain finance in the time frame for the property.

You purchased the property in your own name without knowing the consequences.

You claim the following:

•         The lawyer acted for both you and the vendor.

•         The firm did not enquire into your migration or residency status at the time of acquisition.

•         You were not advised of the stamp duty or land tax implications of being the sole purchaser of the Property, whilst on a visa.

•         You were not advised of the law implications of purchasing an established dwelling and the issues around the Foreign Acquisitions and Takeovers Act (Cth.) 1975 ("FATA"), and the prospect of making a section 59 application for an exemption certificate.

•         The legal firm did not suggest or recommend that you should seek independent tax advice on the transaction.

•         You would have been happy with your spouse being on the title and finance in their name if you had of been advised correctly.

You were informed, in writing, by State Revenue that they would commence an investigation under the Taxation Administration Act, as to whether you might be liable for a Purchaser Surcharge Duty and Land Tax.

The investigation resulted in you having to pay additional Surcharge Purchaser Duty, Land Tax and additional Surcharge Land Tax.

You have been offered a settlement for the incorrect advice by your former lawyer with no admission of liability.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 section 108-5

Reasons for decision

Ordinary Income

Your assessable income includes your net capital gain for the income year (subsection 102-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997)). You make a capital gain (or loss) as a result of a CGT event happening (section 102-20 of the ITAA 1997).

A CGT asset is any kind of property or a legal or equitable right that is not property (section 108-5 of the ITAA 1997).

CGT event C2 happens if your ownership of an intangible CGT asset ends in certain ways, including being released or cancelled (subsection 104-25(1) of the ITAA 1997). The time of the event is when you enter into the contract that results in the asset ending, or if there is no contract, when the asset ends (subsection 104-25(2) of the ITAA 1997).

In your case, your right to seek compensation was an intangible CGT asset and your ownership of that asset ended when you entered into the Deed of Settlement and Release.

At this time CGT event C2 happened and the amount of the lump sum payment received under the terms of the settlement will be the capital proceeds, which may be reduced by any amounts which can be attributed to the cost base of the asset.

Section 110-25 of the ITAA 1997 sets out the elements that form part of the cost base. The cost base is made up of five elements:

1.    The first element is made up of money paid or required to be paid to acquire the CGT asset.

2.    The second element will include incidental costs of acquiring the asset, or costs in relation to the CGT event. Examples are agent's commission, advertising to find a seller of buyer, fees paid to an accountant.

3.    The third element consists of non-capital costs incurred in connection with your ownership of a CGT asset. Examples are interest, rates, repairs and insurance premiums.

4.    The fourth element includes capital expenditure you incur to increase the value of the CGT asset if the expenditure is reflected in the state or nature of the asset at the time of the CGT event.

5.    The fifth element includes capital expenditure you incur to preserve or defend your title or rights to the asset.

You did not incur Surcharge Purchaser Duty, Land Tax and additional Surcharge Land Tax in relation to your right to seek compensation from your solicitor.

These costs are related to the purchase of the property, and as such they may be attributable to cost base of the property (as the relevant asset), not the compensation claim.

Therefore, the relevant amount cannot form part of the cost base of the right to receive compensation and the asset's cost base is zero.