What is the reduced cost base?

When a CGT event happens to a CGT asset and you haven’t made a capital gain, you need the asset’s reduced cost base to work out whether you have made a capital loss. Remember, you can use a capital loss to reduce a capital gain only, you cannot use it to reduce other income.

Elements of the reduced cost base

The reduced cost base of a CGT asset has the same five elements as the cost base, except for the third element:

1. money or property given for the asset
2. incidental costs of acquiring the CGT asset or that relate to the CGT event
3. balancing adjustment amount, that is, any amount that is assessable because of a balancing adjustment for the asset or that would be assessable if certain balancing adjustment relief were not available
4. capital costs to increase or preserve the value of your asset or to install or move it
5. capital costs of preserving or defending your title or rights to your asset.

These elements are not indexed.

You need to work out the amount for each element then add the amounts together to find out your reduced cost base for the relevant CGT asset.

If you are registered for GST, you reduce each element of the reduced cost base of the asset by the amount of any GST net input tax credits for that element. If you are not registered for GST, you do not make any adjustment and the GST paid is included in the reduced cost base.

The reduced cost base does not include any costs you have incurred for which you have claimed a tax deduction or have omitted to claim, but can still claim, a deduction because the period for amending the relevant income tax assessment has not expired, for example, capital works deductions for capital expenditure.

Modifications to the cost base and reduced cost base

In some cases, the general rules for calculating the cost base and reduced cost base have to be modified. For example, you substitute the market value for the first element of the cost base and reduced cost base if:

• you did not incur expenditure to acquire the asset
• some or all of the expenditure you incurred cannot be valued
• you did not deal at arm’s length with the previous owner in acquiring the asset.

This is known as the market value substitution rule for cost base and reduced cost base.

There are exceptions to the market value substitution rule. One exception is where shares in a company, or units in a unit trust, are issued or allotted to you but you did not pay anything for them.

You do not include expenditure you subsequently recoup (such as an insurance pay-out you receive or an amount paid for by someone else) in the cost base and reduced cost of a CGT asset except to the extent the recouped amount is included in your assessable income.

If you acquire a CGT asset and only part of the expenditure relates to the acquisition of the CGT asset, you can only include that part of the expenditure that is reasonably attributable to the acquisition of the asset in its cost base and reduced cost base.

Apportionment is also required if you incur expenditure and only part of that expenditure relates to another element of the cost base and reduced cost base.

Similarly, if a CGT event happens only to part of your CGT asset, you generally apportion the asset’s cost base and reduced cost base to work out the capital gain or capital loss from the CGT event.

Consolidated groups

The rules that apply to members of a consolidated group modify the application of the CGT rules.

See also:

Consolidation

General value shifting regime

Value shifting generally occurs when a dealing or transaction between two parties is not at market value and results in the value of one asset decreasing and (usually) the value of another asset increasing.

The general value shifting regime (GVSR) rules apply to value shifts that arise:

• because interests in a company or trust are issued or bought back at other than market value, or because their rights are varied so that the value of some interests increases while the value of others decreases (direct value shifts on interests)
• because two entities under the same control or ownership conduct dealings or transactions that are neither at market value nor arm’s length, so that the value of interests in one entity decreases while (usually) the value of interests in the other entity increases (indirect value shifting), and
• from the creation of a right over a non-depreciating asset in favour of an associate for less than market value (direct value shifts by creating rights).

The rules on direct value shifts on interests target only equity or loan interests held by an individual or entity that controls the company or trust, the controller’s associates and, if the company or trust is closely held, any active participants in the arrangement.

The indirect value shifting rules target only equity or loan interests held by an individual or entity that controls the two entities conducting the dealing or transaction and the controller’s associates. But if the two entities are closely held, the rules also target equity or loan interests held by two or more common owners of those entities, the common owner’s associates and any active participants in the arrangement.

There are also exclusions and safe harbours that limit the operation of the rules.

If the rules apply, you may need to adjust:

• the cost base and reduced cost base of equity and loan interests affected by the value shift, or
• a realised loss or gain on the disposal of the relevant assets.

In some cases, there may also be an immediate capital gain.

Find out about:

• General value shifting regime: who it affects
• General value shifting regime: overview of provisions.

Other special rules

There are other rules that may affect the cost base and reduced cost base of an asset. For example, they are calculated differently:

• if the asset is your main residence and you use it to produce income for the first time after 20 August 1996, see Real estate and main residence
• if you receive the asset as a beneficiary or as the legal personal representative of a deceased estate, see Deceased estates
• for bonus shares or units, rights and options and convertible notes, see Investments in shares and units
• under a demerger, see Investments in shares and units
• where you have been freed from paying a debt, see Debt forgiveness below
• where you start or cease to have a financial arrangement as consideration for acquiring a CGT asset, see Guide to the taxation of financial arrangements (TOFA) rules.

Debt forgiveness

A debt is forgiven if you are freed from the obligation to pay it. Commercial debt forgiveness rules apply to debts forgiven after 27 June 1996. A debt is a commercial debt if part or all of the interest payable on the debt is, or would be, an allowable deduction.

Under the commercial debt forgiveness rules, a forgiven amount may reduce (in the following order) your:

• prior income year revenue losses
• net capital losses from earlier years
• deductions for capital allowances and some similar deductions
• assets’ cost base and reduced cost base.

These rules do not apply if the debt is forgiven:

• as a result of an action under bankruptcy law
• in a deceased person’s will, or
• for reasons of natural love and affection.