Thank you kindly for all the work that you've done on my and my wife's behalf. A big pressure has been taken off our chests

M. Elliot
Research & Publications
  1. Article
  2. Related Articles
  3. Related Practice Areas

Tax Law - Cost Base(Part 1) - Costs of acquisition

Date: January 12, 2012

Authors: Jonathan Lim B.A., LL.B. (Hons)

A capital gain exists where the capital proceeds attributable to a capital event exceed the cost base of the relevant CGT asset. Capital proceeds are relatively simple to calculate. The more involved issue is the calculation of the cost base of the asset.

The five elements

The theory behind cost base calculation, is that CGT is a tax upon the increase in value of a CGT asset prior to the relevant CGT event. The calculation of the cost base attempts to determine the actual cost of acquiring and holding the CGT asset
 
The following are the five elements of the cost base of a CGT asset:
  • first element: the amount of money paid or assets given by the taxpayer to acquire the asset;
  • second element: incidental costs for the acquisition of the CGT asset;
  • third element: costs of owning the CGT asset;
  • fourth element: costs related to the improvement or preservation of the CGT asset; and
  • fifth element: costs related to the preservation or defending of rights or titles of the CGT asset.
None of these costs form part of the cost base if they are deductible expenses.

First element: Acquisition costs

The first element is obtained by adding together the money originally paid or required to be paid by the taxpayer to acquire the CGT asset, plus the market value of any property give or required to be given in respect of the acquisition.
 
The acquisition cost can include cancelled liabilities. Any acquisition cost does not need to have been paid or given to the entity that disposed of the asset to the taxpayer. It includes amounts paid or given to other entities nominated by that disposing entity.
 
The acquisition cost also cannot include any labour costs to acquire the asset. Any foreign currency amount is converted to Australian dollars.
Second element: Incidental costs
In the acquisition of a CGT asset there may have been incidental costs incurred that are not acquisition costs, exactly, but ought to be taken into account. These incidental costs include:
  • costs of transfer;
  • stamp duty or other similar duty;
  • advertising or marketing costs to find a seller;
  • costs of services provided by tax professionals, brokers, legal advisers, auctioneers and other consultants; and
  • borrowing expenses such as loan application fees and mortgage discharge fees.

Elements three to five will be dealt with in part 2 of this article.

Example: First and second elements
 
X is an individual taxpayer. She acquired an investment property in Turramurra NSW in 1993 for $270,000, from Y Co. Now, in December 2011, she wants to sell it.
 
At the time of acquisition X incurred the following expenses:
  • paid $270,000 to Y Co;
  • she cancelled a liability of Y Co to pay her $30,000;
  • she paid a further $30,000 to a director of Y Co, on the nomination of Y Co;
  • she paid $1000 in legal costs for advice on acquiring the property; and
  • she paid $90,000 in NSW stamp duty. 
In total, the first two elements of X’s cost base add up to a total of $421,000.
 
(Note that this does not take into account inflation. X can choose to index for inflation, but only for the period up to 30 September 1999, and only if she foregoes the CGT general discount).

Conclusion

If you have concerns about calculating a CGT asset’s cost base, call LAC Lawyers and we can provide advice and assistance.

 
  2. Article
  4. Related Articles
  6. Related Practice Areas