Tax Tip 76: Calculating the Cost Base for CGT purposes.

When calculating capital gains tax we need to know what the cost base of the asset that was sold is.

The capital gain will be the sale price less the cost base.

To work out the cost base we need to know the costs for the 5 elements described under Section 110-25 of the ITAA 1997 which are:

1. Money paid or required to be paid for the asset.

2. Incidental costs of acquiring the asset, or costs in relation to the CGT event, for example, stamp duty, legal fees, tax advice, and so on.

3. Non capital costs you incur in connection with your ownership, for example, interest, rates, land tax, repairs and insurance premiums (provided not previously claimed). Included are any expenses incurred while the property was an owner occupied property.

4. Capital expenditure you incur to increase the value of the asset, if the expenditure is reflected in the state or nature of the asset at the time of the CGT event.

5. Capital expenditure you incur to preserve or defend your title rights to the asset.

The interest mentioned in the third element means interest incurred on loans used directly to acquire or improve the asset, but wouldn’t include interest on loan increases to fund private expenses such as borrowing for a holiday or car.


Summarised from from PBR Authorisation Number: 45589
https://www.ato.gov.au/rba/content/?ffi=/misc/rba/content/45589.htm

 

The CGT formula is complex and issues such as losses, exemptions and partial exemptions and various exceptions to some rules all must be considered as must the range of "CGT events" which each come with rules.

Most taxpayers will have little or no idea about these issues (or are led to believe its correct when it is not) and I regularly encounter DIY taxpayers calcs with errors that can mean paying more or less tax than should.

One of the best investments for a CGT issue is professional opinion / checking to ensure the calc is correct.

 

If I could get some feedback on this scenario, that would be great.

PPOR original loan: 800k
Personal savings 100k in offset
Top up loan: 150k with funds put into offset (offset now has 250k)

I spend 50k on onto on improving the asset. I then spend 60k on a car. How does this affect the interest for my cost base?

If PPOR is converted to an IP years later, the loan is consolidated as a single 950k loan. Will interest on the 950k then be deductible?

 

Interest on loans used to fund the car won't be deductible. You will also have a mixed loan so will have to apportion the interest for both CGT and income tax purposes.

The interest on $800k may be deductible.

 

@Terry_w got a question on cgt, IP was bought and rented out. 1 year later there was some significant damage to property due to tenants burglary etc. insurance pays out 75k + excess. Being the 75k is being used for capital repairs would it be legitimate to use that the 75k to the cost base for the calculation of cgt

 

Nope - much more complicated than that. see When your property is damaged or destroyed | Australian Taxation Office

 

Hi Terry, What about selling the asset. eg: agent commission?

 

Yes they would fall under incidental costs. Buyers agent fees too.

 

What about depreciation? Doesn't that reduce the cost base, thus triggering higher cgt?

 

Indeed it does. I was writing another tax tip on this, but here is my draft comments:


For properties acquired after 13 May 1997 capital works depreciation needs to be excluded from the cost base of the property.

110-45(6)(b)(i) of the ITAA 1997 states that any capital expenditure does not form part of the cost base if you could have deducted it under Division 43 of the ITAA 1997 in a relevant income year.

So even if you didn’t claim it you need to exclude the capital works depreciation claims from your cost base.

See
s 110-45 ITAA97 INCOME TAX ASSESSMENT ACT 1997 - SECT 110.45 Assets acquired after 7.30 pm on 13 May 1997

 

Remember a reduced cost base is determined by law. This still provides a 50% CGTdiscount unless a non resident tax concern occurs. You cant lose

 

Terry, query on cost base. 2000 PPOR1 bought, 2004 PPOR1 became IP, valuation done in 2004. Family moves to another PPOR2 in 2004.

PPOR1 sold
- in 2008 (been IP for 4 yrs) cost base for this sale will be valuation that came out of in 2004 so the all the other costs (e.g. home maintenance) occurred between 2000 and 2004 will not be counted. however home maintenance costs occurred between 2004 and 2008 will be counted. owners were also exempt for CGT given this been IP for 4 yrs and they claim MR exemption

 

whats the question?

 

Would these maintenance costs on the IP be deductible ? If so no cost base adjustment. If they were capital expenditure eg a new roof then yes increases cost base.

If its the home (PPOR2) then the CGT is exempt so who cares what the CGT element costs are.

 

No MRE. PPOR1 is 100% taxable and not exempt for all days between 2004 and 2008.
The MRE exemption ceases when you move out UNLESS the 6 year absence rule operates. Since you moved in 2004 to PPOR2 the absence rule is not available and there is no choice - Its fact you lived in PPOR2.

Very different if you had moved out of PPOR2 and/or lived in rental / family accom etc. But you didnt.

 

Ok that confused me even more after reading Tax Tip 23: The 6 year Absent from Main Residence Rule

are you saying cause I moved from PPOR1 to PPOR2....where PPOR1 becomes IP. If I sell PPOR1
-within 6 yrs I am not able to claim MRE
-more than 6 yrs I am not able claim MRE and apportion it

I may sell PPOR2 down the track and the way i understood is I can claim MRE on PPOR2 as well but will need to apportion it making sure years where i owned PPOR1 & 2 will not be exempt...

keep in mind PPOR2 never becomes IP.

 

Terry, Trying to understand capital maintenance done on PPOR1 between 2000 to 2004 is lost or not?? valuation done on 2004 (when PPOR1 becomes IP) I guess this will be the new cost base and capital maintenance done between 2000 to 2004 (while it was PPOR) can not be added to when PPOR1 is being sold in 2008...is that correct understanding?

Paul, yes I'm referring to capital maintenance costs. also PPOR2 will not be CGT exempt for full period cause in my hypothetical scenario I am claiming MR exemption on PPOR1 hence some years (while it overlaps between PPOR2) will be lost as MR exemption on PPOR2. So in this case how it will affect the cost base for PPOR2 (whenever it gets sold) or at all? keep in mind PPOR2 has never been IP.

 

The cost base would be reset at the date you moved out, assuming you are not using the main residence exemption. You are considered to have acquired the property then for its market value.

 

All CGT costs up to 2004 are disregarded and the market value at 2004 becomes the cost base as Terry indicates. The exempt use up to 2004 is disregarded as such (ie its exempt) and its virtually treated as if it was acquired at the MV in 2004 and thereafter is taxable. Makes a simple calculation really.

 

In year 1 Bob buys and moves into a PPOR with cost base of $500k + $50k in incidental costs.

By year 2 Bob pay $30k in interest and gets the PPOR re-valued at $600k before turning it into an IP. Is $600k the new cost base or can Bob add the costs to make it $680k?