Private ruling: Capital gains tax
Date of advice: 14 March 2016
Published: May 2016
Ruling period: Year ended 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Can you include the mortgage interest incurred, during the period the property was your main residence, in the cost base of the property? | A1: Yes. | Q2: Can you include the mortgage interest incurred, during the period the property was an income producing property, in the cost base of the property? | A2: No. | Q3: Are you entitled to the 50% CGT discount? | A3: Yes.

Relevant facts and circumstances: You own a property. The house was your principal place of residence. The property is now being rented. You are now planning to subdivide the property.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 102-20 | Income Tax Assessment Act 1997 section 110-25

Reasons for decision: Detailed Reasoning - Interest: A capital gain or capital loss is made as a result of a capital gains tax (CGT) event happening to a CGT asset (section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997)). The most common CGT event is CGT event A1 the disposal of a CGT asset. The cost base of a CGT asset is generally the cost of the asset when a taxpayer bought it. However, it also includes certain other costs associated with acquiring, holding and disposing of the asset. In order to work out how much a taxpayer's capital gain or capital loss is, a taxpayer must first establish the cost base or reduced cost base of a taxpayer's ownership interest in the property. Section 110-25 of the ITAA 1997 states that the cost base of a CGT asset is made up of five elements. The third element of the cost base of a CGT asset is made up of the costs of owning the asset, including rates, land taxes, repairs and insurance premiums. Non-deductible interest on borrowings to finance a loan used to acquire a CGT asset and on loans used to finance capital expenditure you incur to increase an asset's value are also third element costs. However, expenses that were incurred during or relate to a period the property was being used to produce assessable income, cannot be included in the third element of the cost base because they would be deductible against the income. In your case, you incurred mortgage interest while the property was your principal place of residence and then when it was an income producing property. Mortgage interest can be included in the third element of the cost base. Therefore you are entitled to include the interest in the cost base of the property for the period the property wasn't income producing. However, you are entitled to deductions for interest on the loan used to acquire the property for the period the property is rented. Therefore you are unable to include the interest incurred while the property is rented as part of the cost base of the property. | Detailed Reasoning - 50% discount: You can use the discount method to calculate a capital gain if: • a CGT event happens to an asset you own • the CGT event happens after 21 September 1999 • you acquired the asset at least 12 months before the CGT event, and • you did not choose to use the indexation method. TD 97/3 states that when a property is subdivided the subdivided blocks are taken to have been acquired by the owner of the original land parcel when that original land parcel was acquired. In your case, a CGT event will happen to an asset you own that you acquired more than 12 months before the CGT event. Therefore if you make a capital gain on the sale of the land, you can choose to apply the 50% discount method to reduce the amount of net capital gain included in your assessable income.