Capital Proceeds & Cost Base Calculation

Sarah purchases a holiday home in August 2011 for $350,000. She incurs a legal fee and stamp duty in relation to the purchase of $5,000.

In October 2011, she makes various repairs to the property in order to update it for the summer. These repairs to the property include painting and roof repairs at a total cost of $3,000.

In February 2011, she begins construction of a garage on the property. The construction is complete in September 2011 at a total cost of $50,000 paid on completion. 

In late 2012, Sarah is approached by a developer who wishes to build a multi-unit apartment on the site of her holiday home. 

In March 2013, Sarah enters into a contract to sell the property to the developer for $200,000 plus a unit in the holiday apartment valued at $300,000. Sarah incurs legal fees of $1,000 in relation to this sale to be completed in July 2013. At this time Sarah will receive a cheque for $200,000 and the title to her new unit.

Assume that part of the purchase price of the holiday home was funded by a loan and that, over time Sarah owned the property, she paid interest totaling $90,000. 

  1. What are the income tax consequences of these facts?
  2. What difference would it make if Sarah rents out the property each summer?
  3. What difference would it make to the initial situation if the total amount of interest paid is $95,000?

Assuming that no other CGT events occur.

Total proceeds are $500,000 (money 200k + property 300k) 

Outgoings (s 110-25 cost base):

  • CGT 2 & 3 NOT included in cost base as previously deducted from rent (Not deductible)
Item Amount Category
Purchase price $350,000 1
Legal Fees/Stamp Duty $5,000 2
Repairs $3,000 3
Legal Sale Fee $1,000 2
Interest $90,000 3
Garage $50,000 4
Total $499,000 (500k) Cost Base < (Capital Proceeds)

Exceeds $1,000 capital gain. Held property more than 12 months: $1,000 / 50% = $500 Capital Gain

  • Alternative example: initial repairs different OR indexation no longer applies.
  • Value of land we usually just assume
  • Variation: Rent 110-45(1B)
  • Interest claimed annually
  • Legal fees can be deductible if ongoing costs (in this case not deductible)
  • Repairs are deductible
  • Improvement garage not deductible

NEW COST BASE $406,000

NEW CAPITAL GAIN $94,000 / 50% = $47,000

What if interest were $95,000? COST BASE NOW $504,000, CAPITAL GAIN proceeds > Costs, 500 < 504

Reduced COST BASE 3 Not deductible, NEW COST BASE $406,000, CAPITAL LOSS 500 > 406

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