ATO ID 2001/375: Cost Base: Recoupment of expenses
Date of decision: 5 March 2001
Year of income: Year ended 30 June 2001
Business line: Private Groups and High Wealth Individuals

Issue
Do interest payments in respect of a CGT asset made by an employer as part of an employee's salary sacrifice arrangement form part of the asset's cost base?

Decision
No. Interest payments made by an employer as part of salary sacrifice arrangement constitute a recoupment of these amounts within the meaning of section 20-25 of the Income Tax Assessment Act 1997 (ITAA 1997). Subsection 110-45(3) of the ITAA 1997 provides that expenditure that has been recouped does not form part of the cost base of a CGT asset.

Facts
The taxpayer purchased a property in July 2000 and borrowed to finance the purchase. The taxpayer's parents live in the property rent-free. The taxpayer is considering asking their employer to make the loan repayments as part of a salary sacrifice arrangement. The taxpayer will continue to be liable for the interest payments on the loan.

Reasons for decision
Summary: As provided by paragraph 110-25(4)(a) of the ITAA 1997 interest incurred on the money borrowed to acquire an asset can form part of the cost base of the asset. For assets acquired after 7.30pm on 13 May 1997, subsection 110-45(3) of the ITAA 1997 provides that, except so far as the amount is included in assessable income, expenditure does not form part of the cost base to the extent that it is recouped. The term 'recoupment' is defined in section 20-25 of the ITAA 1997. Subsection 20-25(2) of the ITAA 1997 provides that where another entity pays an amount for you in respect of a loss or outgoing that you incur you are taken to receive the amount as recoupment of the loss or outgoing. As the interest incurred by the taxpayer is to be paid by their employer, the taxpayer is taken to have recouped these amounts. Therefore the interest paid by the taxpayer's employer will not form part of the CGT asset's cost base.

Legislative references: Income Tax Assessment Act 1997 section 20-25 subsection 20-25(2) paragraph 110-25(4)(a) subsection 110-45(3)
Subject references: capital gains tax capital gains expense payment fringe benefits interest expenses non deductible expenses recoupment rental property rental property loan interest expenses salary sacrifice