Issue
Do the costs of demolition of a dwelling fall within the fourth element of the cost base of land in subsection 110-25(5) of the Income Tax Assessment Act 1997 (ITAA 1997))?
Decision
If the demolition expenses were incurred to enhance the value of the land and are reflected in the state or nature of the land at the time of a subsequent CGT event, the expenditure will fall within the fourth element of the cost base in subsection 110-25(5) of the ITAA 1997. This is the case even if the expenditure was incurred merely to facilitate the construction of another dwelling.
Facts
The taxpayer purchased a dwelling after 20 September 1985. The taxpayer demolished the dwelling and subdivided the land into 2 blocks. Prior to the demolition, the taxpayer commissioned a valuation of the land and dwelling by a registered valuer.
The taxpayer entered into a contract for the construction of 2 new dwellings on the land and proposed to use one dwelling as their main residence and the other dwelling as an investment property.
Reasons for Decision
The fourth element of the cost base includes capital expenditure you incurred to increase an asset's value. However, the expenditure 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).
The time for determining whether demolition costs can be included in the cost base of the land is when a subsequent CGT event happens to the land. If the costs of demolition of the original dwelling are reflected in the state or nature of the property at the time of the subsequent CGT event, the expenditure will fall within subsection 110-25(5) of the ITAA 1997. This is the case even if the demolition costs are incurred merely to facilitate the construction of another building.
If the taxpayer can show at the time a subsequent CGT event happens to the land, that the expenditure on demolition is reflected in the state or nature of the asset then the expenditure will be included in the fourth element of the taxpayer's cost base.