Private ruling: Capital gains tax - investment property
Published: February 2012
Ruling period: Year ended 30 June 2012.
Date scheme commenced: 1 July 2011.

Ruling: Q1: Are you required to pay capital gains tax on the sale of your investment property? | A1: Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 - Section 102-20 | Income Tax Assessment Act 1997 - Section 104-10 | Income Tax Assessment Act 1997 - Section 110-25 | Income Tax Assessment Act 1997 - Section 128-50 | Income Tax Assessment Act 1997 - Section 152-40

Reasons for decision: Detailed Reasoning - Capital gains tax:: Capital gains tax (CGT) is the tax you pay on any capital gain you make. You make a capital gain or capital loss if a CGT event happens to a CGT asset. The gain or loss is made at the time of the event. You will make a capital gain if the capital proceeds from the sale are more than the cost base of the asset. Your investment property is a CGT asset. CGT event A1 will happen when you sell your interest in the investment property. The cost base of a CGT asset consists of 5 elements: a) the money you paid, or are required to pay, in respect of acquiring it; b) the incidental costs you incurred to acquire the CGT asset; and that relate to the CGT event; c) the non-capital costs of ownership of the CGT asset you incurred. Those costs include: · interest on money you borrowed to acquire the asset; · cost of maintaining, repairing or insuring it; · rates or land tax, if the asset is land; · interest on money you borrowed to refinance the money you borrowed to acquire the asset; · interest on money you borrowed to finance the capital expenditure to increase the asset's value. d) capital expenditure you incurred to increase the asset's value. However, the expenditure must be reflected in the state or nature of the asset at the time of the CGT event; e) capital expenditure that you incurred to establish, preserve or defend your title to the asset, or a right over the asset. The capital proceeds from a CGT event is the amount of money you have received from the sale of the asset. | Detailed Reasoning - Joint tenants:: If a CGT asset is owned by joint tenants and one of them dies, the survivor is taken to have acquired the individual's interest in the asset on the day the individual died. If the asset was acquired by the deceased on or after 20 September 1985, the first element of the cost base of the interest the survivor is taken to have acquired is the cost base of the individual who died. In this case you and your partner acquired an investment property in 1999. You sold the investment property in 2011, after your partner passed away in 2010. You acquired your partners share in the investment property on the day they passed away. The investment property is a CGT asset. CGT event A1 occurred when you sold the property. You are therefore required to pay CGT on the sale of the investment property. The capital gain is calculated as the difference between the capital proceeds received and the cost base of the property. | Detailed Reasoning - Active asset:: A CGT asset is an active asset at a given time if, at that time: · you use it, or hold it ready for use, in the course of carrying on a business; or · it is an intangible asset that is inherently connected with a business that you carry on. However, CGT assets that cannot be active assets include: · an asset whose main use in the course of carrying on the business is to derive interest, an annuity, rent, royalties or foreign exchange gains unless: · the asset is an intangible asset and has been substantially developed, altered or improved by you so that its market value has been substantially enhanced; or · its main use for deriving rent was only temporary. | Detailed Reasoning - CGT retirement exemption: The CGT retirement exemption allows a taxpayer to choose to disregard all or part of a capital gain from a CGT event happening to an active asset, up to the CGT retirement exemption limit, if the capital proceeds from the event are used in connection with retirement. In this case the investment property is not considered to be an active asset as it was used to derive rental income and was not used in the course of carrying on a business. As the investment property is not considered to be an active asset, the CGT retirement exemption does not apply.

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