Capital gains
Reduced cost base
The reduced cost base is a variation of the cost base used only to work out a capital loss, and it leaves out certain elements that the ordinary cost base includes.
The reduced cost base is used in one particular situation, which is deciding whether you have made a capital loss and how large it is. For working out a capital gain you use the ordinary cost base. For working out a loss, you compare the capital proceeds with the reduced cost base. The two figures are often very close but they are not the same.
Like the ordinary cost base, the reduced cost base is built from several elements: what you paid for the asset, incidental costs of acquiring or disposing of it, capital expenditure that increases its value, and costs of establishing or defending title. The key difference is that the non-capital costs of owning the asset, which form part of the cost base for assets acquired after August 1991, are left out of the reduced cost base.
The reduced cost base also does not allow for indexation. In the years before 1999, indexation was available as an option for working out a gain on some long-held assets. That option has no place in loss calculations, because the law does not allow an indexed amount to create or increase a capital loss. A loss is therefore calculated by reference to actual outlays only.
Another reason for the distinction is to prevent a loss being inflated by costs that are already deductible or that were never really capital in nature. Because the reduced cost base is usually equal to or lower than the cost base, the capital loss is often smaller than the amount you might calculate by simply subtracting the sale price from what you spent.
The reduced cost base is relevant to individuals, companies and trusts alike, and it matters for shares, property and other assets that fall in value. It does not affect the GST position on the sale, which is a separate matter reported on the BAS. Where an asset used in business is sold at a loss, the GST on the sale and the capital loss are separate calculations.
Keep the same records you would for the ordinary cost base, and note which costs are capital and which have been deducted. This is general information only. Confirm how to calculate a loss in your own circumstances with the ATO or a registered tax professional.
Worked example
Tom buys shares for $30,000 plus $60 brokerage. He sells them for $24,000 less $60 brokerage. His reduced cost base is $30,000 + $60 + $60 = $30,120, and his capital proceeds are $24,000. The capital loss is $30,120 - $24,000 = $6,120. That loss can be used only against capital gains, now or in later income years.
Practical tips
- Use the reduced cost base for losses and the ordinary cost base for gains, because mixing them up gives the wrong answer.
- Do not include indexed amounts when calculating a capital loss.
- Expect a loss to be a little smaller than a simple purchase price less sale price comparison suggests.