Capital gains tax: third element of cost base - travel and accommodation costs relating to initial repairs

Can a taxpayer who incurs travel and accommodation costs to carry out initial repairs on a property they use for income producing purposes, include these costs as part of the cost base of the property under the third element in subsection 110-25(4) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. Travel and accommodation costs incurred to carry out initial repairs can be included as part of the cost base of the property under the third element in subsection 110-25(4) of the ITAA 1997.

The taxpayer purchased an investment property in the 2001-02 income year. The property was located a substantial distance from the taxpayer's residence.

Shortly after its acquisition, the taxpayer carried out minor repairs and renovations to the property to make it more attractive to potential tenants.

During the course of the repairs and renovations, serious white ant damage was discovered. The taxpayer incurred substantial expenditure in rectifying the damage.

On completion of the repairs and renovations, the property was rented to tenants.

All of the repairs and renovations were initial repairs of a capital nature and the costs incurred by the taxpayer in making them were therefore not deductible.

The taxpayer also incurred substantial travel and accommodation costs. These costs were also not deductible as they are capital costs.

The taxpayer sold the property in the 2005-06 income year. In working out the amount of their capital gain, the taxpayer sought to include the travel and accommodation costs in the cost base of the property under the third element.

Subsection 110-25(4) of the ITAA 1997 provides that the third element of the cost base of an asset acquired after 20 August 1991 is the costs of owning the asset. The costs include, but are not limited to, costs of maintaining, repairing or insuring it, 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, and if the asset is land, rates and land tax.

For costs to fall within the third element of the cost base of an asset, they must be costs of owning the asset. Travel and accommodation costs will be costs of owning the asset where the carrying out of the repairs on the asset is the sole or main purpose of the travel and accommodation.

In this case, travel and accommodation costs incurred in carrying out initial repairs to the property are costs of owning the property, because the sole or main purpose of the travel was to undertake the repairs. Therefore, these costs can be included in the third element of the cost base of the property under subsection 110-25(4) of the ITAA 1997. Note 1 The costs of owning a CGT asset are not included in the reduced cost base of an asset (subsection 110-55(2) of the ITAA 1997). Note 2 Travel and accommodation costs incurred to carry out initial repairs of a capital nature where the property is not income producing, for example a holiday house, can also be included in the third element of the cost base of the property, provided the conditions in subsection 110-25(4) of the ITAA 1997 are satisfied.