Capital gains
Cost base
The cost base of a CGT asset is the amount made up of what you paid and certain related costs, which is subtracted from the proceeds to work out a capital gain.
The cost base is the starting point for working out your capital gain. It is not just the price you paid. The law splits it into five elements, and understanding each one helps you claim everything you are entitled to and avoid mistakes when the asset is eventually sold.
The first element is the money you paid or the market value of property you gave to acquire the asset. The second is the incidental costs of acquiring or disposing of it, such as legal fees, agent commissions, stamp duty on purchase, valuation fees and advertising to sell. The third covers certain non-capital costs of owning the asset, such as interest, rates and insurance on assets acquired after August 1991, but only where those costs are not deductible.
The fourth element is capital expenditure that increases or preserves the asset's value, such as an extension to a rental property or major improvements made to an investment. The fifth is capital expenditure incurred to establish, preserve or defend your title or right to the asset, such as legal costs fighting a boundary dispute. Routine repairs and maintenance that you claim as a deduction are not part of the cost base.
A common error is claiming a cost as an income tax deduction and also including it in the cost base. You cannot get the benefit twice, so costs that have been deducted are excluded. This is particularly relevant for rental property owners who claim depreciation or capital works deductions, because those amounts can reduce the cost base or be treated differently when the property is sold.
For some older assets, a different method of working out the cost base existed. Before indexation was frozen at the end of September 1999, certain assets held for at least 12 months could use an indexed cost base as an alternative to the 50% discount. Taxpayers may still choose that option for eligible assets, although for most recent purchases it is not available.
Because the cost base may need to be calculated years after purchase, keep every document that supports it, including contracts, invoices and settlement statements. In GST terms, the cost base of a business asset generally excludes any GST for which you were entitled to an input tax credit. This is general information only, so confirm your calculation with the ATO or a registered tax professional.
Worked example
Lena buys a rental unit for $500,000, pays $25,000 stamp duty and $3,000 legal fees, and later spends $40,000 on a new kitchen that adds value. Her cost base is $500,000 + $25,000 + $3,000 + $40,000 = $568,000. When she sells for $720,000 and pays $14,000 agent and advertising costs, the cost base becomes $582,000 and the gain is $138,000.
Practical tips
- Collect and keep every purchase and improvement document, because they may be needed many years later.
- Do not include costs you have already claimed as deductions, since you cannot benefit twice.
- Remember selling costs such as agent fees and advertising can be added to the cost base.