Private ruling: CGT - cost base - fourth element - design costs
Date of advice: 19 July 2016
Published: August 2016
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Can you include unit development design costs in calculating the capital gain from the sale of your rental property, where the unit development was not undertaken? | A1: Yes.

Relevant facts and circumstances: You and your spouse owned a rental property. You engaged a company to design and draft a proposed unit development at the property. Your original intention was to construct the proposed development yourselves. However, this did not eventuate. When you sold the property the sale included the development plans. You have made a capital gain on the sale of the property.

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

Reasons for decision: Summary: 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. 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. The rental property is a CGT asset. The design plans were drawn up with the intention of developing your rental property into a two unit development. This expenditure is seen as potentially increasing the value of the property as there would be two units which could be rented to produce assessable income. Thus, the design cost expenditure can be included in the cost base of the property as a fourth element cost.