Capital gains tax: cost base - fees for building and pest inspection reports

Can the fees paid by a taxpayer for building and pest inspection reports on a property obtained prior to the property being purchased by the taxpayer at auction form part of the second element of the cost base of the property under subsection 110-25(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The fees paid by a taxpayer for building and pest inspection reports on a property obtained prior to the property being purchased by the taxpayer at auction will form part of the second element of the cost base of the property under subsection 110-25(3) of the ITAA 1997. The fees paid for the services provided by a building inspector and pest inspector are considered to be incidental costs under subsection 110-35(2) of the ITAA 1997.

The taxpayer purchased a property at auction in the 1999-2000 income year. Building and pest inspection reports were provided to the taxpayer before the property was auctioned. The taxpayer paid for the cost of the reports.

The taxpayer used the property for rental purposes. The taxpayer disposed of the property in the 2001-02 income year and made a capital gain.

The taxpayer included the cost of the building and pest inspection reports as part of the cost base of the rental property.

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

Incidental costs that can be included in the cost base of a CGT asset are set out in section 110-35 of the ITAA 1997. Subsection 110-35(2) of the ITAA 1997 lists remuneration for the services of a consultant as an incidental cost. Consultant fees would include the fees paid for services provided by a building inspector and pest inspector.

As the fees paid for the building and pest inspection reports are incurred in relation to the acquisition of the rental property, these fees will form part of the second element of the cost base of the rental property in accordance with subsection 110-25(3) of the ITAA 1997.