Private ruling: Capital gains tax cost base
Published: October 2013
Ruling period: Year ending 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Questions and Answers | Is the first element of the cost base the market value of your property when it first became income producing? | Yes | Are you required to reduce the cost base of the property by the amount of capital works deductions claimed? | Yes

Relevant facts and circumstances: You purchased a property prior to 13 May 1997. The property was your main residence for a number of years. The property became income producing after 13 May 1997. You have claimed deductions for capital allowance from when the property became income producing. You sold the property recently.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 43-10 | Income tax Assessment Act 1997 section 110-45 | Income tax Assessment Act 1997 section 118-192

Reasons for decision: Detailed Reasoning - Home first used to produce income: In working out a capital gain or loss on a dwelling, the first used to produce income rule in section 118-192 of the ITAA applies if: · only a partial main residence exemption would be available because the dwelling was used for the purpose of producing assessable income during the taxpayers ownership period (paragraph 118-192(1)(a) of the ITAA 1997) · the income producing use started after 7.30pm (by legal time in the ACT) on 20 August 1996 (paragraph 118-192(1)(aa) of the ITAA 1997), and · the taxpayer would have been entitled to a full main residence exemption if they had entered into a contract to dispose of the dwelling just before the first time it was used for the income producing purpose (paragraph 118-192(1)(b) of the ITAA 1997). If these conditions are satisfied the taxpayer is taken to have acquired the dwelling at the time they first started using it for income producing purposes, for its market value at that time (subsection 118-192(2) of the ITAA 1997). ATO ID 2003/1113 states that this has the effect that the first element of the dwellings cost base and reduced cost base is the market value of the dwelling on the day it was first used for income producing purposes (and that expenditure incurred by the taxpayer prior to that day is ignored). In your case you purchased the property prior to 13 May 1997 and lived in the property as your main residence until it became income producing after 13 May 1997. The first element of your cost base is the market value of the property on the date it became income producing as this is when you are taken to have acquired it under section 118-192 of the ITAA 1997. For all CGT purposes the acquisition date becomes the date you acquired it at the time it became income producing and there is no apportionment for main residence days in the calculation of CGT prior to the property becoming income producing. | Detailed Reasoning - Special Building Write-Off: A deduction is allowable for capital expenditure incurred on the construction of, or an extension, alteration or improvement to, certain income producing buildings. This is referred to as capital works deductions, formerly special building write-offs. Deductions with respect to residential rental properties are generally spread over a period of 25 or 40 years. Total capital works deductions cannot exceed the construction expenditure (section 43-10). If you claim capital works deductions, the construction expenditure on which those deductions are based cannot be taken into account in working out any other types of deductions to be claimed, such as deductions for decline in value of depreciating assets. | Detailed Reasoning - Cost Base: For rental property acquired prior to 13 May 1997, capital works deductions (special building write-off) are included in the cost base. Therefore the cost base does not need to be reduced by the amount of capital works deductions. For rental property acquired after 13 May 1997, capital works deductions (special building write-off) are not included in the cost base. Therefore, the cost base needs to be reduced by the amount of capital works deductions (subsection 110-45(6)). In your circumstances you are taken to have acquired the property on the date it became income producing. This means you are taken to have acquired the property after 13 May 1997 and therefore you are required to reduce your cost base by the amount of capital works.