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Can a taxpayer who sold a rental property include the costs of hiring furniture and ornaments used in marketing the property as part of the cost base of the property under section 110-25 of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. The costs of hiring furniture and ornaments cannot be included as part of the cost base of the rental property under any of the five elements set out in section 110-25 of the ITAA 1997.

The taxpayer owned a rental property, which they decided to sell after the tenants vacated the premises.

The taxpayer hired furniture and ornaments as part of their marketing strategy to sell the property.

The rental property was sold in April 2003. The taxpayer wished to include the costs of hiring the furniture and ornaments as part of the cost base of the rental property.

Section 110-25 of the ITAA 1997 provides that the cost base of a CGT asset consists of five elements.

The first element of the cost base is the total of the money paid, or required to be paid, and the market value of the property given, or required to be given, in respect of the acquisition of the asset (subsection 110-25(2) of the ITAA 1997). The costs of hiring furniture and ornaments do not represent acquisition costs within the meaning of subsection 110-25(2) as they are not money paid in respect of acquiring the rental property.

The second element of the cost base is the incidental costs that the taxpayer incurs in acquiring the CGT asset or which relate to a CGT event that happens in relation to the CGT asset (subsection 110-25(3) of the ITAA 1997).

Section 110-35 of the ITAA 1997 sets out the five types of incidental costs that can be included in the cost base of a CGT asset. The costs of hiring furniture and ornaments are not one of the five types of incidental costs listed in section 110-35.

The third element of the cost base is the non-capital costs of ownership of the asset incurred except to the extent this expenditure has been deducted or is deductible (but only for an asset acquired after 20 August 1991). Non-capital costs of ownership include, but are not limited to, interest on money borrowed to acquire the asset or to refinance such a borrowing, interest on money borrowed to finance capital improvements to the asset, repairs and maintenance, insurance premiums, rates and land tax (subsection 110-25(4) of the ITAA 1997).

In this case, the costs of hiring furniture and ornaments are not directly related to the ownership of the rental property. The expenditure represents costs relating to the disposal of the asset rather than ownership of the asset.

The fourth element of the cost base is capital expenditure incurred to increase the asset's value, which must be reflected in the state or nature of the asset at the time of the CGT event (subsection 110-25(5) of the ITAA 1997).

In this case, it is considered that the costs of hiring furniture and ornaments were incurred to increase the property's appeal to prospective purchasers rather than to increase the asset's value as provided in subsection 110-25(5) of the ITAA 1997. Even if the expenditure did increase the asset's value, it could not be said that the expenditure was reflected in the state or nature of the rental property at the time of the CGT event as the furniture and ornaments were separate to, and did not form part of, the rental property.

The fifth element of the cost base is capital expenditure incurred to establish, preserve or defend the title to the asset, or a right over the asset (subsection 110-25(6) of the ITAA 1997). The costs of hiring furniture and ornaments do not fall within this element of the cost base as they are not expenditure incurred to establish, preserve or defend the title to the rental property.

Accordingly, the costs of hiring furniture and ornaments cannot be included as part of the cost base of the rental property. They do not form part of the cost base of the rental property under any of the five elements set out in section 110-25 of the ITAA 1997.