Issue
Do subsections 110-37(2) and 110-45(3) of the Income Tax Assessment Act 1997 (ITAA 1997) operate so that the expenditure to build a home that can be included in the relevant element of the cost base of the house and land when sold, never includes a grant received under the First Home Owners Grant Scheme?
Decision
Yes, subsections 110-37(2) and 110-45(3) of the ITAA 1997 operate so that the expenditure to build a home that can be included in the relevant element of the cost base of the house and land when sold, never includes the amount of a grant received under the First Home Owners Grant Scheme.
Facts
The owner of land acquired after 20 September 1985 entered into a contract for a home to be built on the land.
The owner qualified for the First Home Owners Grant Scheme administered by their State Government.
The home constructed under this contract was initially the owner's main residence but later ceased to be their main residence.
When the home was eventually sold the owner was only entitled to a partial exemption for that CGT event because the dwelling was their main residence during only part of their ownership period.
In working out the amount of the capital gain on sale the owner questioned whether the grant received under the First Home Owners Grant Scheme was taken into account in calculating the cost base of their land.
Reasons for Decision
The owner's expenditure to build the home falls under the fourth element of the cost base of the land. It is expenditure the owner incurred to increase the land's value (subsection 110-25(5) of the ITAA 1997).
However, subsection 110-45(3) of the ITAA 1997 provides that expenditure does not form part of any element of the cost base to the extent of any amount you have received as recoupment of it, except so far as the amount is included in your assessable income.
Recoupment is defined in subsection 20-25 of the ITAA 1997 to include a grant in respect of a loss or outgoing.
A grant received under the First Home Owners Grant Scheme is considered to be in respect of the outgoing to build the owner's home and is thus a recoupment of that expenditure, to the extent of the amount of the grant, for the purposes of subsection 110-45(3) of the ITAA 1997.
As a grant received under the First Home Owners Grant Scheme is not ordinary income (see ATO ID 2001/715) and is not statutory income in the recipient's hands no amount in respect of it is included in the recipient's assessable income.
Therefore, expenditure to build the home does not form any element of the cost base of the land to the extent of the amount of the grant.
As subsection 110-45(3) of the ITAA 1997 applies in these circumstances, subsection 110-37(2) of the ITAA 1997 provides that the expenditure that has been recouped when the owner receives the grant is never included in the cost base of their land.