Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)CHANGE OF TITLE - TAX LAW IMPROVEMENT BILL (No. 1) 1998 - SENATE - Explanatory Memorandum.
Chapter 2.8 - Cost base and reduced cost base
Overview
This segment explains the rewritten rules in Division 110 for working out the cost base or reduced cost base of a CGT asset.
Part A summarises the rules.
Part B explains the changes to the 1936 Act.
A. Summary of the new law
Division 110: Cost base and reduced cost base
Division 110 sets out the general rules for working out the cost base or reduced cost base of a CGT asset. These are key components as to whether a taxpayer makes a capital gain or capital loss. There are also special rules about cost base and reduced cost base in Division 112. sections 110-1, 110-5]
A table sets out those CGT events which have their own cost rules. [section 110-10]
The cost base of a CGT asset has five elements.
- 1.
- The price paid, or the market value of property given, to acquire the asset.
- 2.
- Incidental costs of acquiring the asset or of the CGT event.
- 3.
- Non-capital costs of ownership.
- 4.
- Capital expenditure on improvements.
- 5.
- Capital expenditure in respect of title or right to the asset.
A taxpayer who has owned the asset for more than twelve months, can index for inflation all elements except the third.
Costs not included in cost base
Some costs are not included in the cost base. These are:
- •
- expenditure in elements 2 and 3 for which deductions are claimed.
- •
- any expenditure recouped that is not included in assessable income.
[section 110-25]
Components of incidental costs
Incidental costs of acquiring a CGT asset or relating to a CGT event are:
- •
- remuneration for specified professional services
- •
- transfer costs
- •
- stamp duty or similar duty
- •
- advertising costs
- •
- valuation costs.
[section 110-35]
General rules about reduced cost base
There are also five elements in the reduced cost base of a CGT asset. Four of them are the same as those in the cost base, the exception being non-capital holding costs which are not included in the reduced cost base. The additional element in the reduced cost base takes into account any assessable balancing adjustment . [section 110-55]
Costs not included in reduced cost base
Costs not included in the reduced cost base are:
- •
- amounts allowable as a deduction. (These include balancing adjustments and amounts that would have been deductible except that the assets concerned had not been used, or installed ready for use, to produce assessable income.)
- •
- costs that have been recouped; and
- •
- if the CGT asset is a share, certain amounts derived by the company before the share was acquired.
[section 110-55]
Cost base modifications - partnerships
A partner's cost base and reduced cost base are modified by excluding:
- •
- expenditure in elements 2 and 3 for which deductions are claimed.
- •
- any expenditure recouped that is not included in assessable income.
Also excluded from a partners reduced cost base are amounts of:
- •
- heritage conservation expenditure for which the partner can obtain a tax rebate;
- •
- expenditure on plant that the partnership has been unable to deduct because it did not use the plant entirely to produce assessable income; and any rebatable dividend adjustment.
Cost base modifications - partnerships(contd)
Another modification includes in a partners reduced cost base his or her share of any assessable balancing adjustment borne by the partnership. [section 110-60]
B. Discussion of changes
Section 110-25 General rules about cost base
This section contains the elements that comprise the cost base.
Include in the cost base non-deductible interest on borrowings to refinance a loan used to acquire a CGT asset.
The 1936 Act includes non-deductible interest on borrowings to finance the acquisition of a CGT asset. But it is not clear whether interest on refinancing loans is included in the cost base. This change removes the uncertainty and is consistent with administrative practice.
Include in the cost base non-deductible interest on loans used to finance improvements to an asset.
The 1936 Act includes non-deductible interest on improvement loans only if the improvement is treated as a separate asset for CGT purposes. This is inequitable as between owners who improve assets and those who acquire assets already improved.
Stipulate that recoupment of expenditure only reduces the cost base if it is not included in assessable income.
If expenditure included in the cost base of an asset is recouped by the owner any capital gain would be understated, and any capital loss overstated, if the cost base were not reduced by the recoupment.
The change adopts the Commissioners interpretation of the law and puts beyond doubt that a recoupment of expenditure cannot both reduce the cost base and be included in assessable income.