Private ruling: CGT - acquisition date
Published: November 2013
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q2: Do you need to reduce the cost base of the property by deductions claimed under Division 43 of the Income Tax Assessment Act 1997 (ITAA 1997)? Answer No

Relevant facts and circumstances: You entered into a contract for the purchase of the property prior to 7.30pm on 13 May 1997. Settlement occurred after 7.30pm on 13 May 1997. The purchase of the property was from an unrelated party. The property was then leased on an arm's length basis to other unrelated parties. Throughout the entire period of ownership, deductions were claimed under Division 43 of the ITAA 1997. The property was sold by contract during the 2012-13 income year.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 102-25(1) | Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 104-60 | Income Tax Assessment Act 1997 Section 109-5 | Income Tax Assessment Act 1997 Section 110-45

Reasons for decision: Summary: The general rules for the acquisition of CGT assets are contained in section 109-5 of the ITAA 1997. The table in subsection 109-5(2) of the ITAA 1997 provides that where you acquire an asset as a result of CGT event A1 occurring, the acquisition date is the date you entered into the contract. Conversely, where you acquire an asset as a result of CGT event E2 occurring, you acquire the asset at the time the asset is transferred to you. CGT event A1 happens if the ownership of a CGT asset changes (section 104-10 of the ITAA 1997). CGT event E2 happens if a CGT asset is transferred to an existing trust (section 104-60 of the ITAA 1997). If more than one CGT event happens in respect of a transaction, the most specific event is to be used (subsection 102-25(1) of the ITAA 1997). On its face, CGT event E2 happens whenever an asset is transferred to a trust and is therefore an applicable event in this case. However, it is considered that CGT event A1 (rather than CGT event E2) is the most specific event where, as in this case, an asset is transferred to another party and the transferor is indifferent as to the identity of that party. That is, CGT event A1 is the most specific event where the parties are completely unconnected and are dealing with each other at arm's length (ATO Interpretive Decision ATO ID 2003/559). Therefore, in accordance with section 109-5 of the ITAA 1997, the trust acquired the property on the contract date. Where an asset has been acquired after 7.30pm on 13 May 1997, subsections 110-45(2) and 110-45(4) of the ITAA 1997 provide that expenditure incurred by a taxpayer in respect of an asset for which a deduction has been allowed under Division 43 of the ITAA 1997, cannot be included in the asset's cost base. Therefore, when calculating any future capital gain or loss, the cost base of the asset must be reduced by the amounts deducted under Division 43 of the ITAA 1997. However, in this case, the property was acquired prior to 13 May 1997. Accordingly, section 110-45 does not apply and the cost base of the property is not required to be reduced by amounts previously deducted under Division 43 of the ITAA 1997.

Question 1: Is capital gains tax (CGT) event A1 the most appropriate event to use to determine the acquisition date of the property?