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Can capital costs in respect of the subdivision of land, incurred in one financial year, be apportioned to the cost base of blocks sold 'off the plan' in an earlier financial year under section 110-25 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. Capital costs incurred in one financial year can be apportioned in determining the cost base of blocks disposed of in an earlier financial year under subsection 110-25(5) of the ITAA 1997.

The taxpayer sold the first two blocks of a subdivision 'off the plan' before any capital works had been completed. The contract for the sale of the two lots of land occurred during the year ended 30 June 2001.

The sale contract required the vendor to complete all road and other works and electricity services to enable the subdivision to meet Council requirements. The construction costs were incurred after the sale of the lots 'off the plan' in the year ended 30 June 2002.

Section 110-25 of the ITAA 1997 sets out the five elements that make up the cost base of an asset for CGT purposes. Subsection 110-25(5) of the ITAA 1997 states that the fourth element of an assets cost base includes any capital expenditure the taxpayer incurred to increase or preserve the asset's value. For CGT events happening before 1 July 2005, the expenditure must also be reflected in the state or nature of the asset at the time of the CGT event.

The expenditure to increase the assets value had not actually been incurred at the time of the CGT event, that is, the time of the 'off the plan' sales. However the vendors were obligated to incur this expenditure under the contract of sale. The completion of the obligations under the contract would have been reflected in the state or nature of the blocks purchased 'off the plan'. Once completed, the blocks would comply with the Council's development consent as per the conditions set down in the contract of sale.

The expenditure incurred to increase the value of the vacant lots can qualify as part of the fourth element of their cost bases, despite being incurred some time after the time of entering into the relevant contracts for the sale of the lots. The completion of various works to comply with Council conditions was part of the sale contract and would inherently increase the value of the blocks purchased 'off the plan'. Note: This note has been added to explain the legislative changes made to certain capital gains provisions, as a result of Act No 32 of 2006, which received Royal Assent on 6 April 2006. For CGT events happening on or after 1 July 2005, the fourth element of the cost base has been amended to include expenditure that will increase or preserve the asset's value. Expenditure incurred on installing or moving the CGT asset will also be included in the fourth element. The requirement that the expenditure be reflected in the state and nature of the CGT asset at the time of the CGT event has been removed. However, these changes do not affect the decision in this interpretative decision. [HISTORY: This ID has been amended to explain the legislative changes made to certain elements of the CGT cost base, where the relevant CGT event happens on or after 1 July 2005.]