Issue
Can the costs of obtaining council approval for subdivision form part of the fourth element of the cost base of land under subsection 110-25(5) of the Income Tax Assessment Act 1997 (ITAA 1997) if the subdivision has not been undertaken when the land is disposed of?
Decision
Yes. Even though the land was not subdivided, the costs of obtaining council approval can be included in the fourth element of its cost base under subsection 110-25(5) of the ITAA 1997 because the costs: - were incurred to enhance the value of the land, and - are reflected in its state or nature at the time it was disposed of.
Facts
The taxpayer acquired a property after 19 September 1985. The taxpayer applied to the council for approval to subdivide the land and, in doing so, incurred capital expenditure.
The council granted approval for the subdivision.
The taxpayer disposed of the land without subdividing it.
Reasons for Decision
The fourth element of the cost base of an asset includes capital expenditure that is incurred to increase its value providing that it is reflected in the state or nature of the asset at the time a CGT event happens (subsection 110-25(5) of the ITAA 1997).
The Macquarie Dictionary in its third edition says that the word 'state' refers to the 'condition' of a thing, 'as with respect to circumstances or attributes'. It can refer to a 'condition with respect to constitution, structure, form, phase or the like'. The word 'nature', in relation to a thing, refers according to the Macquarie Dictionary to the 'particular combination of qualities belonging to a thing by birth or constitution; [its] native or inherent character'; or [its] 'character, kind or sort'.
The costs incurred in obtaining council approval were incurred by the taxpayer to increase the value of the land - the taxpayer believed that a prospective purchaser might be prepared to pay more for land that they knew could be subdivided.
The taxpayer can show that the expenditure incurred in obtaining council approval to subdivide the land is reflected in its state or nature at the time it was disposed of because it is reflected in the attributes of the land, that is, council approval to subdivide has already been obtained.
Accordingly, the expenditure incurred in obtaining the council approval will be included in the fourth element of the taxpayer's cost base. Note: Similarly, the expenditure can be included in the fourth element of the reduced cost base of the land under section 110-55 of the ITAA 1997.