Most capital gains are worked out from the cost base and what you sold for. Working out the cost base, and keeping the records to support it, is a job for you and your accountant. This guide explains the five elements in plain words, how capital improvements fit, and when the law uses market value instead of what you paid.
What is the cost base?
The ATO describes the cost base as generally what an asset cost you to buy, plus other costs you incur to hold and dispose of it. Section 110-25 of the Income Tax Assessment Act 1997 splits it into five elements:
| Element | In plain words | For property, for example |
|---|---|---|
| 1. Money paid or property given | What you paid for the property, plus the market value of anything else you gave for it | The contract price |
| 2. Incidental costs | Costs of buying it, and costs relating to its sale or other CGT event | Stamp duty, transfer costs, fees for a legal adviser, surveyor or agent, and advertising to find a buyer |
| 3. Costs of owning it | Rates, land tax, repairs, insurance and interest, but only if they are not deductible and you acquired the property after 20 August 1991 | Holding costs on vacant land |
| 4. Capital improvements | Capital spending to increase or preserve the property’s value, or to install or move it | An extension or addition, or applying for a zoning change |
| 5. Title costs | Capital spending to establish, preserve or defend your ownership of, or rights to, the property | Legal costs to defend your title |
The ATO says not to include any costs you can claim a tax deduction for, such as the cost of capital works you can claim a deduction for. Your accountant works out which costs belong in which element.
What counts as a capital improvement?
In the law, it is capital spending whose purpose or expected effect is to increase or preserve the property’s value: the fourth element of the cost base. The ATO gives extensions or additions as examples of capital spending on improvements, and the costs of applying for a zoning change, whether or not it succeeds.
Two points are worth knowing:
- Deductible costs are left out. Costs you have claimed, or can claim, as a deduction generally do not go into the cost base. For a rental property, that can include capital works you can claim a deduction for.
- What it cost is not what it is worth. A renovation adds whatever buyers would pay for it, which can be more or less than it cost. For the cost base, your accountant uses what you spent. For a valuation, the valuer uses what the market would pay.
Which records should you keep?
The ATO says to keep records of buying, owning and selling the property: for example the purchase contract, stamp duty, legal fees and the settlement statement; rates, land tax, insurance, interest and repairs; and capital spending on improvements such as extensions or additions. They need to be kept for at least five years after you dispose of the property.
For improvements, keep dated invoices, builders’ contracts, approvals and before-and-after photos. Dated records do two jobs: they support the cost base, and they help a valuer show what the property was like on a past date. See records to keep.
When does the law use market value instead of what you paid?
In some cases the cost base starts from market value, not the price:
| Situation | Market value at | The rule |
|---|---|---|
| You were given the property, or acquired it from someone you were not dealing with at arm’s length | The time you acquired it | Section 112-20 |
| You inherited property the deceased acquired before 20 September 1985, or that was their home just before they died and was not being used to earn income | The date of death | Section 128-15 |
| Your home was first used to produce income after 20 August 1996, and a later sale would only be partly exempt | The day it was first used to produce income | Section 118-192 |
| You hold property across 30 June 2027 as an Australian resident individual or trust | Just before 1 July 2027, unless the apportioning method (not yet finalised) is chosen | Tax Reform No. 1 Act 2026 |
| You still hold property acquired before 20 September 1985 on 30 June 2027 | Just before 1 July 2027 | Tax Reform No. 1 Act 2026 |
Section numbers refer to the Income Tax Assessment Act 1997. Conditions and exceptions apply to each, and your accountant decides which rule applies. In these cases a valuation at the date may be useful as evidence of the figure.
Allowable costs after that date can then generally be added. For a home first used to produce income, the ATO describes the cost base as its market value at that time plus any allowable costs since then. See every CGT valuation date explained for the dates.
How do a valuation and the cost base fit together?
A valuation does not work out your cost base. It states the market value of the property at a date, which your accountant uses where the law calls for it. The valuer values the property as it was on that date, so improvements made later are left out of the value, while your accountant may add what they cost to the cost base. Dated invoices help both of them.
A Desktop CGT Valuation is $149 and an Inspected CGT Valuation is $495, both including GST. The glossary explains terms such as incidental costs and capital improvement.
We value property. We do not give tax advice. Your accountant works out your cost base and decides which rules apply.