Edited version of private advice

Authorisation Number: 1052316282132

Date of advice: 20 January 2025

Ruling

Subject: CGT - asset

Question

Can you include the professional service fees in the fourth element of the cost base of the Property under subsection 110-25(5) of the Income Tax Assessment Act 1997?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June XXXX

The scheme commenced on:

1 July XXXX

Relevant facts and circumstances

You own a residential property (the Property).

You have used the Property as a holiday home with your family. You have never rented the Property out nor have you attempted to have the Property rented. The Property is not used for any income producing purposes.

You have had a series of disputes with your neighbour adjacent to the Property. These disputes are in relation to changes made or proposed to your neighbour's property which, you believe, would affect your property's value. You engaged professionals to help you to object to these changes and incurred costs for their services (collectively referred to as the 'professional service fees').

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 110-25(5)

Income Tax Assessment Act 1997 Section 110-45

Income Tax Assessment Act 1997 Subsection 110-45(1B)

Income Tax Assessment Act 1997 Subsection 110-45(2)

Reasons for decision

Subsection 110-25(5) of the Income Tax Assessment Act 1997 (ITAA 1997) provides:

The fourth element is capital expenditure you incurred:

(a)   the purpose or the expected effect of which is to increase or preserve the asset's value; or

(b)   that relates to installing or moving the asset.

The amounts you incurred on the professional service fees were capital expenses incurred for the purpose or the expected effect of increasing or preserving the Property's value. These amounts are included in the fourth element of the cost base.

Furthermore, section 110-45 of the ITAA 1997 does not apply to prevent these amounts from forming part of the cost base or of an element of the cost base. That section provides that some expenditure is prevented from forming part of the cost base, or an element of the cost base of a CGT asset acquired after 13 May 1997.

Subsection 110-45(1B) of the ITAA 1997 provides:

(1B)   Expenditure does not form part of the second or third element of the cost base to the extent that you have deducted or can deduct it.

Subsection 110-45(2) of the ITAA 1997 provides:

(2)   Expenditure (except expenditure excluded by subsection (1B)) does not form part of the cost base to the extent that you have deducted or can deduct it for an income year.

You have never used the Property to produce income. Therefore, the professional service fees are not otherwise deductible and so are not prevented from forming part of the Property's cost base.

The professional service fees can be included in the fourth element of the cost base of the Property.