If a non-contingent liability to pay a specified amount is included in the cost base of your CGT asset under either subsection 110-25(2) or section 112-35 of the Income Tax Assessment Act 1997 and you deduct or can deduct that amount, does subsection 110-45(2) of that Act apply?
Yes, subsection 110-45(2) of the Income Tax Assessment Act 1997 applies such that the amount does not form part of the cost base of your CGT asset. [1]
All legislative references in this Determination are to the Income Tax Assessment Act 1997.
This Determination applies both before and after its date of issue. However, the Determination will not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of issue of the Determination (see paragraphs 75 to 76 of Taxation Ruling TR 2006/10 Public Rulings).
Appendix - Explanation
In principle, an item of expenditure should either be deductible for income tax purposes or included in the cost base of an underlying asset for CGT purposes, but not both. [2]
Consistently with that principle, for CGT assets acquired after 7:30 pm ACST on 13 May 1997, where you claim a deduction for expenditure, subsection 110-45(2) applies to exclude the expenditure from the CGT asset's cost base: Expenditure (except expenditure excluded by subsection (1B)) does not form part of the cost base to the extent that you have deducted or can deduct it for an income year, except so far as: (a) the deduction has been reversed by an amount being included in your assessable income for an income year by a provision of this Act (outside this Part and Part 3-3 and Division 243); or Note: Division 20 contains some of the provisions that reverse deductions. Section 20-5 lists some others. (ab) the deduction is under Division 243; or (b) the deduction would have been so reversed apart from a provision listed in the table (relief from including a balancing change in your assessable income).
The context in which the word 'expenditure' operates in subsection 110-45(2) is one of deductibility. A non-contingent liability to pay a specified amount [3] is a presently-existing liability to expenditure, even if the liability is yet to be discharged. If the non-contingent liability can be included in cost base under subsection 110-25(2) or section 112-35, and you have deducted or can deduct an amount of expenditure which it represents, then subsection 110-45(2) operates such that the amount included in cost base at the time of acquisition of the asset will not form part of the cost base, provided it does not fall under one of the listed exceptions.
Consequently, subsection 110-45(2) can apply to reduce the amount included in the cost base by subsection 110-25(2) or by section 112-35.
Compendium
The ATO published responses to 12 submissions on this ruling in TD 2022/14EC. Outcome labels are heuristic — read the ATO response for the detail.
1An assumption of a liability is not expenditure, and therefore subsection 110-45(2) cannot apply. The expenditure to discharge a liability is not expenditure in respect of the acquisition of an asset.accepted
ATO response
The final Determination has been amended to clarify its intended application. It provides that a non-contingent liability to pay a specified amount that is deductible will be excluded from the first element of cost base pursuant to subsection 110-45(2). We consider that a taxpayer who has incurred a non-contingent liability of a pecuniary character, and is entitled to claim a deduction in respect of it, has deductible expenditure (even if the liability is yet to be discharged by way of payment).
2The ATO's view means a taxpayer would be required to track the liability until it is discharged and then adjust the cost base depending on the actual amount paid. Where the assumed liability changes over time, the ATO's view may result in the cost base increasing or decreasing if the amount paid on discharge is different to the value of the liability on the date of acquisition of the asset.response provided
ATO response
The final Determination clarifies its application to non-contingent liabilities to pay a specified amount. It is the amount of the non-contingent liability incurred which is the subject of the deduction.