Capital Gains Tax: cost base - Finnish gift tax

Can a taxpayer, who acquired shares by way of a gift from another individual, include the payment of Finnish gift tax in the cost base and reduced cost base of those shares under Division 110 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. Finnish gift tax paid by the taxpayer can be included in the second element of the cost base and reduced cost base of the shares under subsection 110-25(3) and 110-55(2) of the ITAA 1997 because it is an incidental cost the taxpayer incurred in respect of acquiring the shares.

The taxpayer, a resident of Australia, acquired shares in a Finnish company after 20 September 1985 by way of a gift from a Finnish resident.

Shortly after the gift was made, the Finnish National Board of Taxes raised an assessment against the taxpayer for gift tax. The taxpayer paid the amount of Finnish gift tax assessed to them.

The taxpayer sold the shares in the Finnish company in the 2004-05 income year.

The taxpayer wishes to include the amount of gift tax paid in the cost base and reduced cost base of their shares.

A taxpayer will make a capital gain if the capital proceeds received on the sale of a share exceeds its cost base. They will make a capital loss if the capital proceeds are less than the share's reduced cost base (subsection 104-10(4) of the ITAA 1997).

The cost base and reduced cost base of an asset each consist of five elements (sections 110-25 and 110-55 of the ITAA 1997). The elements of the reduced cost base of a CGT asset are the same as those for cost base except for the third element (subsection 110-55(2) of the ITAA 1997).

The first element of cost base and reduced 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).

As noted by Mason J in State Government Insurance Office (Queensland) v. Rees (1979) 144 CLR 549, the meaning to be attached to the words 'in respect of' must reflect the context in which they are used.

In the context of subsection 110-25(2) of the ITAA 1997, regard must be had to the presence of other elements of cost base. In particular, the specific inclusion of incidental costs of acquisition in the second element of cost base indicates that 'incidentals' would not ordinarily be included in the first element of cost base.

Accordingly, the Finnish gift tax does not form part of the first element of the cost base or reduced cost base of the taxpayer's shares.

The second element of cost base and reduced cost base is the incidental costs that the taxpayer incurs in acquiring a 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. These incidental costs include stamp duty or other similar duty: subsection 110-35(4) of the ITAA 1997.

Stamp duty is defined in Butterworths Australian Legal Dictionary as 'a tax imposed by all Australian States on documents or transactions that affect or record the transfer of the ownership of assets (for example, conveyances of real property, shares and business assets) or the creation of rights in respect of assets (for example, the granting of a lease)'.

As Finnish gift tax is a tax imposed on the transfer of property it is an incidental cost within the meaning of the term in subsection 110-35(4) of the ITAA 1997.

Incidental costs can only be included in the second element of the cost base and reduced cost base of an asset if they are incurred by the owner of the asset to acquire the asset or if they relate to a CGT event that later happens to the asset (subsection 110-25(3) of the ITAA 1997).

The gift tax was incurred in this case as a consequence of the taxpayer acquiring the shares. Accordingly, the taxpayer can include the gift tax paid in the second element of the cost base and reduced cost base of their shares. Note: 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, section 110-35 of the ITAA 1997 has been amended to increase the range of incidental costs incurred to acquire or dispose of a CGT asset. 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.]