Private ruling: CGT - Cost base - capital works deductions
Published: April 2013
Ruling period: Year ending 30 June 2013.
Date scheme commenced: February 2013.

Ruling: Q1: Will the capital works deductions claimed during periods of income producing be excluded from the cost base of the property constructed after September 1985 and prior to 7.30pm by legal time in your particular state in mid 19YY? | A1: No.

Relevant facts and circumstances: The Taxpayer has submitted a request for a private ruling in relation to the recent disposal of the property owned jointly. The land was purchased in 19XX. In mid 19XX construction of the house that was to be their main residence commenced. In late 19XX construction was completed and the Taxpayer and spouse immediately took up residence. In mid 19YY, the Taxpayer moved due to a change in employment (no other main residence). The following month of 19YY, the property was rented out. Early February 19ZZ the Taxpayer engaged Quantity Surveyors to prepare Depreciation Schedules. In early 19ZZ the Taxpayer returned and lived with friends. In mid 19ZZ the Taxpayer moved overseas for employment reasons and resided in rented accommodation. Late 20AA the Taxpayer returned to Australia and re-occupied the property as the main residence. In September 20BB the taxpayer moved for employment reasons and resided in rented accommodation while building a new main residence on vacant land. The following month in 20BB the property was rented out again. In May 20CC the Taxpayer moved into the new main residence. The property was sold in February 20DD. Capital works deductions have been claimed by the Taxpayer and spouse during the periods the property was rented out.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 110-40; | Income Tax Assessment Act 1997 section 110-25; | Income Tax Assessment Act 1997 subdivision 43A; | Income Tax Assessment Act 1997 section 43-140; | Income Tax Assessment Act 1997 section 118-192; | Income Tax Assessment Act 1997 section 118-145.

Reasons for decision: Summary: Section 110-40 of the Income Tax Assessment Act 1997 (ITAA 1997) contains rules that apply to a CGT asset which was acquired before 7.30pm legal time in a particular state in mid 19YY. These rules prevent certain expenditure forming part of one or more elements of the cost base of such an asset. Section 110-25 of ITAA 1997, provides the cost base of a CGT asset is made up of five elements: 1. money or property given for the asset; 2. incidental costs of acquiring the CGT asset or relate to the CGT event; 3. costs of owning the asset; 4. capital expenditure you incurred to increase or preserve the value of your asset or to install or move it; and 5. capital costs of preserving or defending your ownership of or rights to your asset. Under subsection 110-40(2) of the ITAA 1997 expenditure does not form part of the second or third element of the asset's cost base to the extent that the Taxpayer has deducted it or can deduct it. A taxpayer can claim a deduction under subdivision 43A of the ITAA 1997 for capital expenditure incurred in constructing capital works including buildings and structural improvements. The deduction is either 2.5% or 4% of the construction expenditure, depending on when construction started and how the capital works are used. In order to obtain a deduction the building must be used in a 'deductible way' as specified in section 43-140 of the ITAA 1997. The facts state that the Taxpayer completed construction of the building in late 19XX and has used the building in a 'deductible way' by deriving rental income from the letting of the property. Accordingly, the Taxpayer and spouse, as joint owners of the building, have been eligible to and have been claiming a deduction for capital works expenditure at the rate of 2.5%. The building was acquired prior to 7.30pm in mid 1997 and amounts have been claimed for capital works deductions. The capital works expenditures do not form part of the second or third elements of the CGT cost base. Costs that have been incurred in building the dwelling form part of the fourth element of the cost base. You will not need to exclude from the cost base the amounts of capital works expenditures that have been claimed or were entitled to claim on the property when calculating the capital gain. | Detailed Reasoning - Main residence exemption on dwelling used as a rental property: Generally, if you are an individual you can ignore a capital gain or capital loss from a CGT event that happens to your ownership interest in a dwelling that is your main residence. To get the full exemption from CGT: · the dwelling must have been your home for the whole period you owned it · you must not have used the dwelling to produce assessable income, and · any land on which the dwelling is situated must be two hectares or less. | Detailed Reasoning - The absence rule: Section 118-145 of the ITAA 1997 provides taxpayers with the concession that a dwelling will continue to be treated as their main residence, despite an absence from the dwelling (the " absence rule "). However, the concession can only apply once the dwelling has qualified as a main residence. In accordance with section 118-145 of the ITAA 1997, the concession applies indefinitely if the dwelling is not used for producing assessable income during the period of absence. However, if the dwelling is used to produce assessable income, the concession only applies for up to 6-years. In the latter case, the exemption applies from the point when the dwelling is first used to derive income, and ends when the dwelling ceases to be used to derive income. If a dwelling ceases to be an individual's main residence more than once during the ownership period, the maximum 6-year period of income-producing use can apply to each period of absence, providing the dwelling again becomes their main residence. | Detailed Reasoning - The first used to produce income rule: Section 118-192 of the ITAA 1997 contains a special rule for the main residence of a taxpayer, acquired post-19 September 1985, when it commences for the first time to be used for the purpose of producing assessable income. There is a deemed acquisition at market value of the dwelling (or an ownership interest in it) at that income time by the taxpayer if the following conditions are met: · the taxpayer would only get a partial main residence exemption for a CGT event happening in relation to a dwelling (or the taxpayer's ownership interest in it) because the dwelling was used for the purpose of producing assessable income during the taxpayer's ownership period · that use occurred for the first time after 7.30 pm in mid to late19XX, and · the taxpayer would have got a full main residence exemption if the CGT event had happened just before the first time (the income time) it was used for the purpose of producing assessable income during the taxpayer's ownership period.