Private ruling: Cost base
Published: June 2014
Ruling period: Year ended 30 June 2014 | Year ended 30 June 2015
Date scheme commenced: 1 July 2013

Ruling: Q1: Can the capital cost incurred to build a residence on the land be included in the cost base for capital gains tax (CGT) purposes? | A1: Yes.

Relevant facts and circumstances: You and your spouse purchased a property which is more than X hectares. There was a house on the land that required repairs. You have lived in this property. You propose to build a new house on the land whilst living in the old house. Once the new home is complete, you plan to knock down the old house and sell the property. You plan to live in the new property once it is complete. There has been no income producing activities conducted on the property.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 120-20

Reasons for decision: Summary: Under section 120-20 of the Income Tax Assessment Act 1997 (ITAA 1997), an entity will make a capital gain or a capital loss if a CGT event happens to a CGT asset. CGT event A1 occurs when you dispose of a CGT asset. You are considered to have disposed of a CGT asset if a change of ownership occurs from you to another entity because of some act or event or by operation of law. To work out your capital gain (or loss) you must first determine the cost base of the CGT asset. The cost base of a CGT asset is generally the cost of the asset when you bought it. However, it also includes certain other costs associated with acquiring, holding and disposing of the asset. The cost base of a CGT asset is made up of five elements. You need to work out the amount for each element, then add them together to work out the cost base of your CGT asset. | Detailed Reasoning - First element: money or property given for the asset: The money paid (or required to be paid) for the asset and the market value of property given (or required to be given) to acquire the asset are included in the first element. | Detailed Reasoning - Second element: incidental costs of acquiring the CGT asset or that relate to the CGT event: There are incidental costs you may have incurred in acquiring the asset or for the CGT event that happens to it, including its disposal. | Detailed Reasoning - Third element: costs of owning the asset: The costs of owning an asset include rates, land taxes, repairs and insurance premiums. Non-deductible interest on borrowings to finance a loan used to acquire a CGT asset and on loans used to finance capital expenditure you incur to increase an asset's value are also third element costs. You do not include such costs if you acquired the asset before 21 August 1991. Nor do you include them if you: • have claimed a tax deduction for them in any income year, or • omitted to claim a deduction but can still claim it because the period for amending the relevant income tax assessment has not expired. | Detailed Reasoning - Fourth element: capital costs to increase or preserve the value of your asset or to install or move it: The fourth element is capital costs you incurred for the purpose or the expected effect of increasing or preserving the asset's value, for example, costs incurred in applying (successfully or unsuccessfully) for zoning changes. It also includes capital costs you incurred that relate to installing or moving an asset. | Detailed Reasoning - Fifth element: capital costs of preserving or defending your ownership of or rights to your asset: Capital expenses you incur to preserve or defend your ownership of, or rights to, the asset come under this element, for example, you paid a call on shares. | Detailed Reasoning - Application to your circumstances: In this case the, you intend to build a home on the property. The capital cost of building the new dwelling is included in the cost base.