ATO Interpretative Decision

ATO ID 2003/469

Income Tax

Capital gains tax: cost base - fourth element - subdivision costs
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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

Can the costs of obtaining council approval for subdivision form part of the fourth element of the cost base of land under subsection 110-25(5) of the Income Tax Assessment Act 1997 (ITAA 1997) if the subdivision has not been undertaken when the land is disposed of?

Decision

Yes. Even though the land was not subdivided, the costs of obtaining council approval can be included in the fourth element of its cost base under subsection 110-25(5) of the ITAA 1997 because the costs:

-: were incurred to enhance the value of the land, and
-: are reflected in its state or nature at the time it was disposed of.

Facts

The taxpayer acquired a property after 19 September 1985. The taxpayer applied to the council for approval to subdivide the land and, in doing so, incurred capital expenditure.

The council granted approval for the subdivision.

The taxpayer disposed of the land without subdividing it.

Reasons for Decision

The fourth element of the cost base of an asset includes capital expenditure that is incurred to increase its value providing that it is reflected in the state or nature of the asset at the time a CGT event happens (subsection 110-25(5) of the ITAA 1997).

The Macquarie Dictionary in its third edition says that the word 'state' refers to the 'condition' of a thing, 'as with respect to circumstances or attributes'. It can refer to a 'condition with respect to constitution, structure, form, phase or the like'. The word 'nature', in relation to a thing, refers according to the Macquarie Dictionary to the 'particular combination of qualities belonging to a thing by birth or constitution; [its] native or inherent character'; or [its] 'character, kind or sort'.

The costs incurred in obtaining council approval were incurred by the taxpayer to increase the value of the land - the taxpayer believed that a prospective purchaser might be prepared to pay more for land that they knew could be subdivided.

The taxpayer can show that the expenditure incurred in obtaining council approval to subdivide the land is reflected in its state or nature at the time it was disposed of because it is reflected in the attributes of the land, that is, council approval to subdivide has already been obtained.

Accordingly, the expenditure incurred in obtaining the council approval will be included in the fourth element of the taxpayer's cost base.

Note: Similarly, the expenditure can be included in the fourth element of the reduced cost base of the land under section 110-55 of the ITAA 1997.

Date of decision: 6 May 2003

Year of income: Year ended 30 June 2003

Legislative References:
Income Tax Assessment Act 1997
subsection 110-25(5)
section 110-55

Keywords
Capital gains tax
CGT assets
CGT cost base
CGT events

Business Line: Losses and CGT Centre of Expertise

Date of publication: 20 June 2003

ISSN: 1445-2782

history

	Date:	Version:
You are here	6 May 2003	Original statement
	26 February 2010	Archived

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