Hi, family members owner built a house about 5 years ago. As it was a PPOR, they didn't keep all records relating to the cost of the build because they never thought tax was going to be an issue. It wasn't a cheaply built house, it has lots of expensive non standard features. They are considering selling or renting it out now as they purchased a new PPOR. If they did rent it out and eventually sell it in future, a portion of the gains will be subject to CGT. However without all receipts/record of expenses, how can they determine the cost base for tax purposes? Would a quantative surveyor cost report be able to be used in lieu of reciepts for building costs? If not, they may consider selling the property now as it's currently not subject to CGT, but they don't want to sell.
see the legislation: INCOME TAX ASSESSMENT ACT 1997 - SECT 110.25 General rules about cost base Note the words "You need to keep records" It refers to Div 121 see the exception at INCOME TAX ASSESSMENT ACT 1997 - SECT 121.30 Exceptions
1. If they sell and use the main residence exemption it wont be important what the costbase was if you claim a 100% exemption. 100% of $10M is still a $0 capital gain. 2. If they rent it out s118-192 may apply and it wont matter what it cost them I suspect obtaining a QS report could be a mistake / waste of $$$ unless option 2 occurs. In which case you still need an idea of the market value at the date the property first produces income. An agent opinion etc may assist that. A QS report may assist for a partial main residence exemption only or for future IP deductions
Thank you for all your replies. I did tell them if they sold then they don't have to worry about it, however they don't need the funds so are looking at turning into an IP. Terry, so you don't think there is a way around this? I understand it's not an ideal situation but it is what it is. The larger capital expenses have invoices but about half the costs cannot be substantiated via receipts, however the overall building cost is reasonable. approx $350k for a 30sqm house inc. timber floors, double glazed windows, terracotta roof tiles, reverse cycle air cond, hydronic heating etc. Not like they are trying to claim it cost them $20k per square. Scott, yeah I'll give them a buzz to seek their opinion, I've used BMT previously. Depreciator, Pity you're in Sydney. Has the ATO accepted your report for CGT in an audit? Paul, I understand the benefits of a QS report for depreciation, but wasn't sure if they could produce a report to estimate the historical building cost for CGT purposes. Your thoughts? Thank you again.
John, did you have a read of s121-30 - you probably don't need to keep records and therefore might be able to use an estimation from a QS/
Yes Terry, I did read it. Howover, no, I didn't understand how the s121-30 applies to them, other than 'You need to keep records of each element'.
We have QSs in all capital cities. Even if the property was in Sydney, it wouldn't be me inspecting it. We do a couple of these per month always at the request of an accountant. The scenarios differ in detail, but the broad request is the same: the client built/improved a property and there are no records of this work. That could be because the owner died, records were lost in a flood, the dog ate them, there has been a marriage breakdown etc etc. The process at the front end is not all that different from the starting point of a Depreciation Schedule where we need to estimate the historical cost of building works. In the case of a CGT letter, we also make allowances for Assets.
Many taxpayers cant determine their costbase. A QS is suitably qualified to assist provided they also possess Tax Practitioner Board qiualifications
I encounter this frequently. Client has no idea what their stamp duty was. I use scales from old copies of Master Tax Guide. ATO accept this and dont seek evidence of cost. Stamp duty, land tax etc are stautory charges that can be reliably estimated. There is no provision in tax law however. The ATO will consider what is reasonable if it arises. ATO do same when estimating undeclared CGT amounts and issuing default assessments. But third element CGT costs are often overlooked by clients and can be a problem if they dont retain records - eg after refinance they cant work out what their home loan interest was. as they lose access to the former loan account. Caution : Estimating a cost base may be unnecessary for a former home if s118-192 applies
Thank you very much Gentlemen. I will report back to the family member. If they choose to rent it out, it seems the QS can produce a report for both estimated cost base and depreciation. I'll forward them your business details Scott. Thanks once again.
Hi John, You seem to be missing Paul@PFI point that this could be unnecessary. If s118-192 applies, (appears likely from limited OP comments) it is the current market value when first rented out after PPOR applies not the historical cost base that you need for your records. Please check details of this part first to see if applied. The depreciation schedule however is still required and a good idea from the QS for ongoing deductions when turned into IP. Good luck!
s118-192 is not a option. When property that was a former home commences to produce rental for the first time the costbase is reset. It would help to obtain a agent value opinion at this time. Keep that of file. There is no requirement for a formal valuation.
