Private ruling: Cost base
Published: December 2014
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: Can you forgo a deduction for depreciation and capital works in relation to an investment property and not reduce the cost base for capital gains tax purposes? | A1: No.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You own a share in a number rental properties. You are a low income earner and generally earn below the tax free threshold. You are claiming deduction expenses and capital allowances on the rental properties.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 110-45(1B).

Reasons for decision: Summary: A capital gain is made on the disposal of a CGT asset when the proceeds received from the sale are more that the cost base of the asset. Accordingly, to determine the extent of any assessable gain, it is necessary to determine the cost base of the asset. Subsection 110-45(1B) of the Income Tax Assessment Act 1997 (ITAA 1997) details that expenditure does not form part of the second or third element of the cost base to the extent that you have or can deduct it. Taxation Determination TD 2005/47 explains that under Division 110 of the ITAA 1997 you can deduct an amount at a particular time if: • the terms of the relevant deduction provision have been satisfied in respect of the amount; and • the deduction is not prevented by the expiry of amendment periods prescribed by section 170 of the Income Tax Assessment Act 1936. TD 2005/47 provides the following example: Sybil acquired a property (a small shopping complex) in December 1997 which she leases commercially. The shopping complex was constructed in 1996. There is an amount of capital works expenditure in respect of the buildings which can be deducted by her under Division 43 of the ITAA 1997. Despite having the necessary information to claim the deductions, Sybil overlooked deducting any amounts under Division 43 of the ITAA 1997 for the property when completing her income tax returns for the income years ending 30 June 1998-2003. Sybil sold the property in May 2004. In December 2004, she lodged her income tax return for the income year ended 30 June 2004. In calculating her capital gain, Sybil became aware that subsection 110-45(4) of the ITAA 1997 required her to reduce the cost base of the property by amounts that she had deducted or can deduct under Division 43. Sybil therefore reduced the cost base of the property by the amounts that were able to be deducted under Division 43 of the ITAA 1997 for the income years ended 30 June 2001-2004 and promptly requested an amendment to her assessments for the income years ending 30 June 2001-2003 to deduct the Division 43 amounts. In your case, you want to make a choice as to whether or not you will claim depreciation and capital works as a deduction from your rental properties each year. However, as you can deduct amounts for depreciation and capital works, you are required to reduce the cost base of your investment property for CGT purposes.