Private ruling: Capital gains tax capital gain - exemptions - rollovers - cost base
Date of advice: 12 October 2016
Published: December 2016
Ruling period: Income year ending 30 June 20YY.
Date scheme commenced: 1 July 20XX.

Ruling: Q1: Will any gain made on the sale of the Property be assessable under the capital gains tax provisions? | A1: Yes. | Q2: Can the costs of improvements on the Property be included in the cost base of the Property for capital gains tax purposes? | A2: Yes. | Q3: Can the legal costs incurred in relation to the legal proceedings be included in the cost base of the Property? | A3: Yes. | Q4: Can the costs you incurred in relation to moving from the Property and storage of your possessions be included in the cost base of the Property? | A4: No.

Relevant facts and circumstances: Information and documentation has been provided with this private ruling which forms part of, and should be read in conjunction with this ruling. Prior to 20 September 1985, your parents (Parent A and B) purchased a property (the Property) which consisted of Lots Y and Z. The Property has no access to a public road and no right of carriage way or legal means of access to a public road. The Property is bordered as follows: • by neighbouring property; and • by a creek and on the other side of the creek is private property. There are no bridges over the creek • the boundary adjoins a parcel of Crown Land (Lot A) which then adjoins a major road, which is a controlled access road. A new neighbour (Person X) purchased the property which bordered the Property. Person X's property consisted of Lots B, C and D. For the period from the time your parents purchased the Property until prior to 20 September 1985, access to the Property was achieved via a gravel road, thought to be a permanent right of way over vacant Lots C and D. Prior to 20 September 1985, Person X requested a change in the access road from Lots C and D as they ran by Person X's house. The change of the access road was agreed to by your parents and as a result the access road was constructed via Lot B, which provided Person X with more privacy. Person X constructed and paid for the new access road (the Access Road), with the Access Road being used to access the Property for more than 20 years. After 20 September 1985, Parent A passed away and Parent B continued to reside on the Property. Many years after Parent A had passed away, Parent B wanted to ensure that the Access Road was a permanent right of way after you and your family had become aware that no permanent right of way was on Title for access to Lot Y or Z. For a number of years you and various family members approached Person X to discuss a permanent right of way to access the Property. Person X did not commit to reaching an agreement for the permanent right of way to access the Property and Parent B had continued to have discussions with them in relation to this issue until they had passed away. In accordance with Parent B's will, you inherited an ownership interest in the Property. In the year following Parent B's passing, a Deed of Family Arrangement (the Arrangement) was entered into between you and the other beneficiaries of Parent B's estate for you to acquire the other ownership interests in the Property. Under the Arrangement, you paid each of the other beneficiaries a specified amount. Settlement on your purchase of the other ownership interests in the Property occurred shortly after the Arrangement had been entered into. Once you had sole ownership of the Property, you had made improvements to the Property. You continued to gain access to the Property via the existing Access Road after you became the sole owner, with Person X continuing to allow you to use that route to access the Property. You had numerous discussions with Person X in relation to agreeing on an access arrangement by legal title and had anticipated that once Person X knew that you had sole ownership of the Property that they would agree on an access arrangement by legal title. Person X had on many occasions expressed their desire to purchase the Property from you. In the year after you became the sole owner of the Property, you had sent emails to a Government agency seeking vehicular access to the Property via the major road and the Crown Land adjoining the Property, or alternatively seeking emergency access to Lot A. Both of your applications were refused for safety reasons. You contacted another Government agency seeking road access across the Licence holding which had been refused. Around the same time that you had sent the emails to the Government agency, the Trustee of Parent B's estate had instructed the estate's legal representatives (the Estate's legal representatives) to send a letter to Person X. However, no response was received from Person X and a second letter was sent by the Estate's legal representatives to Person X. About that time, Person X prevented you from gaining access to the Property via that route. As a result, you could only access the Property by leaving your car on land owned by another landlord, crossing the creek and walking to the house. You used this method of accessing the Property for a number of months. A number of months later, Person X agreed that you could put a lock on the gate and enter the Property using the Access Road. Shortly after, Person X's legal representative wrote to the Estate's legal representative on their behalf outlining that Person X was not prepared to consent to an easement. At the same time, Person X's legal representative sent a letter outlining Person X's offer to purchase the Property for $XXX,000. In the following year a letter was sent to Person X which suggested that there was a right of access to the Property over Person X's property due to the long history of use of the existing Access Road. Person X was requested to reconsider their refusal to grant an easement for access over their property. In following income year you sent an email to a Government agency to enquire if they would support your accessing the Property via a lane located near the Property, and over Lot B. You were advised that that they would support that access option subject to the land owner of Lot B, being Person X, legally formalising the right of way arrangement. You met with Person X on numerous occasions over a period of more than 12 months to discuss the access issue without success. As a result, you lodged a statement of claim in the courts. A mediation hearing was held in accordance with court orders. On the same day that the mediation hearing occurred, you received an offer to settle the proceedings which included the following: • the sale of Lots Y and Z for a specified sum; • each party to pay their own costs; and • the proceedings to be dismissed. You accepted the offer for the sale of the Property to Person X. Settlement on the disposal of the Property occurred a number of months after the mediation hearing had occurred and you were required to vacate the Property by the date. You incurred legal fees in relation to the legal proceedings. You incurred costs to move your household, personal belongings and other items from the Property and had to put some of those items in storage.

Relevant legislative provisions: Income Tax Assessment Act 1997 Part 3-1 | Income Tax Assessment Act 1997 Part 3-3

Reasons for decision: Summary: You make a capital gain or capital loss if a capital gains tax (CGT) event occurs. The most common CGT event is CGT event A1 which occurs when your ownership interest in a CGT asset is transferred to another party. Your assessable income includes any net capital gain made by you in the relevant income year. The net capital gain is your total capital gains for the relevant income year, less any capital losses made in the same income year or carried forward from a prior income year/s, less any capital gains tax (CGT) discount concessions you are eligible to apply. If a particular CGT event happens, it is necessary to consider whether an exception applies which would mean that any capital gain or capital loss that would be made on the happening of the CGT event is disregarded. For instance, any capital gain or capital loss made when CGT event A1 occurs on the disposal of a CGT asset that was acquired before 20 September 1985 will be disregarded. There are also rollovers that may allow a taxpayer to reduce, defer or disregard their capital gain or capital loss. If a CGT event happens and no exception or exemption applies and rollover relief is not available, it is necessary to calculate the capital gain or capital loss that is made from the happening of the event. For most CGT events, your capital gain is the difference between your capital proceeds and the cost base of your asset. A capital loss is the difference between your capital proceeds and the reduced cost base of your asset. The cost base consists of five elements which are added together to calculate the cost base of the CGT asset. Briefly those elements are: • Money paid or required to be paid for the property, including property given. • Incidental costs of acquiring the property, or costs in relation to the CGT event, for example, stamp duty, legal fees, agent's commission etc. • Costs of owning the asset such as rates, land taxes, repairs and insurance premiums. These costs can only be included if the asset was acquired after 20 August 1991. This does not include an amount that you have deducted or can deduct previously. • Capital expenditure you incur to increase or preserve the value of the asset such as renovations that are improvements rather than repairs. • Capital expenditure you incur to preserve or defend your title or right to the asset. In certain circumstances, you may be eligible to reduce the amount of capital gain you have made as a result of the CGT event occurring. If you meet the following conditions you will be entitled to apply the 50% CGT discount to the capital gain: • You must be an individual; • You must have held the CGT asset for longer than 12 months; and • the CGT event happens after 11:45am ACT legal time on 21 September 1999. Application to your situation You inherited an ownership interest in the Property when Parent B passed away, and had purchased the remaining ownership interests in the Property from the other beneficiaries in the year after Parent B had passed away. It is viewed that you have two CGT assets in the Property, being the ownership interest acquired when Parent B passed away and the second CGT asset, being the remaining ownership interests that you acquired in the following year. During your period of ownership of the Property you had undertaken numerous improvements to the Property. The Property and access to it had been achieved via an Access Road over an adjoining property owned by the neighbour, being Person X. Some issues had arisen in relation to this access route and despite numerous attempts by you, Parent B and other relatives; no permanent access to the Property had been obtained. As a result, you had commenced legal action against Person X in an effort to obtain permanent access to the Property via Person X's property. You and Person X attended mediation at the directive of the courts and as a result you received an offer for the Property. You accepted the offer with settlement occurring on the sale of the Property a number of months after the mediation hearing was held. You were required to vacate the Property by the date that settlement occurred and had incurred costs in relation to moving your belongings. You had put some of your possessions into storage after moving from the Property. In your case, CGT event A1 occurred when you disposed of the Property to Person X. While we appreciate the circumstances under which you sold the Property, there are no exemptions or rollovers available to you to enable you to reduce, defer or disregard the capital gain you have made on the sale of the Property. Therefore, you will need to calculate the capital gain you have made on the sale of the Property. As outlined above, the cost base includes all of the amounts included in the five elements of the cost base of the CGT asset, in this case the Property. You incurred costs in relation to improvement undertaken on the Property. Those costs can be included in the fourth element of the cost base of the Property. You incurred legal costs in relation to legal proceedings you commenced against Person X in an attempt to obtain permanent access to the Property through their property. Those legal costs will be included in the cost base of the Property because it could be viewed that they relate to the valuation of the Property given that they arose in relation to maintaining access to the Property. Also it could be viewed that you had incurred the legal costs to protect your right to the Property. Therefore, the legal costs you incurred in relation to the legal proceedings will be included in the cost base of the Property as they relate directly to the Property. You incurred costs in relation to the moving of your possessions. While you had not wanted to sell the Property, the costs you incurred in relation to moving will not be included in the cost base of the Property because those costs do not relate to the Property being disposed of. This is similar to when someone sells their main residence and their moving costs will not be included in the cost base of their main residence as they do not relate to the disposal of the main residence. Therefore, the moving costs you incurred cannot be included in the cost base of the Property. You have also incurred storage costs to store some of your possessions after they were moved from the Property. As outlined above, if the costs do not relate to the Property, they cannot be included in the Property's cost base. Therefore, as the storage costs do not relate to the Property they cannot be included in the cost base of the Property. Note: If you meet the conditions for the 50% CGT discount to apply in your situation, you will be entitled to reduce the capital gain made on the sale of the Property by 50%.