ATO Interpretative Decision

ATO ID 2002/514

income tax

Capital gains tax: cost base - fourth element: demolition expenses
FOI status: may be released

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If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

Do the costs of demolition of a dwelling fall within the fourth element of the cost base of land in subsection 110-25(5) of the Income Tax Assessment Act 1997 (ITAA 1997))?

Decision

If the demolition expenses were incurred to enhance the value of the land and are reflected in the state or nature of the land at the time of a subsequent CGT event, the expenditure will fall within the fourth element of the cost base in subsection 110-25(5) of the ITAA 1997. This is the case even if the expenditure was incurred merely to facilitate the construction of another dwelling.

Facts

The taxpayer purchased a dwelling after 20 September 1985. The taxpayer demolished the dwelling and subdivided the land into 2 blocks. Prior to the demolition, the taxpayer commissioned a valuation of the land and dwelling by a registered valuer.

The taxpayer entered into a contract for the construction of 2 new dwellings on the land and proposed to use one dwelling as their main residence and the other dwelling as an investment property.

Reasons for Decision

The fourth element of the cost base includes capital expenditure you incurred to increase an asset's value. However, the expenditure must be reflected in the state or nature of the asset at the time of the CGT event (subsection 110-25(5) of the ITAA 1997).

The time for determining whether demolition costs can be included in the cost base of the land is when a subsequent CGT event happens to the land. If the costs of demolition of the original dwelling are reflected in the state or nature of the property at the time of the subsequent CGT event, the expenditure will fall within subsection 110-25(5) of the ITAA 1997. This is the case even if the demolition costs are incurred merely to facilitate the construction of another building.

If the taxpayer can show at the time a subsequent CGT event happens to the land, that the expenditure on demolition is reflected in the state or nature of the asset then the expenditure will be included in the fourth element of the taxpayer's cost base.

Date of decision:  23 February 2001

Year of income:  Year ended 30 June 2001

Legislative References:
Income Tax Assessment Act 1997
   subsection 110-25(5)

Related ATO Interpretative Decisions
ATO ID 2001/665 ATO ID 2003/469

Keywords
Capital gains tax
CGT cost base

Business Line:  Small Business/Individual Taxpayers

Date of publication:  31 May 2002

ISSN: 1445-2782

history
  Date: Version:
You are here 23 February 2001 Original statement
  9 April 2010 Archived

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