Private ruling: Capital gains tax
Date of advice: 15 May 2019
Published: July 2019

Ruling: Q1: Is the building on the property a separate capital gains tax (CGT) asset from the land? | A1: Yes. | Q2: Are the 20XX/20XX rates values considered a reasonable basis for determining the capital proceeds of each asset when calculating the capital gain? | A2: No. | Q3: Are you required to obtain records for rates and insurance costs where they exist? | A3: Yes. Year ending 30 June 20XX 1 July 20XX You purchased land before 1985. A contract to build a house on the land was signed after 1985 and the house was completed. Some other improvements also occurred after the house was constructed. The dwelling has never been your main residence and was used as a family holiday home. A contract to sell the property was signed and settlement occurred in the 20XX-XX income year. The relevant council advised you of the 20XX/20XX site value and the capital improved value of the property. The 20XX-XX rates notice shows the site value and the capital improved value. You have invoice receipts for the council rates for 20XX-20XX. Council rates for the years before then have been estimated by decreasing the earliest known council rates amount by the Australian CPI index per year. You have invoice receipts for water rates for 20XX-20XX. Water rates for the years before then have been estimated. You have house insurance invoice receipts for 20XX-20XX. House insurance costs for the years before then have been estimated. You have land tax invoice receipts exist for 20XX-20XX. Land tax costs for the years before then have been estimated. When you contacted the council, insurance company and relevant authorities for previous years costs, you were advised that the organisations have had numerous computer changes and upgrades. To go back to the prior years records would involve accessing prior systems or manually searching for the information with no guarantee as to what may be located. Income Tax Assessment Act 1997 Section 102-20 Income Tax Assessment Act 1997 Section 104-10 Income Tax Assessment Act 1997 Section 108-55 Income Tax Assessment Act 1997 Section 112-30 Income Tax Assessment Act 1997 Section 116-40 Income Tax Assessment Act 1997 Division 121 Income Tax Assessment Act 1997 Subsection 121-20(5) Capital gains tax provisions Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a capital gain or capital loss is made only if a capital gains tax (CGT) event happens. Under section 104-10 of the ITAA 1997, CGT event A1 happens when you dispose of a CGT asset. You will make a capital gain if the capital proceeds from the disposal of a property are more than the cost base. Separate CGT assets Subdivision 108-D of the ITAA 1997 covers when assets are separate CGT assets. Under subsection 108-55(2) of the ITAA 1997 a building or structure that is constructed on land that you acquired before 20 September 1985 is taken to be a separate CGT asset from the land if you entered into a contract for the construction on or after that day. As you acquired the land before 20 September 1985 (pre-CGT) and the contract to build the house occurred post-CGT, for the purposes of capital gains tax the building is a separate CGT asset from the land. Therefore the land, being a pre-CGT asset is exempt from capital gains, however, the building is not exempt from CGT. Apportionment Under section 116-40 of the ITAA 1997, if you receive payment in connection with a transaction that relates to more than one CGT event, the capital proceeds from each event are so much of the payment as is reasonably attributable to that event. In Taxation Determination TD 98/24 Income tax: capital gains: what are the CGT consequences of a CGT event happening to post-CGT real property if the property comprises separate CGT assets under Subdivision 108-D in Part 3-1 of the Income Tax Assessment Act 1997 (the 1997 Act) or if the property is sold with depreciable assets? the Commissioner ruled on the apportionment of consideration received on the disposal at one time of multiple CGT assets. If the property is disposed of under a contract and the parties, dealing with each other at arm's length, allocate the overall capital proceeds to the separate assets, the Commissioner will accept the allocation. If there is no agreed apportionment, each party needs to make their own reasonable apportionment of the capital proceeds to the separate assets. In making this apportionment, it is expected that each party would have regard to the relevant market values of the separate assets at the time of the making of the contract. In this case CGT event A1 happened in relation to your property. The market value of the property must be apportioned on a reasonable basis between the pre-CGT land and the post-CGT house. In your application, you have used the 20XX/20XX rates values to apportion the value of the pre-CGT land and the post-CGT asset. As outlined in TD 98/24, a reasonable apportionment needs to be made at the time of making the contract for the CGT event. In your case you signed the contract of sale in the 2017-18 income year. Therefore, it is more appropriate to obtain the market value at that time or subsequent time rather than the 20XX/20XX values to determine the market values for each asset and the relevant portion of capital proceeds that belongs to each asset. It is questionable whether the rates notice provides an accurate market value in calculating the relevant capital proceeds for each asset. As the 2018 rates notice shows the capital improved value as being substantially different to the selling price you received, it is considered that obtaining an independent valuation of the land and building may be more appropriate. As highlighted in CGT Determination Number 9, TD 9 Capital Gains: How do you apportion consideration received on the disposal of a composite asset? there is no statutory formula to be used in determining the consideration for the disposal of a CGT separate asset. Although it is not mandatory for you to obtain an independent valuation for the purposes of apportioning the consideration received on disposal, you need to be able to justify the apportionments made. Similarly, expenditure you incurred for your rates that form part of the third element of the cost base relate both to your land and building. Therefore, as per subsection 112-30(1A) of the ITAA 1997, you need to apportion these costs so that you include only that part of the expenditure that is reasonably attributable to that element for each asset. Insurance costs relate to the building and not the land. As the insurance costs only relate to only the one CGT asset, no apportionment is required. Land tax is calculated on the site value of your land. Therefore it is considered that such expenditure relates to your land only and not the building. As such no apportionment of your land tax costs are required. Records Division 121 of the ITAA 1997 addresses record keeping requirements under the CGT provisions. It requires that you must keep records of every act, transaction, event or circumstance that may be relevant to working out whether you have made a capital gain or capital loss from a CGT event. If the necessary records of an act, transaction, event or circumstance do not already exist, you must reconstruct them or have someone else reconstruct them (subsection 121-20(5) of the ITAA 1997). In your case, it is not considered that the records for your rates and insurance do not exist. Rather you do not currently have a copy of the required records that relate to the earlier years. Where records are lost or have not been maintained for the purpose of calculating your CGT cost base you should first make an attempt to obtain the relevant documentation by approaching the relevant council, insurance body and other relevant authority to obtain copies. In the event that the necessary documentation cannot be obtained from the relevant archives or manual searches by the council and/or insurance body, searches of the relevant bank statements and/or credit card payments may show the amount of expense incurred. Using estimates for prior years based on the CPI index may not always provide a correct amount as rates and insurance can change at a different rate than CPI. Please note, as the land tax relates to your pre-CGT land, and any capital gain made on this land is disregarded, you are not required to keep records in relation to the land (section 121-30 of the ITAA 1997).