ATO ID 2012/46: Capital Gains Tax: cost base: fourth element of cost base
Date of decision: 22 May 2012
Year of income: Year ending 30 June 2012
Business line: Public Groups and International

Issue
Does an underground power levy paid by a taxpayer form part of the cost base of the taxpayer's property under subsection 110-25(5) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
Yes. The levy will form part of the fourth element of the cost base of the property under subsection 110-25(5) of the ITAA 1997 if the purpose or the expected effect of the expenditure is to increase or preserve the property's value.

Facts
The taxpayer owns a rental property that was acquired after 20 September 1985. The electricity supply to the property was converted from overhead mains to underground power through a joint state government and local council project by the installation of underground cables. The taxpayer contributed to the local council's capital works cost by way of levy.

Reasons for decision
Summary: Subsection 110-25(5) of the ITAA 1997 provides that the fourth element of the cost base of a CGT asset is that capital expenditure incurred to increase the asset's value. Expenditure incurred for capital improvements to post-CGT land will not be included in the cost base of the land if the capital improvement is considered to be a separate CGT asset. As neither of subsection 108-70(1) or section 108-60 of the ITAA 1997 apply in relation to the cabling it is not a separate asset for CGT purposes. Subsection 108-70(1) of the ITAA 1997 does not treat the cabling as a separate asset because none of the balancing adjustments contained in section 108-55 of the ITAA 1997 apply to it. Section 108-60 of the ITAA 1997 will not apply in this case as the cabling is not a depreciating asset that is part of a building. For expenditure to be included in the fourth element of the cost base of an asset under subsection 110-25(5) of the ITAA 1997, it must be incurred 'to' enhance the value of the asset, that is, for the purpose of enhancing the value of an asset. It is immaterial whether or not the expenditure in fact enhances the value of the asset.

Legislative references: Income Tax Assessment Act 1997 section 110-25 subsection 110-25(5) section 108-55 section 108-60 subsection 108-70(1) subsection 110-25(5)
Subject references: CGT separate assets Capital gains tax CGT cost base