ATO ID 2002/1069: Capital Gains Tax - Cost Base -apportionment of costs to sale of blocks 'off the plan' in a previous income year.
Date of decision: 29 September 2001
Year of income: Year ended 30 June 2000
Business line: Public Groups and International

Issue
Can capital costs in respect of the subdivision of land, incurred in one financial year, be apportioned to the cost base of blocks sold 'off the plan' in an earlier financial year under section 110-25 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
Yes. Capital costs incurred in one financial year can be apportioned in determining the cost base of blocks disposed of in an earlier financial year under subsection 110-25(5) of the ITAA 1997.

Facts
The taxpayer sold the first two blocks of a subdivision 'off the plan' before any capital works had been completed. The contract for the sale of the two lots of land occurred during the year ended 30 June 2001. The sale contract required the vendor to complete all road and other works and electricity services to enable the subdivision to meet Council requirements. The construction costs were incurred after the sale of the lots 'off the plan' in the year ended 30 June 2002.

Reasons for decision
Summary: Section 110-25 of the ITAA 1997 sets out the five elements that make up the cost base of an asset for CGT purposes. Subsection 110-25(5) of the ITAA 1997 states that the fourth element of an assets cost base includes any capital expenditure the taxpayer incurred to increase or preserve the asset's value. For CGT events happening before 1 July 2005, the expenditure must also be reflected in the state or nature of the asset at the time of the CGT event. The expenditure to increase the assets value had not actually been incurred at the time of the CGT event, that is, the time of the 'off the plan' sales. However the vendors were obligated to incur this expenditure under the contract of sale. The completion of the obligations under the contract would have been reflected in the state or nature of the blocks purchased 'off the plan'. Once completed, the blocks would comply with the Council's development consent as per the conditions set down in the contract of sale. The expenditure incurred to increase the value of the vacant lots can qualify as part of the fourth element of their cost bases, despite being incurred some time after the time of entering into the relevant contracts for the sale of the lots. The completion of various works to comply with Council conditions was part of the sale contract and would inherently increase the value of the blocks purchased 'off the plan'.

Legislative references: Income Tax Assessment Act 1997 section 110-25 subsection 110-25(5)
Subject references: Capital gains tax Small business exemption CGT small business relief Cost Base Capital Gains Tax Event A1