Capital gains tax: cost base - non income producing property - travel expenses - third element of cost base

If a taxpayer incurs travel costs to carry out maintenance on a non income producing property, can the taxpayer include those travel costs in the third element of the property's cost base under subsection 110-25(4) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The taxpayer can include the travel costs in the third element of the cost base of the property under subsection 110-25(4) of the ITAA 1997 provided that the main purpose for undertaking the travel was to carry out maintenance on the property. If carrying out maintenance was incidental to another purpose, only those travel expenses directly attributable to the ownership of the property can be included in the third element of the cost base of the property under subsection 110-25(4).

A taxpayer who resides in one State owned a non income producing property in another State which they acquired after 20 August 1991.

The taxpayer travelled interstate for a holiday and whilst there travelled to the property to carry out maintenance work.

The taxpayer disposed of the property and made a capital gain.

The taxpayer sought to include in the cost base of the property the costs incurred both in travelling interstate and in travelling to the property.

The third element of the cost base of an asset acquired after 20 August 1991 includes the non-capital costs of ownership of the asset which are not deductible. These costs 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).

For costs to fall within the third element of the cost base, the costs incurred must be directly related to the ownership of the asset. Travel costs incurred to carry out maintenance on a property will be directly related to the ownership of that property if the performance of the maintenance was the main purpose for undertaking the travel. In these cases, any travel costs will form part of the third element of the cost base of the property. However if carrying out the maintenance was merely incidental to another purpose (for example, private) only the expenses directly attributable to the ownership of the property can be included in the third element of the cost base of the property.

In this case, the main purpose for the taxpayer undertaking the travel was private such as visiting family and taking holidays. Accordingly, the third element of the cost base of the property will include only the cost of travel to the property to carry out maintenance (such as travel from the taxpayer's temporary accommodation interstate to the property).

Note 1: non-capital costs of ownership are not included in: - the cost base of a personal use asset: section 108-30 of the ITAA 1997 - the cost base of a collectable: section 108-17 of the ITAA 1997, and - the third element of the reduced cost base of any asset: subsection 110-55(2) of the ITAA 1997. Note 2: 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 third element of the cost base has been amended to include the 'cost of owning' the CGT asset and remove the requirement that the costs be 'non-capital costs of ownership'. 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.]