Private ruling: Capital gains tax - discount - cost base
Date of advice: 12 January 2017
Published: June 2017
Ruling period: Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018
Date scheme commenced: 1 July 2014

Ruling: Q1: Are you entitled to apply the 50% Capital gains tax discount when you sell your properties? | A1: Yes. | Q2: Are you entitled to a deduction for all interest incurred on a loan, from the date the deposit was drawn down to purchase rental property units “off the plan”? | A2: No | Q3: Are you entitled to include the interest expenses incurred in the property's cost base? | A3: Yes

Relevant facts and circumstances: You established a loan to facilitate the purchase of two properties “off the plan” (the properties) from a developer. You signed the contract and paid the deposit in 201X. You service the loan repayments on your own. The developer advised that the building of the properties will be completed in 201X. Once completed the properties will settle and the balance of the purchase price will fall due. You intended to use the properties for income producing purposes, however due to a change in circumstances you will sell the properties when the buildings are completed. You incurred interest on the loan from the date the borrowings were drawn down to fund the deposit. You have not used the loan for private purposes. You are not carrying on a business of property development.


Reasons for decision: Summary: Subdivision 115-A of the Income Tax Assessment Act 1997 (ITAA 1997) establishes the requirements for the 50% Capital gains tax (CGT) discount. The requirements include: ● the capital gain must be made by an individual, trust or complying superannuation entity; ● must be made after 21 September 1999; ● must not have indexed cost base; and ● must be on an asset acquired at least 12 months before the CGT asset. Section 104-10 states that a CGT event A1 occurs when an entity disposes of their ownership interest in a CGT asset to another entity. The time of the A1 event is when you enter into the contract for the disposal, or if there is not contract, when a change of ownership occurs. You entered into the contract to acquire the properties in 201X; this is your acquisition date. You will not be selling the properties until after the building is completed in 201X. You have held the asset for more than 12 months, are an individual, the event is after 21 September 1999 and you are not indexing the cost base. You are entitled the 50% CGT discount. Section 8-1 of the ITAA 1997 allows a deduction for any loss or outgoing that is incurred in gaining or producing your assessable income, to the extent that it is not of a private, capital or domestic nature. Taxation Ruling TR 2004/4 in considering the decision of the High Court in Steele v. Deputy Commissioner of Taxation (1999) 197 CLR 459; 99 ATC 4242; (1999) 41 ATR 139 concludes that interest incurred in a period prior to the derivation of relevant assessable income will be incurred in gaining or producing the assessable income where: ● the interest is not incurred too soon, is not preliminary to the income earning activities and is not a prelude to those activities ● the interest is not private or domestic ● the period of interest outgoings prior to the derivation of relevant assessable income is not so long, taking into account the kind of income earning activities involved, that the necessary connection between outgoings and assessable income is lost ● the interest is incurred with one end in view, the gaining or producing of assessable income, and ● continuing efforts are undertaken in pursuit of that end. In your case you purchased a property off the plan from a developer, with the intention of using the properties for income producing purposes once completed, however this has not eventuated. You have made the decision to sell the properties rather than make them income producing. There have been no continuing efforts undertaken to make the properties income producing. As the interest expenses are not incurred in producing your assessable income, you are not entitled to a deduction. Subdivision 110-A of the ITAA 1997 specifies amounts that can be included in the cost base for an asset and amounts that do not form part of the cost base. Subsection 110-25(4) specifies that the third element of the cost base is the costs of owning the CGT assets that you have incurred. It includes interest on money you borrowed to acquire the asset, rates and insurance. You have incurred interest expenses on money you borrowed for the deposit to acquire the properties. You are entitled to include the interest expenses in the property's cost base.