Private ruling: Cost base of property
Date of advice: 2 July 2015
Published: July 2015
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Will the settlement payment, auctioneer fees, legal expenses and financial expenses that you incurred be included in the cost base of the property? | A1: Yes.

Relevant facts and circumstances: A property was purchased by multiple owners ('the owners'). The property was auctioned for sale with a reserve price. The highest bid received was under the reserve price. A contract was entered into for this price. The contract was signed by one owner only. When the buyer lodged the documents they were refused as not all owners had signed the documents. The owners entered into legal action to repossess the property with the intention to sell at a higher price. An out of court settlement was made whereby the owners would pay the buyer compensation and auctioneer's fees. The owners borrowed funds to pay the settlement amounts and incurred financial expenses in doing so. The owners incurred legal expenses in relation to the legal action.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 110-25

Reasons for decision: Summary: Any capital gain arising from the disposal of a capital gains tax (CGT) asset is calculated using the cost base of that asset. The cost base of a CGT asset consists of five elements: • the first element, being the acquisition costs, is the total of the money paid, or required to be paid, in respect of the acquisition • the second element is the incidental costs that the taxpayer incurs in acquiring the asset or which relate to a CGT event that happens in relation to the asset • the third element is cost of ownership, including both capital and non-capital costs • the fourth element is capital costs associated with increasing or preserving the value of the asset, or installing or moving the asset, and • the fifth element is capital expenditure incurred by a taxpayer in establishing preserving or defending their title to an asset, or right over an asset. The settlement amount including auction fees, legal fees and financial expenses were incurred by the owners so that they could retain title to the property. The settlement was an amount paid so that the buyer would agree to the termination of the contract as opposed to enforcing the performance of the contract. The effect of the termination was that the owners retained the title to the property. The legal fees and financial expenses were associated with the owners' successful action to terminate the contract. As such they relate to the preservation of the title in the owners hands. Accordingly, the settlement amount, legal fees and financial expenses are to be included in the fifth element of the cost base of the property.