Tax Law – Cost Base(Part 3) – Reduced cost base

This article is part 3 of our three-article series on CGT Cost Base. You can find parts 1 and 2 by clicking on the following links:

A capital gain exists where the capital proceeds attributable to a capital event exceed the cost base of the relevant CGT asset. However, a capital loss exists where the capital proceeds are exceeded by the reduced cost base of the asset.

Purpose of reduced cost base

The purpose for having a different cost base depending on whether a gain or loss exists, is presumably to lessen the ability of the taxpayer to create a capital loss artificially by incurring expenses that are not obviously reflected in the state of the asset at the time of the CGT event.

Elements of a reduced cost base

The elements of a reduced cost base are identical to those for a cost base, except that the third element is replaced. The elements are as follows:
  • 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: any amount assessable due to a balancing adjustment event, or which would have been assessable had balancing adjustment relief not been available;
  • 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.

Conclusion

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